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IFRS Outlook: Hurry Up and Wait

Accounting convergence worries finance chiefs, but they aren't doing much about it yet, according to the latest Duke/&splt;em class=&doublequot;ita...
David KatzMarch 9, 2011

While the prospect of moving to a single set of global financial reporting standards is very much at the top of CFOs’ minds, most of them work for companies that haven’t begun to grapple with the challenges of accounting convergence, the latest Duke University/CFO Magazine Global Business Outlook Survey suggests.

Asked which are the most crucial accounting issues their companies are facing in 2011, 34% of the 472 CFOs who responded to the question ranked “convergence to IFRS,” or international financial reporting standards, as number one. Cumulatively, the respondents ranked IFRS convergence higher than any other accounting issue.

Yet asked to describe their companies’ “readiness to comply with global accounting standards,” 44.2% said they hadn’t “begun to address convergence,” while 38.8% said they were preparing, “but far from ready.”

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Corporations are “still several years away from having to implement a plan” to comply with a converged set of standards, confirms James Kaiser, U.S. Convergence IFRS leader for PricewaterhouseCoopers. Yet, as alarming as the state of awareness without preparedness sounds, it just about fits the current state of the regulatory outlook. “It’s important to monitor [regulatory developments] and develop a plan, but not get out in front of the standards until they’re finalized,” says Kaiser.

IFRS outlook chart 1

Indeed, under the most optimistic (or pessimistic, depending on whom you’re speaking to) projections, corporations would have at least three years to comply from the date the Securities and Exchange Commission decides what course the United States will take in terms of convergence and the timing of required implementation. That would put the earliest possible start date for compliance at 2014, according to Kaiser.

Few CFOs, however, seem to be immune from uncertainty about what a single set of worldwide accounting standards might bring. “Being a private company, I think we’re somewhat isolated from some of the wailing and gnashing of teeth that’s taking place in the accounting community concerning the convergence of financial reporting standards,” says Steve Ragaller, CFO of Cretex Cos., a family-owned manufacturing holding company. “But I think we’re all struggling with the increasing demands for more footnotes and more elaborate disclosures. From a general perspective that’s the biggest issue.”

Even though complete convergence is likely to be years away, some melding of significant standards may be close at hand. Leslie Seidman, chairman of the Financial Accounting Standards Board, recently reported that FASB is proceeding apace to propose converged accounting standards in three key accounting areas by June 30: accounting for financial instruments, leases, and revenue recognition. Not surprisingly, the latter two were rated most crucial by Duke/CFO survey respondents. Revenue recognition finished third, with 29.9% of the respondents concerned about the issue, and lease accounting placed fifth, with 22.9% concerned.

IFRS outlook chart 2

The potential for a converged — and radically changed — leasing standard is particularly worrisome to many CFOs who participated in the study. Although the current FASB and IASB strictures are similar, they each omit important assets and liabilities from the balance sheet, according to Seidman. Lessees have also expressed strong concerns about the “right-to-use” asset notion in the standard FASB is working on. That accounting approach, which would essentially eliminate operating leases, would place leased assets and liabilities on the balance sheets of lessees as if they owned the assets.

Criticizing the value of adding such liabilities to balance sheets, Robert Gold, CFO of United Plastics Group, singled out the possible effect on bank agreements. In general, standard-setters and accountants are “spending a lot of time talking about all these liabilities,” he says, even though they are often reported elsewhere. “Whether they’re on the balance sheet itself or whether they’re a disclosure, they’re inside the financial statements,” says Gold.