By Jeff Jardine, CMA®, CPA
Senior Consultant, Deloitte & Touche LLP
As U.S.-based accountants look ahead to a transition from U.S. GAAP to International Financial Reporting Standards (IFRS), a general consensus is building both in boardrooms and among investors that a reliable set of worldwide accounting standards is indeed the ideal.
The Securities and Exchange Commission (SEC) has recommended a gradual transition toward IFRS beginning with large, accelerated filers with fiscal years ending after 12/15/2015 (three-year IFRS balance sheets would need to be presented from 2013-2015).
Young professional accountants need to get on the bandwagon with IFRS and embrace this transition as an opportunity to become experts in a field where many superiors may be less knowledgeable. Therefore, here are potential challenges that young professionals should watch for as the U.S. prepares for the transition to IFRS:
1) Flexibility versus comparability
2) IFRS today = U.S. GAAP at inception
3) IFRS may initially increase the cost of capital for U.S. investors
Flexibility vs. Comparability
Perhaps the most widely circulated explanation of IFRS is that it is “principles based” while U.S. GAAP is “rules based.” Because IFRS has less rules, proponents argue, companies will be able to choose from a wide range of options as to how best to reflect a particular transaction; further, IFRS financial statements will benefit investors who will be able to more easily compare companies from various countries.
The assumption that flexibility and comparability can coexist in worldwide financial reporting standards will be a challenge for young professionals to surmise, especially if transactions can be recognized within the broad range of a set of accepted accounting principles (entities within the same industry could report the same transactions differently, thus leading to decreased comparability of these companies’ financials).
One study, for example, has already shown that most countries are now using IFRS’ flexibility as an excuse to adjust financials to pre-IFRS local GAAP(1). Young professionals will need to be aware of the implications of this flexibility principle potentially leading to decreased comparability, and seek solutions to narrow any potential uncertainty with financial reporting under IFRS.
IFRS today = US GAAP at inception
Recently, PCAOB board member Charles D. Niemeier stated, “The reality is that IFRS are not more principles-based, they are just younger."(2) Indeed, U.S. GAAP at inception was more principles based. Such principles are known today as the Conceptual Framework.(3) From this foundation, and over several decades, governing organizations such as the FASB have provided specific guidance to complex accounting problems as they have arisen. Certainly US GAAP is not perfect, but it is proven over time.
Today, IFRS provides few specific rules to ensure this desired comparability. IFRS will ultimately need to evolve as managers request guidance with regard to specific transactions. For young professionals, this presents a great opportunity to lead the discussion on how IFRS will be used in day-to-day accounting. Could a wiki-like site run by today’s millennial generation lead the way in defining the IFRS discussion?
IFRS may initially increase the cost of capital for investors
Although enacted as a punishment on businesses and accounting firms, the Sarbanes-Oxley act of 2002 (SOX) has been a boon to public accounting firms. Every year since 2002, major accounting firms have posted double-digit revenue growth.
Admittedly, in many cases SOX has improved transparency in financial reporting; however, the enormous cost of SOX implementation has in some cases doubled audit fees for companies. Much like the fuel surcharge on airline tickets that remains even when oil prices are relatively low, the cost of an audit many years after SOX has stayed significantly higher than in the years prior to SOX (save only reductions due to the downturn in the economy over the last few years).
Likewise, companies may also see audit fees increase again if IFRS were implemented in the U.S. The majority of U.S. accountants understand little regarding IFRS, and increasing audit fees will reflect the gigantic training cost of getting auditors up to speed.
Of course, for young professionals this represents an enormously rare career opportunity where they can, from the outset of their careers, become experts in this new frontier. I highly endorse the website www.iasplus.com (run by my employer, Deloitte, for the past two decades) as a mechanism to become familiar with and even become trained in IFRS.
This will require additional work and studying, but the investment of time over the next few years will pay off significant dividends for young professionals in 2015, allowing them to lead the way in their companies and in the accounting industry, and even lower future audit fees for clients.
Indeed, the implementation of IFRS in the U.S. over the coming decade will provide a time of murky waters that young professionals will need to navigate. However, as we put in the necessary study time and understand how IFRS interplays with U.S. GAAP, we may find that the U.S. transition to IFRS represents an enormous career opportunity for many young professional accountants.