Risk Management

IFRS Requires a Soft Touch

If American companies plan on moving to IFRS, their financial statement preparers will require less technical training and more instruction on "sof...
Marie LeoneNovember 17, 2008

Corporate accountants facing a move to IFRS are quick to say they will need technical training. But their toughest task may actually be mastering “soft skills,” says Richard Fuchs, PricewaterhouseCoopers partner and global IFRS specialist. Fuchs says a move from U.S. GAAP to IFRS will require training in how to apply judgment, analysis and critical thinking to accounting standards, as well as how to make transparent disclosures.

Fuchs, who spoke on Monday at a financial reporting conference sponsored by Financial Executives International, worked in Europe and Asia helping companies move from local generally accepted accounting principles to IFRS. His observation from his time abroad is that U.S. accountants will have to be trained differently. No longer will accountants collect and examine the facts, and then pour over 25,000 pages of rules to find the correct accounting application, quipped Fuchs. Rather, when applying IFRS, they will have to work with broader principles and “learn how to report in openness.”

In fact, Fuchs points out that many of the concepts contained in IFRS are the same as those used in U.S. GAAP. The trick for corporate accountants in America will be to learn how to evaluate the economics and substance of a transaction, and then apply judgment to arrive at an answer, rather than point to guidance or bright line rule.

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Many preparers and auditors argue that making a professional judgment call is difficult for American accountants because the U.S. legal system is so litigious, and judgments that turn out to be wrong could also wind up being grounds for a negligence lawsuit. Yet other observers disagree. Cases that charge negligence when a sound judgment based on evidence is presented won’t stand up in court, ultimately causing those types of suits to die out, said David Tweedie, chairman of the International Accounting Standards Board, who gave the keynote address at the conference.

Preparers will be called on to “to make a call, and sometimes that will be wrong, but it won’t be negligence,” mused Tweedie. What’s more, he said that under IFRS, financial statement preparers and users won’t get the exact same number every time, but “an envelope of acceptability” regarding financial results must emerge in the United States.

Tweedie reckons that there will be some small discrepancies between the financial results submitted by companies, and those worked up by financial statement users, but both sides “will have to say we can live with that” instead of beating a path to court, said Tweedie. Further, regulators should give up the second guessing game. If preparers and auditors “act with integrity” and base their judgments on sound evidence, then regulators should not feel compelled to open up an investigation. This new way of operating won’t open the door to lax reporting or regulation, insists Tweedie, just adherence to principles that demand that the economics and substance of a transaction be highlighted and explained.

The legal ramifications of IFRS are one hurdle that U.S. companies must clear; another is the compliance cost component. Without a doubt, if the Securities and Exchange Commission mandates IFRS in the United States, there will be a “significant” one-time upfront cost to making the switch. While that cost varies by company and country, Fuchs pointed out that in the past, government and private studies underestimated the expenditures for European and Asia companies, and he figures that the same will happen in the United States.

The cost estimates came up short mainly because studies tend to omit the cost associated with internal time and resources, such as retraining, implementing new processes and procedures, and building and integrating new systems and software. For example, one European study found that for companies generating revenues of $1.3 billion, IFRS transition costs ran between $1.3 million and $1.9 million. But that estimate never took into account the internal costs, which remain difficult to calculate.

On Friday, the U.S. SEC released estimates predicting that U.S. companies will spend between 0.125 percent and 0.13 percent of their revenue on making the transition to IFRS during the first year of filing.

Nevertheless, IFRS marches forward, and with good reason, says Fuchs. He listed several benefits that U.S.-based companies could derive from moving to IFRS, including: leaving behind complex U.S. GAAP rules; reducing the cost of compliance if a companies file results in multiple local GAAPs; and joining the growing global movement of using one set of high-quality standards to improve comparability for investors.

Fuchs also counseled companies to start thinking and preparing for the transition now, since most companies in the U.S. estimate that it will take four to five years to make the changeover. Indeed, the SEC has already announced that it will decide by 2011 whether to mandate IFRS, but many experts, including Financial Accounting Standards Board chairman Robert Herz, think the switch is inevitable.

Still, some audience members questioned whether moving to IFRS sooner than later was a good idea, given that some of the most contentious international standards — related to leasing, pensions, taxes and revenue recognition — were due to be reworked over the next year or two. Fuchs answered the question by pointing out that the standards slated to be rewritten were part of the joint FASB/IASB convergence project to reduce the differences between international and American accounting standards. As a result, most of the rule changes would affect companies regardless of whether they applied IFRS or U.S. GAAP.

One group of corporations that may find IFRS “a refreshing change” are small companies, added Fuchs. To be sure, smaller companies will find IFRS less complex than U.S. GAAP. In fact, IASB is putting the finishing touches on a 250-page IFRS for private companies, that also applies to most smaller public companies. Among other modifications, it contains simplified standards with respect to recognition and measurement; reduces the number of required disclosures; and if IFRS gives the preparer a choice of how to apply a standard, only the less complex option is included, noted Tweedie.