All professional accountants, regardless of the area in which they are practicing, need to keep up to date with the developments in the field. International Financial Reporting Standards (IFRS), is one of the most dramatic changes the accounting profession has witnessed in a long time.
There are a large number of seminars, conferences, and courses available to accountants and the list will only get longer as January 1, 2011 deadline approaches. Canada will be adopting IFRS by 2011; the US has not defined an exact date but convergence of US GAAP with IFRS is happening now. How does one choose between the seminars? Part of the answer, like with any other purchase, is cost, but cost is rarely a deciding factor. These days, everyone is busy and there is no greater disappointment than spending a day or two sitting in a class only to find out that time could have been more effectively spent doing something else.
Too many people register for a course just for the sake of taking some training without giving much thought to the specific details. In order to get the most out of an IFRS course, the first step for any participant is to determine he or she wants to learn. The differences between IFRS and GAAP are so substantial that it is not realistic to expect to sit through one or two days of training and become an IFRS expert. After all, it took more than four years of university education to learn GAAP. How would it be possible to learn the equivalent of international standards in just a few days? The more productive route is to first determine which areas of international GAAP you want to focus on and then find the course that offers the most selection in those areas.
If you are a novice to IFRS and want to understand some of the key differences between IFRS and GAAP, then you will want to look for a course that covers at least the following:
Fixed assets
Under GAAP, fixed assets are accounted for at historical cost and then depreciated regularly. Under IFRS, there is a choice of accounting method. Either a company can choose a cost model, which is very similar at the conceptual level to GAAP, or the company can use the revaluation model, a model which regularly revalues assets to their fair value periodically.
Impairments
Impairments are calculated differently under IFRS and GAAP. In Canada and the US, an asset is currently considered to be impaired when its book value is less than the future cash flows the asset expects to generate. Under IFRS, an asset is considered impaired if its carrying value is higher than its recoverable amount. The recoverable amount is defined as the greater of the asset's expected selling price (less costs to dispose) and its value in use, which is defined as the present value of future cash flows expected from the asset. By analyzing the definition of impairment, it is easy to see that impairments will be more likely under IFRS than under GAAP.
Impairment reversals
Under GAAP, once an asset is written down, its value cannot be increased, even if the conditions which caused the impairment reverse themselves. Under IFRS, the reverse is true. Not only are impairment reversals allowed, they are mandatory, should the conditions warrant them.
Cash Generating Units (CGUs)
IFRS has a concept called a Cash Generating Unit (CGU), a term which does not exist in GAAP. The standards define a CGU as "the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of cash inflows from other assets or groups of assets." (IAS 36) The concept of a CGU is used for impairment testing. In some cases, it may be difficult to isolate the cash flows from a particular asset from those coming from other assets. Usually in a business, assets work closely together to generate cash flows and it is hard to isolate the cash flows which come solely from one asset. Where assets cannot be tested individually for impairment, CGUs should be tested for impairment and then the assets written down proportionately.
Interest Capitalization
There are some small differences between interest expenses related to the purchases of assets. GAAP allows firms to either expense or capitalize the interest. Many firms choose to expense it immediately. IFRS requires companies to capitalize the interest and in addition, has much more detailed guidance than GAAP on how to do so.
Financial statement presentation
Last but certainly not least, IFRS has a different financial statement presentation than GAAP. In addition, the regulators recently issued a discussion paper which proposes to drastically change the look and feel of the statements from their current state. At first glance, a balance sheet doesn't look like it balances and looks more like a cash flow statement than a balance sheet. Of course, when one looks at the details, it is easy to see that the balance sheet still balances, although not at all in the same format that North Americans are used to seeing. Anyone who enjoys seeing assets balancing to liabilities plus equity on a balance sheet will need to change their expectations. There are also new statements required under IFRS. For example, the Statement of Retained Earnings is replaced by a more detailed Statement of Changes in Equity. In addition, there is a new statement required in the notes to reconcile net income to cash flow.
The above topics present some of the key differences between the two accounting methodologies that anyone seeking an understanding of IFRS should look to for in a course. However, the list above is certainly not comprehensive and there are many other differences which exist. It might also be worthwhile to look for a review of IFRS 1, the standard which describes the rules related to adopting IFRS for the first time. Finally, there are specific issues to various industries, such as oil and gas, utilities, and insurance. The first step in understanding IFRS is to understand the basics. Once that is done, the next step is to understand the particularities as they relate to one's specific industry.
How to make the most of your time in an IFRS course - By Karine Benzacar, MBA, CMA, CPA (Del.)
Karine Benzacar, MBA, CMA, CPA (Del.) (karine@knowledgeplus.org) is Managing Director of Knowledge Plus Corporation (www.knowledgeplus.org), an organization which provides IFRS training across Canada and the US.
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