IFRS

DEVELOPMENTS IN GLOBAL CAPITAL MARKETS

have meant that the historic dominance of the United

States in the international economy has declined in rela-

tive terms. At the same time, U.S. investment in equities

outside America has reached roughly $3 trillion. Many

countries around the world are now adopting or have

plans to adopt the International Financial Reporting

Standards (IFRS) as written by the International

Accounting Standards Board (IASB).

Against this backdrop, U.S. standards setters and regu-

lators are committed to adopting/converging to one set of

high-quality global accounting standards, namely IFRS.

But how and when they get there and what the ramifica-

tions will be for various constituents isn’t certain. On

June 16, 2008, the Financial Accounting Standards Board

(FASB), in conjunction with Baruch College in New York

City, held an all-day forum to gain and provide insights

on exactly these issues. While the path to convergence is

still some matter of debate, the overriding consensus of

the day was, “SEC, just set a date, but not too soon. And

between now and then, please, IASB/FASB, finalize the

remaining standards—and quickly.”

GET I T DONE!From this observer’s vantage point, there appears to be a

confusing chicken-and-egg scenario going on between

the Securities & Exchange Commission (SEC) and the

FASB/IASB at this point in time. The SEC seems to want

the two Boards to finalize certain major standards, such

as revenue recognition, before it sets an adoption date.

When then FASB Board member Mike Crooch asked

what it would take to help fix an adoption date, John

White, director of the SEC Division on Corporation

Finance, replied, “What Conrad Hewitt said.” To

wit….“We at the SEC believe in the past your

[FASB/IASB] Memorandum of Understanding has

worked very well to try and converge standards and dif-

ferences in standards worldwide vs. the U.S. standards.

However, I think it’s confusing if you don’t come to com-

plete convergence—what I call a true standard of identi-

cal words. You have nine major standards that need to be

accomplished by both sides. I think what you’re planning

to do is wonderful, but you need to do it. Both sides, get

it done.”

A TALE OF TWO HORSESAt the same time, without a date it appears that the FASB

will be carrying on business as usual, maintaining its

rather complex juggling act—dealing with U.S. Generally

Accepted Accounting Principles (GAAP) while working

on joint IFRS projects. Right now the FASB has a com-

mitment to work toward the ultimate goal of a single set

of high-quality global standards. But it also has a respon-

sibility for maintaining and improving U.S. GAAP and

dealing with urgent issues as they arise. FASB Chairman

Bob Herz explains: “In effect, it’s like trying to ride two

horses….The two horses sometimes go at different

speeds, and they can go in different directions….This is

not an easy ride for us as a standard setter, but, much

more importantly, it is not an easy ride for our reporting

system.” And, he adds, “There is a need for a national

plan or a blueprint to foster an orderly and effective

transition of the U.S. into the international reporting

system….In terms of U.S. registrants, the ball is certainly

in the court of the SEC.”

WHAT ’S HAPPENING? Is the SEC taking a wait-and-see approach to ensure that

the joint projects of the FASB/IASB look close enough to

U.S. GAAP for everyone’s (America’s) comfort? Will Bob

Herz eventually sneak U.S. GAAP into IFRS, under the

nose of IASB Chairman Sir David Tweedie? Some people

IFRS in America— When?B Y R A M O N A D Z I N K O W S K I

40 STRATEG IC F INANCE I Sep tembe r 2008

think so. According to Rick Murray, chairman of the

Center for Capital Markets Competitiveness (CCMC) at

the U.S. Chamber of Commerce, “Our view is that the

right way to proceed at the moment is to let Mr. Herz

continue with his dilemma of how to both combine the

refinements and perfection of GAAP on a U.S. basis

while simultaneously blending those into IFRS. We have

every confidence that he is capable of carrying off that

sleight of hand.” Furthermore, he suggests that Herz

should do this sooner rather than later. “From a time

scale standpoint, the time is now to complete conver-

gence and reach adoption as quickly as possible.”

Regardless of how and when the U.S. eventually gets

there, whether it’s when Conrad Hewitt sets a date or

when the joint projects of the FASB/IASB are completed,

the ramifications of adopting IFRS in the U.S. are huge.

As Bob Herz says, “This won’t come without some wide,

sweeping consequences. Moving to IFRS in America has

infrastructure issues such as education, training, tax regu-

lation, law, and regulatory framework [implications].”

— When?

The FASB is dealing with U.S. GAAP while

working on joint IFRS projects. “In effect, it’s

like trying to ride two horses….The two

horses sometimes go at different speeds,

and they can go in different directions….This

is not an easy ride for us as a

standard setter, but, much

more importantly, it is not an

easy ride for our reporting

system.”

Sep tembe r 2008 I S TRATEG IC F INANCE 41

WILL THE AUDITORS BE READY? From an auditor training perspective, the challenges of

moving to IFRS are expected to be significant but not

insurmountable. As Sam Ranzilla, partner at KPMG and

member of the Center for Audit Quality, explains, there

are a couple of things working on the side of the Big 4.

“The first thing to recognize is that we’re not starting

from ground zero,” he says. “The infrastructure and the

quality control systems to support IFRS in the United

States have been evolving for a half a dozen years or more

as we have served cross-border clients. A fair amount of

training of our professionals has already occurred, and

each of the larger firms has developed some form of cre-

dentialing system as we match up the right people for the

right engagement.”

But one complication from the auditors’ perspective

arises from potentially running two sets of GAAP simul-

taneously and the resulting requirement for auditors in

America to be versed in both IFRS and U.S. GAAP. Says

Ranzilla, “As you start to look at your audit practice, you

have to make decisions around ‘Do I want all my audit

people to be bilingual? Do they understand equally U.S.

GAAP and IFRS, or do you segment off your audit prac-

tice?’ Either model or some hybrid needs to acknowledge

that the U.S. system is going to be working off two sets of

accounting principles for some period of time.” Accord-

ing to Ranzilla, the audit firms are ramping up now for

the eventual adoption of IFRS, but, he adds, “Even if the

SEC were to mandate fairly quickly, and this is an

assumption that we have, there’s going to be a dual model

in this country for some extended period of time. We’re

going to have to deal with that in terms of our audit

practice. Firms must also continue to develop their IFRS

infrastructure and quality control system to support a

wide range of the use of IFRS by domestic issuers.”

Also on the training side, auditors will be focusing on

all functions across the firm—audit, tax, and advisory

practice. They’re also focused on knowledge sharing and

training for the issuer community, the user community,

and the academic community. Yet, Ranzilla points out,

timing is everything: “As we look at training, the biggest

single issue around training is time and the uncertainty

that we currently sit with today. I can, in relatively short

order, mandate training for everyone in the audit practice

at KPMG. If they don’t use it in some period of time, I

just wasted a whole lot of money and a whole lot of time.

So timing is the most significant issue because it’s [train-

ing] got to be used in a relatively short period, and it’s got

to be just in time.” Furthermore, he cautions against giv-

ing U.S. companies an extended optional period in which

to adopt. “Any long optional period,” he says, “will, in my

mind, affect the quality of our training and our ability to

make a seamless transition to IFRS.”

While the Big 4 may be on their way to facilitating a

smooth transition to IFRS even without a date, smaller

firms are being left behind. According to Steven Rafferty,

a Professional Practice Executive Committee member

with the Center for Audit Quality and partner with CPA

firm BKD, “From a smaller CPA firm perspective, the

challenge right now is that we have no demand….With

almost no demand today, I can’t muster the resources to

do a lot….Until we have a date, I don’t think a lot’s going

to happen in the smaller firms around the country….We

don’t have resources to be heading down two paths at the

same time.”

TRA IN ING ACCOUNTANTSAs for accounting education in general, a deadline would

be most helpful. Arlene Thomas, senior vice president,

member competency and development at the American

Institute of Certified Public Accountants (AICPA), says,

“Practicing CPAs are really the pressure point for us. We

could be ready by 2013.” But, she notes, “…the real key is

the right training and the right time, and that depends on

the date.” Furthermore, Thomas adds, “The impact on the

CPA exam is quite significant. It covers the body of knowl-

edge that you are required to know to be licensed. Every

section of the exam could be impacted.” She also notes that

“It’s also very doable. It’s nothing to be afraid of.”

According to Linda Biek, director of governmental,

international, and professional relationships for the

National Association of State Boards of Accountancy

(NASBA), “Educators are just waiting for it [IFRS] to be a

State Board requirement. It’s hard to push education if

it’s not going to be on the exam. There are not a lot of

[IFRS] practitioners out there. IFRS is an emerging issue

and has to be included on the CPA exam. In order for

CPAs to be properly licensed, they’re going to have to

have experience in IFRS.”

From the perspective of Sue Haka, president of the

American Accounting Association (AAA), the academic

community in America isn’t ready for IFRS. The reason,

she explains, is that “Because there’s no perception that

this is in front of them, we need a stake in the ground, we

need a drop-dead date. There’s no demand for materials

yet. Furthermore, IFRS education is not just an issue for

the accounting faculty.” She adds, “It’s not just a financial

accounting issue—it’s a business issue. It’s a challenge to

42 STRATEG IC F INANCE I Sep tembe r 2008

get all faculty to think about the implications of what

they teach. Finally, there is a fundamental difference

between how U.S. GAAP has been taught and how IFRS

might be taught in universities in America. Because

U.S. GAAP has wonderful authoritative litera-

ture, teaching has been more rules based.

Getting the faculty to move away from

this approach will be a sea change for

some of them who have relied on the

guidance that has been published. Finally,

U.S.-based university textbooks that speak

to IFRS and the principal differences between

the two GAAP don’t exist and won’t be available for

a while.” According to Haka, “Regarding curriculum

materials, it takes roughly three years to get textbooks

written and published. Furthermore, if U.S. GAAP and

IFRS had to be taught simultaneously, that would be a big

issue. Getting additional courses is very difficult. It’s a

challenge to fit the required courses in. I think academics

could be ready in a three- to five-year time period.”

BROADER BUS INESS IMPL ICAT IONSAndre Van Hoek, member of the Financial Reporting

Committee of the Institute of Management Accountants

(IMA®), notes that, in addition to the training of accoun-

tants, adopting IFRS will have wider impacts across the

firm. He points out, “At a high level, the conversion is not

just an accounting exercise—it goes beyond the debits

and the credits. This is a transformational project for any

organization. It requires a strategic approach, the involve-

ment of senior management first of all, and the involve-

ment of key departments.” Furthermore, he says, “We

don’t know how much this is going to cost, and we can

probably expect it to be significant.” He also describes the

potential substantial impacts on systems, explaining that

“Top-sided solutions don’t work in a project like this. Any

changes would have to be embedded in systems and sub-

systems. I don’t think one can underestimate the system

changes, [including] business planning and performance

metrics partly driven by financials. Performance indica-

tors will have to be reexamined. The impact on contracts

and compensation structures will have to be looked at,

particularly executive compensation tied to financial

results.”

I FRS CULTURE IN AMERICA?During one of the sessions, Rick Murray pointed to the

potential clash of two accounting and reporting cultures,

cautioning that in order to combine a wider scope of

judgment in companies’ issuances and in auditors’

processes, “…the death threat of liability needs to be han-

dled…in a way that secures and sustains the business

model of public company auditing. We suggest that

the convergence with auditing standards needs

to be closely associated with reaching the

point of [IFRS] adoption.”

It was also noted that perhaps a bit of

a cultural shift could do some good.

According to Michael Cangemi, past

president and CEO of Financial Executives

International (FEI), these and other issues

surrounding IFRS adoption are not insurmount-

able if the U.S. looks beyond its own borders for guid-

ance. Says Cangemi, “Every time I’ve seen an obstacle

thrown up, I’ve seen some clarity put up around it

because the rest of the world has some experience. I

think American business needs to develop a global mind-

set. Maybe we need to do a PR campaign to get our

businesses to think globally.” As for the conceptual foun-

dations of audit in America, do we have to change our

audit methodology in the U.S.? Sam Ranzilla thinks not

really. He says, “My feeling is that it’s not a big concern

because our audit methodology is based on international

standards, and then we adapt local standards where they

go above international standards. I don’t think that’s a

significant issue, but it’s one that we keep on our radar

screen.”

JUST GET I T DONEAt the end of the day, what were the main conclusions of

the forum? Many of the major stakeholders involved in

the financial reporting community just want to get on

with IFRS in the most effective and efficient way. But to be

clear, they want to go forward. For many reasons, the SEC

needs to provide a hard target date for adoption. The

remaining major international standards need to be final-

ized sooner rather than later. In the meantime, the Big 4

are readying themselves for IFRS, and companies need to

understand that, when it comes, the change will have

broad implications across the entire company. Finally, uni-

versity professors will have to begin to think about deliv-

ering the type of content that will ensure that accountants

are ready for the coming of IFRS to America. ■

Ramona Dzinkowski is an economist and business journal-

ist living in Toronto. You can reach her at

rndresearch@interhop.net. ©2008 by Ramona Dzinkowski.

For copies and reprints, contact the author.

Sep tembe r 2008 I S TRATEG IC F INANCE 43