Japan deciding on IFRS

Feb 15, 2011

On February 7 and 8, 2011 members of the Accounting Standards Board of Japan and the Financial Accounting Standards Board (FASB) met to update each other on the progress they are making on convergence of their respective Accounting Standards with International Financial Reporting Standards (IFRS). This meeting is one of the many that FASB has undertaken with different International Accounting Standards Board to discuss the convergence of  U.S. GAAP with International Financial Reporting Standards.

 In terms of making a decision about convergence, for Japan it will be around 2012. For US, the Securities and Exchange Commission is expected to decide whether the FASB and IASB (International Accounting Standards Board) have made sufficient progress on convergence, and whether IFRS can eventually be incorporated into the U.S. financial reporting system.

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Joint rule proposed for bank losses

Feb 2, 2011

Another step towards the convergence of accounting standards was taken recently when a joint proposal was made by International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) in relation to recognizing the losses on loans by banks.

The current practice in many countries requires that the banks wait to write down the value of financial asset until they have hard evidence of the loss. But the proposed rule will require that the banks predict the losses ahead of time, so they have more time to find the extra funds to cover the losses.

This rule will help address one of the main issues in the recent financial crisis ; by the time the financial institutions recognized the loan losses it was too late in the game. The taxpayers funded bailout money was the savior for many of these financial institutions.

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PCOAB and POB join hands

Jan 13, 2011

With the recent Dodd Frank law amending the accounting rules to permit exchange of information with overseas regulators, the Public Company Accounting Oversight Board (PCOAB) and its British counterpart Professional Oversight Board (POB) have signed an agreement to cooperate in the oversight of auditors and public accounting firms in either jurisdiction.The six largest global accountancy firms – BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG and PwC have also welcomed this co-operative agreement.

The agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the U.K. and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.

The agreement could open the door for the PCAOB to look into Ernst & Young UK’s role in the accounting fraud involving the removal of billions of dollars of fixed income securities from the Lehman Brothers balance sheet to deceive investors about the bank’s liquidity; the Repo 105 scandal.

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Lease accounting convergence

Nov 11, 2010

Another step towards convergence of the accounting standards. On August 27, 2010, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly published an Exposure Draft, outlining proposed major changes to Generally Accepted Accounting Principles (GAAP) for leases. The changes would modify GAAP accounting standards to require the capitalization of most leases now treated as operating leases.

The changes are intended to provide greater disclosure in GAAP financial statements, since operating leases are not generally reflected on the balance sheets of either landlords or tenants, and to harmonize GAAP treatment of leases with international accounting standards.

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UK getting set to adopt IFRS

Nov 8, 2010

The Accounting Standards Board (ASB) is ready to incur 78.9 million pounds in order to move to the International Financial Reporting Standards (IFRS). The new system would introduce across the business community, but the ABS insists the cost will be well worth it.

The rule book will be reduced from 2,000 pages to 400. The scope for auditing errors will also be reduced. The new standards would modernize and simplify the accounting system which would provide make it easier to read financial statements and benefit the investors and the market in general.

The system had been scrutinized and debated for 6 years and is expected to be fully in place by summer 2013. Transition costs for companies of medium to large size are expected to average 80 million pounds.

One question that arises associated with the changes that different economies are trying to implement to their accounting standards is whether it is the right time. With the global economy being fragile would it move the resources from strategizing about the future of the company to getting the books compliant with the new standards.

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The convergence project

Nov 8, 2010

October 2002 was a significant year in the history of accounting. The Norwalk Agreement , a memorandum of understanding was announced by Financial Accounting Standards Board and the International Accounting Standards Board (IASB). This was a significant step towards the formalization of  the commitment of the two organizations to converge the US and International accounting standards.

The FASB has has undertaken the following six key initiatives to further the goal of convergence of U.S. GAAP with International Financial Reporting Standards (IFRS):

1. Joint projects being conducted with the IASB – Key projects under this are Revenue Recognition and Business Combinations
2. The short-term convergence project. – These are projects where the convergence around high quality solutions to resolve differences between US GAAP and IFRS appear achievable in the short term .Solution could be selecting between existing existing U.S. GAAP and IFRS.
3. Liaison IASB member on site at the FASB offices. – Having full time IASB member , James J. Leisenring, in residenece at the FASB office is a significant feature.
4. FASB monitoring of IASB projects. IASB projects are monitored by the FASB based upon the FASB’s level of interest in the topic being addressed.
5. The convergence research project. The FASB staff is currently working on a research project related to convergence. The project identifies and catalogs the substantive differences between U.S. GAAP and IFRS.
6. Explicit consideration of convergence potential in all Board agenda decisions. Within the framework of the Board’s agenda criteria, all topics formally considered for addition to the FASB’s agenda need to be assessed for the possibilities for cooperation with the IASB (or another standard setter).

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FASB planning to expand fair -value accounting

Nov 3, 2010

In an effort to align US GAAP to IFRS, FASB is considering expanding the fair- value accounting to land and buildings held for investment. The biggest impact of the change will be on real estate companies and real estate investment trusts. At present such assets are recorded at historical cost, but with the new standard fair value or in other terms the market value of the asset will be the basis of recording the asset in the financial statements.

What would the impact on companies’ financial statement be. Well that depends on the age of the properties. If the property is old and has been depreciated significantly, then the value of those assets would be significantly higher; but on the other side assets that were bought at the peak of the market in 2006-2007-2008, possibly would have significant decline in the value of the property that will be recorded on the balance sheet.

FASB’s rule is expected to be similar to International Accounting Standard 40, which allows a fair-value option.

The proposal is expected to be sometime next year and there is no time set for implementation yet. But the good news is that we are moving towards the global standards.

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Another drop out for IFRS

Nov 2, 2010

A couple of weeks ago, the Indian government announced dropping the new rule from International Financial Reporting Standards  that allows property developers to book sales only when the project is complete. Another announcement came out this week of dropping the government’s plans to introduce a new accounting norm for agriculture as part of the move to converge its accounting standards with globally adopted International Financial Reporting Standards (IFRS).

India will keep their present rules to guide the agricultural industry in maintaining their financial statements. Apart from agriculture the Indian government will depart or “carve out” compared to IFRS in real estate, property, plant and purchase and mergers to name a few key areas. 

The guideline based standards of IFRS have been met with general acceptance over the world, except some specific areas that the countries consider sensitive like banking where countries want to keep their own standards which usually are rule based.

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Korea requests delay in consolidation

Nov 1, 2010

Korea, the host of the 2010 G20 Summit, requested the G20 to delay the consolidation process of the global accounting standards. Korea has defined its role at the G20 mainly as an arbiter and a consensus builder among the world’s largest economies.

The G20 initiative for new, consolidated rule, Korea believes will be an issue for the Korean firms. Considering that many large firms have already spent a lot of money in setting up accounting and IT systems based on the IFRS method over the past few years.

Accounting firms say that the move towards convergence could cost Korean firms tens of billions of won, after they have just spent a huge amount of money in shifting from the GAAP-based standard to the IFRS-oriented one. The government is forcing them to use the IFRS for every listed company from next year.

Only time will tell whether Korea will be able to get a consensus among the G20 members to move the consolidation process to a later date and save the Korean firms from spending even more on meeting the new requirement.

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Technical difficulties with new Revenue Recognition rules

Oct 23, 2010

The recent draft rules proposed by the Financial Accounting Standard Board concerning the revenue recognition rules would not just change the way accounting folks would recognize and record the revenue, but it would also require the companies to change or revamp their accounting systems.

One such situation will be in implementing the draft rule of assigning fair value to bundled products. Under the draft rule companies will have to use the relative selling price method, which allocates revenue for bundled products on a percentage to assign fair value rather than the popular residual allocation method, which assigns a straight dollar amount of revenue to each element of a bundled product.

Generally Enterprise Resource Planning (ERP) systems built for software revenue recognition are configured to handle the percentage method, while most ERP systems are programmed to handle the residual allocation method. So most non software companies will have to revamp their ERP system to comply with the rule if and when it becomes a rule. Will it be a small tweak in the system or a work around situation or will it be an opportunity for small or even large vendors to come up with stand alone products catering to this niche market, only time will tell.

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Convergence of Revenue Recognition

Oct 23, 2010

One accounting principle that is omnipresent in the accounting of all companies, be it public or private, domestic or private, billion dollar company or a startup, is the “Revenue recognition principle”.  Presently, US Generally Accepted Accounting Principles (GAAP) offers more than 100 pronouncements regarding when and how to book revenue, including industry specific rules for 25 different sectors.  The variations of the rules definitely leads to comparability issues among different companies, but due to the type of work different organizations do it is almost required to have variations in the rule. A construction company that uses the percentage of completion method to recognize revenue, will show a warped picture if it were to recognize the revenue only when the final sale of the property was done. If it takes 5 years to construct and sell, the company would be a loss making company for the five years as there will be costs associated with the construction but no revenue to show!

With the GAAP and IFRS convergence on full swing, the goal is to have a converged revenue recognition principle by the second quarter of next year. But consider this, under IFRS there are just two broad revenue rules augmented by four interpretations. A hundred pronouncements vs two broad rules; how do you come to a middle ground. This will be a major challenge for the standard setters and more so for all the companies that have to comply with the converged standards. Would it be more effective and show a clearer picture is something only time will tell.

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Mexican airport operator – an early adopter of IFRS

Oct 23, 2010

In January of 2009,the National Banking and Securities Commission made mandatory the presentation of financial statements prepared in accordance with IFRS starting  with the year ending December 31, 2012, but allowing for early adoption for the years 2008-2011, subject to prior notification to the CNBV and Mexican Stock Exchange (BMV). One of the early adopters of the requirement is the Mexican airport operator Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., known as OMA. The  operator announced that it will make early adoption of International Financial Reporting Standards (IFRS) (beginning a year ahead of the mandate with their first IFRS financial statements being year ending December 31, 2011, they will be considering the year 2010 as a transition year) and provided information on the estimated effects of the change.

It seems like the accounting standards world is coming closer to convergence and becoming totally global.

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