Update on Lease Accounting Proposed Changes

By: BJ Davis, Supervisor, Assurance Services,  BJ.Davis@BCGCompany.com

The Financial Accounting Standards Board (FASB) recently released some key decisions regarding proposed changes to lease accounting as part of its ongoing convergence project with the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS). The original exposure draft proposed to essentially eliminate off-balance-sheet financing through operating leases by requiring lessees to book assets and liabilities for all leases. However, the FASB and IASB have now acknowledged that there may be a place for operating type leases as well as financing leases.

In a recent joint board meeting held between the FASB and IASB, the boards decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows:

  1. A finance lease with a profit or loss recognition pattern consistent with the proposals in the Exposure Draft.
  2. An other-than-finance lease with a profit or loss recognition pattern consistent with an operating lease under existing IFRSs/U.S. GAAP.

In addition, both Boards asked their staff to establish indicators that would be used to identify the differences between the two types of leases.

This is certainly good news for opponents of the original exposure draft, many of whom complained that the cost of complying with the proposed changes, both from a time and information technology standpoint, far outweighed the benefits. However, the key to these changes will be in the indicators that are established by the Boards. I would point out that IFRS lease standards currently allow for operating leases, but the standards are such that it is very difficult for a lease agreement to qualify as an operating lease. This is because the lessee and lessor must take into account the economic substance of the transaction and frequently the economic substance of a transaction under IFRS lends itself to a financing lease arrangement.

For additional detail on the FASB’s recent lease accounting decisions see their synopsis at: http://www.fasb.org/jsp/FASB/FASBContent_C/ActionAlertPage&cid=1176158252007

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BCG Blogger, March 7th 2011 | Tags: , , ,
Posted in General, U.S. Conversion Status

Roundup from IFRS Symposium

By: Jim Keeslar, Director, Assurance Services, Jim.Keeslar@BCGcompany.com 

What a difference a day makes in Northeast Ohio!  Yesterday about 60 people spent the afternoon learning about IFRS and today we are all looking at yet another winter storm. I am hoping that Cecil Nazareth, one of our speakers, from IFRS Partners in New York City, is able to get out of the Akron/Canton Airport on time so he makes his speaking engagement in Orlando this evening. Cecil did a nice job discussing the global marketplace and how IFRS is just another basis of accounting so it may not be whether IFRS will replace GAAP, but rather IFRS will be another option. So we need to think GAAP AND IFRS.  Cecil also outlined many of the key differences between GAAP and IFRS. 

We also were fortunate to have Peter Margaritis, CEO of IFRS Education and Training, speak on IFRS for SME’s. A “light” version of IFRS for entities that do not have public accountability (typically entities not traded on stock exchanges). These standards are more practical for the privately-held businesses trying to balance the cost/benefit of financial reporting.

We finished the afternoon with a panel discussion led by Jeremy Michael and myself and were joined by Mike Denholm and Greg Friedman.  The focus was on real life conversion issues including most difficult standards to implement, training that was needed, cost of conversion and general advice to those considering conversion projects. When we opened the panel up for audience questions one person asked, “Will the banks accept IFRS?” One of our bankers in the audience replied, “I think the U.S. is moving in the right direction toward principle based accounting and I think this will help our economy be more competitive.”

I would like to thank Dr. Thomas Calderon and the University of Akron’s George W. Daverio School of Accountancy for co-sponsoring the symposium with us.  In Dr. Calderon’s closing remarks he mentioned how their accounting program has changed to include IFRS in their classroom and is currently on the CPA exam.

I am glad we got a chance to shed light on this “foreign” topic of IFRS and how it will impact the future of business. Continue to follow along on the blog as we keep an eye on IFRS.

Until next time, think big…think global!

Jim

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BCG Blogger, February 25th 2011 | Posted in General

Sir David Tweedie’s Final Thoughts As IASB Chairman

By: BJ Davis, Supervisor, Assurance Services,  BJ.Davis@BCGCompany.com

Sir David Tweedie, the only person to hold the International Accounting Standards Board’s (IASB) chairman seat, recently spoke to CFO Magazine about his thoughts on the U.S. adoption of IFRS, professional judgment and education. As he enters the last four months of his 10-year tenure at the IASB, Tweedie was generally positive about the future of global accounting.

When asked his thoughts about how some critics believe that if the U.S. does not adopt IFRS they should lose their seats on the IASB and the board of trustees, Tweedie noted that this line of thinking angers him. He said he understood the thought process that the U.S. should not have a say in standards they don’t use, but emphasized you can’t have true global accounting without U.S. involvement.

When the topic turned to professional judgment and how many people don’t think that a heavy reliance on professional judgment (a basic concept in IFRS accounting) will work in the U.S.’s highly litigious society, Tweedie noted that the key to solving accounting issues under IFRS is to develop a clear, documented process that supports a conclusion. As part of this process you should consider whether other accounting treatments make sense and would work in your situation and then you should consider how well your solution could be defended against any type of grievance. In the end you may end up making the wrong decision, but you have a process and method in place to defend your decision.

Finally, when asked about education and how accounting should be taught, Tweedie emphasized the importance of teaching the overall accounting conceptual framework, as opposed to teaching standard by standard. By teaching the conceptual framework, students become used to applying the concepts to each specific accounting situation. This, in turn, helps develop professional judgment and lessens the need for rules based accounting standards.

For additional thoughts from Sir David Tweedie, see this article in the CFO Magazine: http://www.cfo.com/article.cfm/14551016?f=search

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BCG Blogger, February 17th 2011 | Tags: , , ,
Posted in General

IFRS not only affects accountants in the United States, it also has a significant impact on attorneys

 By: Jeremy Michael, CPA, Manager Assurance Services, Jeremy.Michael@BCGCompany.com

 As the world continues to shrink through the use of technology, doing business internationally is becoming increasingly more the norm than the exception. Across the world, investors are weighing their options of going international, whether it be through investing, conducting business, or entering new business markets through mergers and acquisitions. The new global market place is driving the need for a universal accounting language and this language is being implemented through the international financial reporting standards (IFRS).  IFRS is aimed at having companies across the world report accounting transactions in a manner that are consistent to one another. Attorneys providing services to investors or corporations in the United States will be at a disadvantage if they turn a blind eye to the impact of IFRS and its differences from U.S.  generally accepted accounting principles (GAAP).

Attorneys that draft or review contracts containing accounting provisions will need to take notice where IFRS significantly differs from GAAP and recognize the possibility that GAAP may no longer exist 5 to 10 years from now.  It will be increasingly important to understand that clauses based on key fundamental drivers driven by financial statement measurements like net income or EBITDA, such as those found in compensation agreements, earn-out calculations from business mergers or acquisitions, income-sharing arrangements, bonus plans and so on, will significantly differ when measured under IFRS.  It is estimated that approximately 30 to 300+ differences exist between GAAP and IFRS.  The difficulty will come in assessing the full impact of IFRS because a seemingly minor difference could have a major impact when IFRS and GAAP converge.

One option that attorneys may want to implement now is including what is often referred to as a “frozen GAAP” contractual provision, where the accounting principles employed at the inception of the contract are preserved, for measurement purposes, throughout the term of the agreement.  Attorneys may also want to review existing agreements to analyze the impact of convergence with IFRS prior to the U.S. formally adopting IFRS. 

One last significant point on why attorneys in the United States need to take notice of IFRS, is that IFRS has already made its trek to North America. Starting in 2011, Canada will require publicly traded entities (optional for privately held entities) to begin reporting under IFRS.  Mexico is on track to make the transition in 2012.

For Northeast Ohio attorneys interested in hearing more about the impact of IFRS, they can register  for the upcoming symposium being presented by The University of Akron’s George W. Daverio School of Accountancy and BCG & Company on February 24, 2011.

Until next time…Think big. Think global.

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BCG Blogger, February 2nd 2011 | Tags: , ,
Posted in IFRS vs. U.S. GAAP, U.S. Conversion Status

So What’s the Difference?

By: Jim Keeslar, Director, Assurance Services, Jim.Keeslar@BCGcompany.com

To date, we have covered some IFRS topics like, revenue recognition, IFRS for SMEs, why one should be interested now and even Wiki . But we haven’t said much yet about some of the major differences between U.S. GAAP and IFRS. I will give you a few of the major differences below.  If you want to hear more, sign up for our symposium on February 24th. 

  • No LIFO inventory option in IFRS.
  • Research & Development (R&D) costs are expensed in U.S. GAAP where research is expensed and development is generally capitalized for IFRS.
  • IFRS requires component depreciation. So if an asset is made up of several components that can be segregated and would have different useful lives, then the asset is broken down into the components for depreciation purposes. U.S. GAAP does not require this method.
  • Property, plant and equipment can be carried at cost or revalued at fair market value under IFRS.  U.S. GAAP allows cost method only.
  • Certain impairments (such as for inventory) can be written back up (after being written down) for IFRS which is not the case under U.S. GAAP.
  • All deferred tax assets and liabilities are classified as long-term under IFRS whereas they are classified as current or long-term under U.S. GAAP.

The above list is by no means all-inclusive. It is just meant to give you a flavor for some differences between U.S. GAAP and IFRS. Over the months ahead, we will cover more differences and dig deeper into particular ones. In the meantime, if you want to hear more now register for the upcoming symposium.

Until next time…Think big. Think global.

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BCG Blogger, January 17th 2011 | Tags: , , ,
Posted in IFRS for SMEs, IFRS vs. U.S. GAAP

IFRS for SMEs: Taking Its Talents to the U.S.

By: BJ Davis, Supervisor, Assurance Services,  BJ.Davis@BCGCompany.com

It has been a year and a half since the IASB released IFRS for small and medium-sized entities (SMEs). However, its use has not gained much traction in the U.S. despite the fact that it’s a viable option for many entities.  The question now is – will it ever be a viable option?

Currently, any entity that meets the following definition of a “small and medium-sized entity” is eligible to use IFRS for SMEs:

  • Do not have public accountability, but
  • Do publish general purpose financial statements for external users.

But what is meant by “public accountability?” An entity is considered to have public accountability if it:

  • Has debt or equity instruments that trades in a public market or it is in the process of issuing such instruments, or
  • The entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.

A key point to note is that there is no size restriction on an entity as long as it meets the above conditions. It should also be noted that IFRS for SMEs is not designed to be used by not-for-profit or government entities. Therefore, U.S. GAAP remains the only viable accounting standard for these entities.

So why would an entity want to use IFRS for SMEs? For starters, at approximately 230 pages, it’s simpler and less complex than regular IFRS and it’s much simpler than U.S. GAAP, which runs about 17,000 pages, depending on your font of choice. IFRS for SMEs also reduces disclosure requirements and cuts out topics from regular IFRS and U.S. GAAP that are not relevant to those entities, such as earnings per share and segment reporting. Also, the IASB has committed to only revising IFRS for SMEs once every three years, thus adding stability to the standard.

But there are some drawbacks regarding IFRS for SMEs. Most notable is the significant knowledge gap surrounding IFRS for SMEs in the U.S. Financial statement preparers, as well as users, must be trained on IFRS for SMEs and this takes time as well money. Even educators, such as university professors and teachers, are just now beginning to address IFRS in the classroom setting.

Hopefully, once this knowledge gap is closed, it will become clearer whether IFRS for SMEs is right for a given entity. For additional thoughts on IFRS for SMEs, see this article in the Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2009/Dec/20091928.

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BCG Blogger, January 11th 2011 | Posted in Uncategorized

IFRS “Wiki” Resource

By: Jeremy Michael, CPA, Manager Assurance Services, Jeremy.Michael@BCGCompany.com

With the word “wiki” in the news lately I began wondering what exactly does “wiki” mean.  So naturally I performed an internet search and found the most simplistic answer to that question on the American Heritage Dictionary website where it is defined as a collaborative website whose content can be edited by anyone with access to it.  I also found a very detailed, all-encompassing definition on a very well known “wiki” page; wikipedia.org. 

 By now you are probably asking yourself what in the world does this have to do with “Where in the World is IFRS?”?  The answer to that question is quite simple and actually will point us to a very useful resource I found on IFRS.com entitled  IFRS for SME’s – U.S. GAAP Comparison Wiki, a topic developed by the AICPA accounting standards team in an effort to help everyone learn about the similarities and differences between international financial accounting standards for small and medium-sized entities (IFRS for SME’s) compared to U.S. generally accepted accounting principles (GAAP). The page site is organized on the right in a manner that resembles actual sections of the IFRS for SME’s standards issued by the International Accounting Standards Board (IASB).  What makes this resource extremely useful is that the IFRS for SME’s standards are listed on the right with paragraph references and the new standard is then compared to treatment under U.S. GAAP.  Anyone currently preparing financial statements under IFRS for SME’s or anyone who may be interested in the differences between the two sets of accounting standards will find this “wiki” site extremely useful. You may want to add this to your favorites and refer to it often since the site’s contents will continue to evolve as users contribute additional content on their experiences with adopting IFRS for SME’s.

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BCG Blogger, January 3rd 2011 | Tags: , , , ,
Posted in IFRS for SMEs, Resources

A Question of Revenue

By: BJ Davis, BJ.Davis@BCGCompany.com

IAS 18. It can bring chills to those that even hear the words, and it will be here sooner than you think. IAS 18 is the IFRS standard regarding revenue recognition and whether it’s through convergence or outright adoption, it’s in the United States’ future. I’m talking about the Single Model for revenue recognition.

A Single Model for revenue recognition has several key objectives:

  • To have a single revenue recognition model across all industries and transactions.
  • Eliminate inconsistencies between existing standards.
  • Simplify the preparation of financial statements by reducing the number of requirements to which entities must refer.
  • To ultimately converge IFRS and U.S. GAAP.

These are certainly admirable goals, but will it work? A key issue that is making the reality of a Single Model more difficult to realize is the challenge that long-term contracts pose. Currently, most long-term contracts are recognized for revenue purposes under the percentage-of-completion method. However, the proposed Single Model requires that an entity recognize revenue as control is transferred to the customer. When is that? Is it when a building is completed or can it be based on stages? Without better definitions of what “transfer” and “control” mean there is likely to be be inconsistent identification of performance obligations from company to company, which is counter to one of the main objectives of the Single Model.

Another key point of the Single Model is the requirement for sales and service packages bundled together in a transaction that they are broken out into their components.  This can be very difficult for some transactions because it may require a business to estimate the stand-alone selling price for two or more components that are inherently intertwined.

Hopefully, as the IASB and FASB work towards this convergence more clarity will arise on how to deal with these complex situations.

For more information on the progress of the revenue recognition joint project between the IASB and FASB, visit the FASB website at http://www.fasb.org/revenue_recognition.shtml.

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BCG Blogger, December 20th 2010 | Tags: , , ,
Posted in U.S. Conversion Status

Why You Should Be Interested NOW

By: Jim Keeslar,CPA, Director of Assurance Services, Jim.Keeslar@BCGCompany.com

International Financial Reporting Standards (IFRS) is already here whether the Securities and Exchange Commission (SEC) chooses to adopt it or not.  The SEC’s adoption would certainly speed it along, but due to our global economy and the fact that the American Institute of Certified Public Accountants (AICPA) has already recognized the International Accounting Standards Board (IASB) as the second designated standard setter, the Financial Accounting Standards Board (FASB) being the first, IFRS is here.  The only question left is to what degree?

Think of these questions/scenarios and how you would respond:

  • Your company is considering buying a foreign entity whose financial statements are under IFRS—can you help?
  • A foreign entity is considering buying your company and wants financial statements under IFRS—can you help?
  • Your company is looking to sell product to a major foreign customer who wants to see your financial statements under IFRS—can you handle?
  • Your company is in need of financing and one alternative is international financing, but the lender needs financial statements converted to IFRS—what do you do?

All very real scenarios that could happen at any time. When you need to know and understand IFRS it will be too late to learn it.  No one was taught Generally Accepted Accounting Principles (GAAP) at an 8 hour course. 

So now is the time to start the education process.  If you need assistance on where to start feel free to contact us.

Until next time, think big, think global!

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BCG Blogger, December 10th 2010 | Tags: , , , ,
Posted in U.S. Conversion Status

Addressing IFRS Myths

By: BJ Davis, BJ.Davis@BCGCompany.com

As the IASB and FASB continue to work towards convergence of IFRS and US GAAP, it seems as though myths continue to exist here in the United States around the differences between the two standards. A lot of these misconceptions stem from the idea that IFRS is a principle-based set of standards, while US GAAP is rules based. This leads to the notion that US GAAP is more rigorous than IFRS and that IFRS can be easily manipulated.  Are these assertions correct?

When you begin to dig deeper into the assertions, some interesting answers come to light. At the core of US GAAP are underlying principles, just like IFRS. However, because US GAAP has been around decades longer than IFRS, it has accumulated a lot of additional rules along the way. It will be interesting to see what IFRS looks like twenty or thirty years from now when it is forced to respond to changing economic conditions and rapidly moving financial markets, just like US GAAP has over the past decades.

But what about the ideas that IFRS is less rigorous than US GAAP and can be easily manipulated by management? Both of these assertions seem to be born out of the fear of decision making and the fact that IFRS requires more judgment. This increased judgment means that accountants, as well as management, are going to have to more thoroughly document their thought process and rationale for financial decisions. In the end, this is probably going to make for better accountants and more engaged management who have a better grasp of accounting standards, which is always a good thing.

For additional myths debunked, please see the following article at http://www.cfo.com/article.cfm/14525731

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BCG Blogger, December 3rd 2010 | Posted in Uncategorized
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