Differences Between IFRS and GAAP Could Create Challenges for Educators

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1 Differences Between IFRS and GAAP Could Create Challenges for Educators Dr. A.G. Suryavanshi 1 Abstract: Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS. International Financial Reporting Standards (IFRS) are financial standards set forth by the International Accounting Standards Board (IASB). These standards are the international equivalent to the U.S. Generally Accepted Accounting Principles (GAAP) set forth by the Financial Accounting Standards Board (FASB). Both sets of standards provide authoritative literature for public companies under their jurisdiction. Discussion of adopting IFRS for U.S. public companies has generated a lot of discussion over the last several years. The U.S. Securities and Exchange Commission detailed a proposed roadmap for conversion on November 14, While the new administration has not embraced the roadmap at this point, the general belief is that some form of convergence or conversion will occur as we move forward, but that the timeline may be pushed back from the proposal. This decision, regardless of the timing, may ultimately add to the massive amount of material educational institutions will need to cover in accounting programs. Journey to IFRS India, in 2011, joins the global accounting revolution: International Financial Reporting Standards. IFRS issued by the International Accounting Standards Board (IASB) are increasingly being recognized as Global Reporting Standards. Convergence with IFRS issued 1 Assistant Professor, Deptt. Of Commerce, The New College, Kolhapur

2 by the International Accounting Standards Board (IASB) has gained momentum in recent years all over the World. More than 100 countries such as countries of European Union, Australia, New Zealand, China and Russia currently require or permit the use of IFRS in their countries. Apart from India, countries like Japan, Sri Lanka, Canada and Korea have also committed to adopt IFRS from United States of America has also taken-up convergence projects with the IASB with a view to permit filing of IFRS-Compliant Financial Statements in the US Stock Exchanges without requiring the presentation of reconciliation statement. IFRS in India In early 2010, the Ministry of Corporate Affairs issued various press releases on IFRS roadmap and convergence plan for India specifying the convergence date to be 1st April, 2011 through 2014 for select Indian companies. The highlights and specific timelines as per the MCA press release are given below in the tab IFRS roadmap. At present, it appears that the timeline in the roadmap is no longer valid for phase I companies. The new implementation date for Ind AS is awaited from the MCA. It is unclear if the MCA will release a fresh Roadmap or just amend the implementation date for phase I companies. Conversion is much more than a technical accounting issue. IFRS or Ind AS may significantly affect any-number of a company s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively reassess financial reporting and take a clean sheet of paper approach to financial policies and processes. Differences in IFRS and GAAP While some describe IFRS as purely principles-based and GAAP as purely rules-based, this characterization is actually not appropriate. IFRS does tend to provide less precise guidance, but there are most certainly rules embedded in the international standards. On the other hand, anyone schooled in accounting knows that GAAP are based on the Conceptual Framework; which is a set of guiding principles. The

3 difference is that the U.S. standards have grown to include many rules due to requests by constituents for guidance. For example, in the area of revenue recognition there are numerous standards under GAAP while IFRS has fewer revenue recognition standards. The FASB and the IASB Boards issued a Discussion Paper in December 2008 on revenue recognition and plan to have an Exposure Draft in This is one of many projects that the two Boards are working on together. However, one must keep in mind that the U.S. standards are older than their international counterparts. Therefore, a question that is often asked is Will IFRS look like GAAP in 40 years? In other words, over time will companies desire more guidance that leads to more rules in the international standards? This is a question that only the future can answer. Convergence or Conversion Another looming question is Are we going to convert or converge the two sets of standards, assuming the move to IFRS will occur? The FASB and the IASB met in September 2002 and agreed to a memorandum of understanding (MOU) know as the Norwalk Agreement. This agreement states that the two boards will work toward making standards as compatible as possible and that they will work together to coordinate future projects. Additional MOUs were issued in 2006 and 2008 indicating short term and long term projects. The first converged standard was Business Combinations (FAS 141R) on the U.S. side and IFRS 3 in the international standards. Additional convergence projects remain underway. There has also been discussion of the U.S. adopting IFRS though a conversion. People on both sides of the argument have valid points. Some fear that if convergence is the ultimate decision we could end up in a situation much like we did in the 1960s with the metric system convergence just simply fails to happen. These people feel that if we are to move toward IFRS in the U.S. then we should either have a convergence plan with an ultimate conversion date or just set a conversion date outright. Others fear that conversion to IFRS without planned convergence will lead to a weaker set of standards without guidance they feel is needed in the U.S. The U.S. system is different in many ways from international systems and these differences must be considered. The one most often discussed difference is the U.S. legal environment. The U.S. is known for having a much more litigious environment. The fear is that if the U.S. is forced to convert to IFRS without some form of legal overhaul or

4 agreement then we could find ourselves with lawsuits due to the increased use of judgment required under IFRS. This argument is a valid one and must be considered prior to a decision on possible conversion. Another issue facing potential conversion is the funding of the IASB versus the FASB. Sarbanes-Oxley requires that the FASB be funded through dues paid by public companies and accountants. It prohibits the acceptance of contributions. The IASB, on the other hand, relies on contributions as a primary source of funding. The fear is that contributions can lead to increased pressure from special interest groups. This source has also led to questions regarding stability of the IASB. Funding source is most certainly an issue that must be addressed before a serious discussion around conversion can take place. Educational Institutions and Their Responsibility Accounting educators are charged with preparing their students for a profession that is constantly changing. These changes, in turn, lead to a need to continuously update curriculum. Educational institutions are now at a crossroads with the profession. They are left with a choice between 1) incorporating IFRS into the curriculum now before it is adopted in the U.S. or 2) waiting a while to gauge a better adoption picture in the event it does occur. Still another choice to be made if IFRS is to be integrated into the curriculum is whether a single course or complete curriculum integration is more appropriate. These choices are difficult ones with the future of IFRS in the U.S. so unsure at this point. Include IFRS or Not? The decision to include IFRS or not should be a relatively easy one. Accounting educators are increasingly being told that they need to prepare their students for the global marketplace. That global marketplace, by definition, includes a world where IFRS is already in use. Virtually every other developed country in the world uses some form of IFRS. Not including IFRS in the curriculum to some degree definitely fails the global marketplace yardstick. In addition, at least one of the Big Four accounting firms is requiring some level of knowledge during the interviewing phase. This firm is now requesting that interviewers ask IFRS-specific questions and interviewees must display some level of knowledge based on the

5 courses they have completed. Students who have had a principles or accounting course must display knowledge of what IFRS stands for and that the IASB governs these standards. Students who have had intermediate accounting course should be able to list differences between IFRS and GAAP. Therefore, at a minimum, those institutions preparing students to work with the public accounting firms need to consider some form of IFRS education in their curriculum. Single Course or Curriculum Change? This is a more difficult question to answer than whether to include IFRS or not. Some institutions are running a separate IFRS course. Others are integrating it throughout their curriculum. The choice between these two, or some combination, is a matter of resources and program beliefs. Incorporating IFRS though a single, stand alone course is in place at some institutions. This course usually discusses the major areas of difference between the two sets of standards and allows students to concentrate on IFRS after they are well grounded in GAAP. This course is generally taught at the master s level and may be a required or elective course. While this may be easier to implement than an all-out curriculum integration, it does come at a cost. Students may interview for full time positions or internships before having this course. Therefore, to comply with the IFRS interview knowledge requirements noted above, IFRS may need to be discussed earlier as well or may need to be incorporated through some other mechanism. Fortunately, all of the Big Four and many of the other international firms have IFRS materials accessible by faculty and/or students on their websites. One benefit of this method is that a single, or maybe two, faculty members are all that need to be well versed in IFRS. A more radical change is to incorporate IFRS throughout the entire curriculum. IFRS touches almost all of the courses that are taught in some way or another. The perception is that teaching IFRS is primarily a financial accounting issue. However, IFRS issues may also be taught in tax, accounting information systems, auditing, and other accounting courses. Teaching IFRS in a standalone course may not make the best use of area expertise as it is difficult for a financial expert to understand all the nuances faced by the tax expert, etc. The

6 cost to complete curriculum integration is that most, if not all, of the accounting faculty must understand how IFRS will impact their particular area. In addition, choices must be made as to what will be limited or excluded from the old course content as accountancy courses are already packed full of content. Without extending the length of a course material coverage choices must be made. The benefit in the long run to this path is that, if IFRS is fully adopted, those universities that have opted to integrate throughout the curriculum will be ahead of the learning curve. THE IMPACT ON INDIAN CORPORATE International Financial Reporting Standards (IFRS) has gained huge momentum in recent years across the world as it is used as a universal financial reporting language. Almost 100 countries have adopted it while few other countries have declared their willingness to adopt or converge with IFRS over the next two-three years. In the world of globalization, world has become more dependent on each other, which forces more and more countries to open their doors for businesses expansion across borders and to foreign investment. A large number of multi-national companies are establishing their businesses in various countries especially in emerging countries; as a result the companies in emerging countries are increasingly accessing the global markets to fulfill their capital requirement by getting their securities listed on the stock exchanges outside their country. Few Indian companies are also being listed on overseas stock exchanges, but different countries follow their own accounting frameworks, which create a great confusion for users of financial statements, finally it leads to inefficiency in capital markets across the world. Therefore, there is a requirement for a single set of high quality accounting standards that should be spoken by all of them across the globe, to meet the increasing complexity of business transactions and globalisation of capital, which has prompted many countries to go for convergence of national accounting standards with IFRSs. In this changing scenario, India cannot cut off itself from the developments taking place worldwide. At present, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulates Accounting Standards (ASs).

7 Complex nature of IFRSs and the differences between the existing ASs and IFRSs, the ICAI is of the view that IFRSs should be adopted for the public interest entities such as listed entities, banks and insurance entities and largesized entities from the accounting periods beginning effect from April, Convergence to IFRS would mean India would join a league of more than 100 countries, which have converged with IFRS. Converging to IFRS by Indian companies will be very challenging and on the contrary it could also be rewarding too. Benefits to corporate in the Indian context World Class Peer Standards for Financial Reporting: IFRSs will surely enhance the comparability of financial information and financial performance with global peers and industry. This will result in more transparent financial reporting of a company s activities which will benefit investors, customers and other key stakeholders in India and overseas. The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. Investors: It will be a great help for those investors who wish to invest outside their own country and looking for a Financial statements, which prepared by using a common set of accounting standards IFRS provides them better comprehensible investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial statements, global investors have to incur more cost in terms of the time and efforts to convert the financial statements so that they can confidently compare opportunities. Investors confidence would be well-built if accounting standards used are globally accepted. Convergence with IFRSs contributes to investors understanding and confidence in high quality financial statements. The industry: It will be easier to raise capital from foreign markets at lower cost if the industry can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. The burden of financial reporting is lessened with convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and

8 thereby reduces the costs of preparing the financial statements using different sets of accounting standards. The accounting professionals: Convergence with IFRSs also create more business opportunity to the accounting professionals in a great way that they are able to sell their services as experts in different parts of the world, it offers them more opportunities in any part of the world if same accounting practices prevail throughout the world. They are able to quote IFRSs to clients to give them backing for recommending certain ways of reporting. Challenges to Indian Corporate Laws and regulations: There is a need to bring a change in several laws and regulations governing financial accounting and reporting system in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. Lack of adequate professionals: There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. Replacement and Up gradation in systems: Conversion to IFRS will require extensive upgrades or total replacement of major system. With sufficient planning, upgrades and replacements can occur as part of the overall strategic technology planning and procurement process. Convert historical data: Historical data from recent prior periods will have to be recast for comparative purposes. This is necessary to permit accurate and comparative trend and ratio analysis. Record retention requirements should be reviewed to ensure that data currently being retained is detailed enough to permit proper restatement of priorperiod financials. Coordination of Conversion System: For many organizations, the conversion to IFRS will be a multi-year exercise with numerous changes to technology infrastructure and

9 systems. Development of new technology systems should be carefully examined so IFRS requirements can be incorporated. Conclusion Convergence to IFRS will greatly enhance the transparency of Indian companies which will surely help them to project themselves in global map, which will help Indian com panies benchmark their performance with global counterparts. But companies will need to be proactive to build awareness and consensus amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements. However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India will play a vital role. The ICAI will have to make adequate investments and build infrastructure for awareness and training program. Successful implementation of IFRS in India depends on the regulator s immediate intention to convert to IFRS and make appropriate regulatory amendments. IFRS will most likely come to the U.S. in some form but the timeline is still unknown. The differences between IFRS and GAAP are something that educators need to be addressing now as they send students out into a global marketplace. IFRS may be integrated into the curriculum through a single course, a complete curriculum change, or some combination of these two. The single course or limited combination method are the least costly in the short run but the most costly in the long run. Integrating IFRS throughout the curriculum means that faculty must get up to speed on IFRS and how it relates to their area now but could save the institution time and curriculum reform in the future. Each institution needs to weigh the costs and benefits of these paths but all accounting programs need to look at some form of IFRS integration into their curriculum. References: International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis, ISBN Original texts of IAS/IFRS, SIC and IFRIC adopted by the Commission of the European Communities and published in Official Journal of the European Union

10 Daske, H., L. Hail, C. Leuz, and R. Verdi Mandatory IFRS Reporting around the world: early evidence on the economic consequences. Journal of Accounting Research 46: Ding, Y., T. Jeanjean, and H. Stolowy Why do national GAAP differ from IAS? The role of culture. The International Journal of Accounting 40: Ball R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors