From Local Generally Accepted Accounting Principles to International Financial Reporting Standards - Annotated Bibliography Example

Introduction The change from local generally accepted accounting principles (local GAAP) to International Financial Reporting Standards (IFRS) has already happened for a lot of countries and is still happening for other countries. Issues have cropped up before, during and even after the said shift to IFRS. Issues may range from whether the country (or the entities) should really convert to IFRS to whether all the provisions of all the IFRS will be adopted. Issues also include the adoption methodology, the shift in technology, the reconciliation to tax regulations and finally, how successful the transition to IFRS was. This article discusses and analyzes certain documents that talks about the issues concerned and / or how to deal with them. The first article is from Leslie Stevens – Huffman entitled Busting IFRS Myths which talks about the truth behind the impact of adoption of IFRS for U. S. – based companies. The second is entitled Global Accounting Firm CEOs on Challenges – Transitioning from GAAP to IFRS, and More and was written by Ellen M. Heffes. This article is all about the challenges faced not only by the CEOs but also by auditing firms as well, and how these firms are meeting these challenges head-on. The third article is by Lewis Dulitz and its title is IFRS: A Preparer’s Point of View. Published in April 2009 in the Journal of Accountancy, this article outlines the phases a company has to undergo in order to fully adopt IFRS. Finally, the fourth article was written by George T. Tsakumis, David R. Campbell, Sr. and Timothy S. Doupnik and its title is IFRS: Beyond the Standards. In this article, the authors wrote that, despite the thrust to uniform international accounting standards in the presence of the IFRS, the culture of the adopters and translation of the IFRS to local culture could significantly affect the consistent and uniform application of the IFRS in various countries. Busting IFRS Myths by Leslie Stevens – Huffman At the moment, almost 100 countries have adopted or will adopt IFRS in the near future. Others, such as the United States or U. S., are still on the verge of adopting IFRS or converging their local GAAP with IFRS. For a lot of these countries, especially for the early adopters, myths, assumptions, and even fears of the adoption abound. There are a lot of conjectures and opinions (factual or not) about what to do and how IFRS will affect the country’s business sector. This article of Leslie Stevens – Huffman is aimed towards breaking certain myths about IFRS. The contents of the article were derived from the writer’s interview with the partner-in-charge of Haskell and White LLP’s audit and business advisory services. The article is rather short but it goes straight to the point and tells it as it is. For one, the article pointed out that there’s no stopping U. S.’ adoption of the IFRS. Because of the rapid deployment and adoption of IFRS in other countries, the U. S. will be left behind in terms of competitiveness in the global market as it finds its share of the capital markets become smaller and smaller. For another, IFRS will not only impact international businesses with head offices in the U. S., all public companies are actually required to convert to IFRS, regardless whether they have international operations or not. Not only that, the resource person, Mr. Smetanka, sees further deployment of IFRS even to the private companies, and the ultimate “death of U. S. GAAP” as more and more companies moves towards IFRS. Lastly, the resource person pointed out that, even though the planned adoption is still set in 2014, now is the time to prepare for IFRS as adoption of these standards entail a lot of work for the companies involved, particularly on educating their people about IFRS and converting their technology to become IFRS-compliant. Global Accounting Firm CEOs on Challenges – Transitioning from GAAP to IFRS, and More by Ellen M. Heffes A most important view point expressed in the first article is that the adoption of IFRS is not only the responsibility of accountants, but the whole company as well. The companies have to plan not only for training their people but also for tweaking their information technology to track and to summarize the needed financial data and reports. Companies have also to consider the impact of IFRS in their bottom line and profit-sharing, as well as the amount of money they have to invest as they adopt the new standards. Article number two may be for accounting firms but it also expanded the above view point from the previous article (although the two articles are by no means related to each other). The author started this article by putting in the viewpoint of one particular accounting firm. The chairman of this accounting firm specifically stated that U. S. companies should see their adoption of IFRS from two various perspectives: regulatory and competitiveness. These two perspectives highlight the fact that adoption of IFRS is not merely “an accounting exercise” (Heffes, 2008) as it affects the various business sectors, both in the national and in the international levels. To further prove the point of view that the IFRS adoption is not only for accountants and auditors, the same chairman also gives a rundown of which entities will be affected by the eventual IFRS adoption. Of course, accountants come in first as they should be the first to be trained on IFRS. The education sector is also not exempted as it needs to update its curricula to reflect the new standards. Investors also need to update their knowledge in financial reporting to ensure that they will be able to understand the new financial reports and disclosures. Same as the previous article, this article also emphasized the fact that the adoption of IFRS “will impact more than accounting and reporting; it will affect a company’s business, systems and processes and people” (Heffes, 2008). The same view is shared by almost all the other accounting firms, not in so many words, but by the gist of what they revealed through this article. Accounting firms, particularly those that have global operations, are the most particularly affected by the IFRS adoption. This is mainly due to the fact that their clients or the companies will be looking at them to provide much needed solution and help as they (the companies) transition towards IFRS and even after the transition. This article outlines the major ways by which these accounting firms are meeting the challenges and, from the article, it would seem that they are meeting these challenges head on. Almost all of the accounting firms say that the most critical thing is training and equipping their (and their clients’) people to better deal with the conversion and to better understand and apply the new standards. Some accounting firms approached their internal training by choosing specific people within their firms to be trained and to gain experience on the field; by leveraging on this exclusive training and hands-on experience and by letting these trained people train their other people as well. Others emphasize not only internal training but also collaborating with the academia to come up with a new accounting curriculum that integrates the new standards and trains the accounting students. In another aspect of training, all the accounting firms are one in saying that there is also a need to train the people of their clients and to make their clients more aware of the impact of the IFRS and the hard work its adoption will entail. Although their methodologies in helping the clients are different, their intent is one and the same: to make the clients see how important the conversion is and to make them aware what they need to do to fully comprehend the standards and to convert to them. One last point is that it is interesting to see that only one accounting firm highlighted the challenge of increasing detection of fraud. This firm sees this challenge as at par with IFRS conversion and also calls on more research and training to increase the likelihood of detecting fraud during the audit of financial statements. IFRS: A Preparer’s Point of View by Lewis Dulitz The third article basically states that we should “be ready to lead” our “company’s transition to IFRS” (Dulitz, 2009). It outlines various phases in the conversion or adoption process. The first phase, called Phase 0: Internal Education, may be the most commonly overlooked by accounting firms and their clients. The accounting firms, according to the article, actually starts with the assessment phase, which is phase 1, and skips Phase 0 altogether. This can be a quite dangerous thing to do because it may have skipped a major consideration: whether the companies know what they are assessing for. This means that prior to the assessment, companies must understand first where they are coming from and where they are going to. With this, the article suggested that the companies should actually start at Phase 0. This means that the company should take the initiative towards training and educating its people, most particularly their top management, about IFRS and its impact on the company. The training should emphasize what are the issues and differences specific to the company and its accounts and which departments will be affected. This type of training can be more educational and interactive as it already breaks down the impact of the adoption of IFRS to company-specific level and even to the department-specific levels. Thus, it will help the company focus more on these areas and on the specific standards that will really have an impact to the company, its operations and its financial reports. The next phase is developing a strategy that will work best for the company. The article gives two alternatives: an adoption or a conversion. For a lot of countries, adoption was the option chosen and this means that everything will just start anew, all options in accounting are studied and accounting policies and procedures are then chosen based on the option chosen. Conversion, on the other hand, deals only between the perceived differences between the local (U. S.) GAAP and IFRS. The company’s strategy will not only be on whether to convert or adopt but also will be on how the change will impact its operations. The article emphasized the need to develop a strategy for accountants to closely collaborate with the company’s operations department in order to evaluate how the new standards will impact the business transaction and operations of the company. The third strategy presents a concept not found in any of the other articles. This is how complex the audit will be if the company converts to IFRS, as such a conversion will give rise to keeping as many as three sets of books (IFRS, local GAAP and tax-compliant books). This portion highlights the need for the companies to be aware what they need to maintain during and even after the transition to IFRS. This is most especially true if the local tax regulations are not yet in line with the new standards, so there is still to reconcile the IFRS financial report with the tax compliant one. The last strategy deals with the general steps on conversion or adoption. It puts emphasis on the need to form a core group (a steering committee) who will identify the areas that will be affected, the strategies that will be implemented and the necessary communication systems that will be in place during the conversion phase, and even after. IFRS: Beyond the Standards by George T. Tsakumis, David R. Campbell, Sr. and Timothy S. Doupnik This last article may actually be a devil’s advocate in terms of going against the usual thought that adoption of IFRS will bring about uniform accounting policies and comparable financial reports from all over the world. The article puts forward two factors that can affect these thrusts to uniformity and comparability: the adopter’s (country) culture and the translation of the IFRS to local languages. In the first factor, the article pointed out different studies that show how national cultures affect how the IFRS are interpreted and applied. One example given was how different countries and nationalities interpret ‘conservatism’ in the context of accounting. One country (one culture) may be more conservative than another. One country may interpret this word differently as it applies to accounting from another country. Thus, the culture may determine how the IFRS provisions are applied and may really cause differences in their application throughout the world. Another factor that can affect the uniform application of IFRS and the generation of comparable financial reports is the translation of IFRS to local language. Since these standards are written in English, they are translated to the various languages of the country – adopters, a process that is easier said than done. Various English words (some critical at that) can be translated differently in these local languages and given new meanings that may make the application of the particular standard different in that country. The article highlights the need for standard policy-setters, both national and international, to take into consideration the cultural differences of the countries adopting IFRS. By becoming aware of these differences, the policy-setters (as well as the accountants and the companies themselves) will be able to take these differences into consideration and understand better the cultural effects on the impact of the adoption of IFRS and the resulting (needed) accounting judgments and interpretations. Addressing the second factor may also be quite tricky. First stop is to “enhance the language translation process to ensure that inconsistencies are avoided” (Tsakumis, Campbell and Doupnik, 2009). Second is to perform a sort of reverse translation from English to the local language and back to English to capture the inconsistencies. Last stop is to reduce the ambiguity of some of the words used in the English version of the standards. Conclusion Changing from local GAAP to IFRS is a very challenging activity. Such a change will not only affect the accountants (who are normally the ones applying the standards, both old and new) but also the whole company and the country, as well. This change poses new challenges that may never have been faced before by these companies. Most of the articles included in this write-up say one thing: adoption of IFRS will entail a much bigger role for the company and its management than first perceived. The change encompasses a much larger scope and affects a much larger circle, from top management down to its department levels. The change also affects accounting firms who are the first line of defense in terms of ensuring a successful transition to IFRS. The accounting firms, particularly the international ones, have been preparing for such a transition, and their preparedness have borne fruit for them. Now they are looking into spreading this degree of preparedness to other companies and the academe as well. Lastly, adoption of the IFRS is not as clear-cut as it would seem as even the local culture and language can actually affect how it is adopted. This means that the companies, the accountants and the standard-setters should be aware of these factors and how they affect the impact of adoption on the companies and to take steps to mitigate any negative effect on IFRS’ thrust towards uniformity and comparability. Bibliographies 1. Dulitz, Lewis (2009). “IFRS: A Preparer’s Point of View.” Journal of Accountancy. Available from http://www.journalofaccountancy.com/Issues/2009/Apr/Preparers PointofView.htm; accessed October 12, 2009. 2. Heffes, Ellen (2008). “Global Accounting Firm CEOs on Challenges – Transitioning from GAAP to IFRS, and More.” Financial Executive. Accessed from http://www.allbusiness.com/education-training/employee-training-assistance-employee/ 10541205-1.html; accessed October 14, 2009. 3. Stevens - Huffman, Leslie (2008). “Busting IFRS Myths.” SmartBusiness.com. Available from: http://www.sbnonline.com/Local/Article/15913/77/115/Busting_IFRS_myths.aspx; accessed October 14, 2009. 4. Tsakumis, George T., Campbell, David Sr. and Doupnik, Timothy S. (2009). “IFRS: Beyond the Standards”. Journal of Accountancy. Available from: http://www.journalofaccountancy.com/Issues/2009/Feb/IFRSBeyondtheStandards.htm; accessed October 14, 2009. Read More