The Age of the Bilingual Accountant

The accounting convergence movement may be waning, but that doesn't mean international accounting rules are any less relevant in the United States. In fact, their importance is growing, according to those who say companies should be as committed as ever to learning and understanding the international rule book.

“The dialogue has shifted,” says David Schmid, a partner and international accounting leader at PwC. The focus today is less centered on whether, when, and how the Securities and Exchange Commission might permit or require the use of International Financial Reporting Standards in the United States. U.S. Generally Accepted Accounting Standards remain entrenched, but IFRS is gaining ground around the world, even in some U.S. markets, he says. “So much capital now moves globally, and that means you're dealing with IFRS. If you want to be a relevant participant in U.S. capital markets, you need to have this bilingual skill.”

After the Financial Accounting Standards Board and the International Accounting Standards Board complete their cornerstone convergence projects to reduce differences between U.S. and international rules in revenue recognition, leasing, financial instruments, and insurance, the boards will pursue further improvements to their respective accounting standards independently. Neither board is prepared to take up new projects in tandem with the other.

FASB Chairman Russ Golden has said in recent speeches that FASB needs to evolve beyond the bilateral convergence process and focus its efforts on improving GAAP for the sake of GAAP users. “I envision a long-term, global standard-setting environment in which FASB, IASB, and other major capital market standard setters co-exist and cooperate with the stated goal of issuing converged standards, while also addressing the specific needs of the capital markets for which they set standards,” he said.

That will leave some differences between the two rulebooks that presumably will endure indefinitely. Schmid says accountants need to commit themselves to understanding those differences to operate effectively in a global environment. Merger and acquisition activity, for example, is rarely confined within U.S. borders, he says. “If you want to attract the largest population of potential buyers, you're going to have to present information in U.S. GAAP and IFRS,” he says. U.S. companies increasingly have ties to overseas operations, whether as the parent or the subsidiary of an overseas company. “More capital is coming into the United States, and that's driving reporting requirements,” he says. “Even for budgets and management information.”

Tax issues also drive a need for better understanding the differences that remain between IFRS and GAAP, EY partner Myles Corson says. Companies may change locations based on tax incentives, but retain their original public listings, often leading to new reporting requirements either under GAAP or IFRS. “That's another driver of the need to understand how to manage and report under both GAAP and IFRS going forward,” he says.

“The dialogue has shifted. So much capital now moves globally, and that means you're dealing with IFRS. If you want to be a relevant participant in U.S. capital markets, you need to have this bilingual skill.”

—David Schmid,

Partner,

PwC

Paul Munter, a partner with KPMG, says the time and effort companies and accounting firms have invested in learning IFRS was still well worth it, even if the U.S. doesn't adopt international standards anytime soon. “A lot of investment opportunities that a company might be looking at strategically are likely on an IFRS basis,” he says. KPMG has a significant number of clients located in the United States that deal with both GAAP and IFRS, he says, and some that deal with IFRS only, usually because they have an IFRS parent in another country or because they are listed in another jurisdiction. “There are a lot of benefits we've gained and continue to gain by having made that investment, without regard to what the SEC might do or how soon it might do something.”

Wayne Bossov, a director with Warbird Consulting who focuses on international accounting standards, says companies will continue to make good use of their IFRS knowledge going forward and should keep up on the differences between GAAP and IFRS. “IFRS isn't going away for the rest of the world,” he says. “The momentum for additional markets that could come online with IFRS in the next few years hasn't stopped. We are becoming more of an island in the sea of IFRS. If you're part of a global operation with a truly global scope, you can't ignore it.”

BEING BILINGUAL

Below, an excerpt from PwC's guide on the differences between U.S. GAAP and IFRS explains “The importance of being financially bilingual.”

IFRS affects U.S. businesses in multiple ways

The near-term use of IFRS in the United States by public companies will not be required, but IFRS remains or is becoming increasingly relevant to many U.S. businesses. Companies will be affected by IFRS at different times and to a different degree, depending on factors such as size, industry, geographic makeup, M&A activity, and global expansion plans. The following discussion expands on these impacts.

Mergers and acquisitions and capital-raising

Global M&A transactions are on the rise. As more companies look outside their borders for potential buyers, targets, and capital, knowledge and understanding of IFRS becomes increasingly important. Despite the boards' standard setting

coordination, significant differences in both bottom-line impact and disclosure requirements will remain. Understanding these differences and their impact on key deal metrics, as well as both short- and long-term financial reporting requirements, will lead to a more informed decision-making process and help minimize late surprises that could significantly impact deal value or completion.

Non-U.S. stakeholders

As our marketplace becomes increasing global, more U.S. companies begin to have non-US stakeholders. These stakeholders may require IFRS financial information, audited IFRS financial statements, and budgets and management information prepared under IFRS.

Non-U.S. subsidiaries

Many countries currently require or permit IFRS for statutory financial reporting purposes, while other countries have incorporated IFRS into their local accounting framework used for statutory reporting. As a result, multinational companies should, at a minimum, monitor the IFRS activity of their non-U.S. subsidiaries. Complex transactions,

new IFRS standards, and changes in accounting policies may have an impact on an organization beyond that of a specific subsidiary.

U.S. reporting

The impact of the accounting changes resulting from the boards' joint efforts will be significant and will have broad-based implications. IFRS has already influenced U.S. GAAP, and we believe that this influence will continue.

Source: PwC.

Where the Standards Diverge

Beyond whatever FASB and IASB may accomplish in reaching converged standards on their top outstanding projects, some significant differences will endure between GAAP and IFRS, says Corson. He puts those differences into three broad categories—operational or transactional areas, corporate accounting issues, and financial statement and reporting issues. Operational or transaction issues include the various ways IFRS and GAAP approach accounting for things like inventory, or property, plant, and equipment, with differences in how assets are grouped and valued. Corporate accounting includes things like share-based payments and benefits, especially pensions. Those are bigger numbers, he says, but easier to manage because they are more centralized within a given company. In terms of reporting, IFRS requires a great deal more disclosure in most areas, he says, in part because the basis for accounting for things is more clearly defined in GAAP.

Joel Osnoss, a partner at Deloitte, says it remains to be seen just how converged the final standards are when FASB and IASB issued their final determinations on revenue recognition, leasing, financial instruments, and insurance. Players in different jurisdictions may well interpret the standards differently, leading to differences in implementation and practice, he says. Without a single global regulatory force to standardize implementation, differences in application are almost inevitable, he adds. That's another reason companies will need to be well-versed in both rule books, so they can see and interpret differences in how they are applied.

All of this is not to say that the convergence movement will be dead forever, once the major standard setters finish the current slate of convergence projects. Lee Graul, a partner at BDO USA, is convinced that the convergence movement will eventually catch its second wind. “At some point in the future, we will come back to this concept that one GAAP around the world would be a good idea,” says Graul. “The world is getting smaller all the time.”

Osnoss agrees. “I live in eternal optimism that one day it will work itself out,” he says.