IFRS – "Like A Band of Gypsies We’ll Go Down The Highway…"

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Edith Orenstein is one of those people I know I’d like, if I ever got to meet her in person. She’s smart, been around long enough to know a straight shooter from a BS’er, and knows how to subtly get a message across without hitting you over the head with it.  And I love that Edith is letting her hair down a little, (lyrics from Willie Nelson, oh my!) even if she didn’t much like that I associated her name with a picture of Elizabeth Taylor in a slip in a previous post.  Those of you that subscribe to my feed may have this seen this gem.  Others will have to content themselves with the more demure, anonymous, half-torso version that was the replacement.

I could learn a few things from Edith… 

One of these days, Edith, I’ll show up in NJ and we’ll get some very strong margaritas and dish the dirt… 

Whenever I need to discuss something technical I go to Edith first, and then perhaps Tom Selling for the superfine details and a lot of attitude and Broc for the legal angle…  
IFRS is one of those things. Given the SEC’s announcement yesterday of a more specific timetable for implementation and a request for comments, it’s the topic du jour.
At least for everyone who’s not getting “made redundant” at Deloitte…
So let me say, go to the FEI site and Edith’s comments for the details. Go to Tom Selling’s post for some attitude. On this blog, I’m only going to expectorate on the impact on the Big 4.
First, a few comments from Edith that were posted, not surprisingly, at 1:03 am.
Yes, bloggers get more creative after midnight…
Driver’s Ed
Maybe some folks will listen to Willie Nelson’s On The Road Again as background music for reading SEC’s proposed IFRS Roadmap. Although some of the lyrics would seem to speak to the ‘old days’ – e.g. “Insisting that the world keep turnin’ our way…” … other lyrics may inspire the move to one set of global accounting standards – a move predicted for a number of years now by the SEC, FASB, IASB and others:  

“On the road again
Goin’ places that I’ve never been
Seein’ things that I may never see again,
And I can’t wait to get on the road again.”

 


And now a few from Tom Selling:
1. The sole purpose of financial reporting standards promulgated by the IASB or FASB is to provide timely and relevant information to investors, period.

2. Investors should be provided with information relevant to assessing the amount of wealth available to the reporting entity, claims on wealth, and how wealth has changed over time.
a. The balance sheet is the principle financial statement for reporting wealth (assets) and claims on wealth.
b. The claims on wealth are distinguished by non-owner claims (liabilities) and owner claims (owners’ equity).
c. The income statement reports changes in assets and liabilities for a given period resulting from transactions between the reporting entity and non-owners (or owners in a non-owner capacity). Such changes should clearly delineate the effects of operating and financing activities.
3. Wealth is the command over goods and services.
4. Providing information about wealth is costly. Financial reporting standards must weigh the aggregate costs an entity will incur in producing information against the benefits of being provided with information. This weighing of costs and benefits, has, among other things, the following implications:
a. Not all assets and liabilities of the reporting entity may be recognized on the balance sheet.
b. The most accurate approach to measurement of some recognized assets and liabilities may not be economically justifiable. Therefore, financial reporting standards may require or permit alternative measures that are less accurate, without sacrificing the objective of wealth measurement.
5. The needs of regulators, managers, or auditors are not directly germane to establishing financial reporting standards, except to the extent that their past and future actions cause the costs of producing information for investors to change.


My opinion, from a completely non-technical perspective is this:
1. Anything that gives investors, all investors, retail or sophisticated hedge funds, shorts, and institutional investors “timely and relevant information” on an equal and fair basis is better in my book than the current situation. The world is increasingly global. Many investors have interests in investments that are outside their home country and many investments are complex in terms of their structure and underlying valuation. Consistency in theory and approach, if not in practice, is better than not.
2. Rules are meant to be broken and gotten around. Better to judge professionals on their judgement, and let them take full responsibility for it, than to constantly have debates and lawsuits about whether arbitrary rules have been broken.
3. All change is an opportunity and this one is certainly an opportunity for the Big 4. It’s another reason why companies will need the Big 4 – both as a consulting firm to help them get it right and as an audit firm to tell them they got it right. But it’s also an opportunity for the alternative firms to gear up and displace the Big 4 as consultants.
The Big 4 have already launched numerous special mini-sites to address the issue, have started seminars and briefings for executives and are gearing up to help companies with the transition on a consulting basis. New revenue from this issue make a small dent in the loss of revenue from less Sarbanes-Oxley hours at clients.
Some quotes from the WSJ: (Kara Scannel and Joanna Slater did a great job with a difficult topic.)
...Introduced in two steps, the shift could eventually cut costs for companies (Note from fm: They’re talking about internal costs for non-US based multinationals who are now preparing two or three sets of statements – local GAAP for taxes, US GAAP for filing with SEC, and IFRS) and smooth cross-border investing. At the same time,investors worry it will create confusion, especially during the transition. Other critics worry that the international system offers too much wiggle room for companies, compared with the more precise rules enshrined in U.S. standards.  

…A move to international standards “will likely inflate the earnings of U.S. companies and mislead investors,” said Gregory Pai of Paradigm Asset Management in White Plains, N.Y. On the plus side, he noted, the convergence should eventually allow multinationals to save on their accounting bills. (Note from fm: This concern about “inflated earnings” is a non-issue. The level of the water in the lock will rise and all the boats will rise with it. All companies will adjust and once all are on standard, it’s all relative. Which is the idea…)

Big U.S. accounting firms support the push to a single world-wide rule book, and say the transition will take years. D.J. Gannon, a partner with Deloitte & Touche LLP in Washington, figures most U.S. companies aren’t ready yet to switch to international accounting, and probably need five to seven years to prepare. “Education and training is a big issue,” Mr. Gannon said.

 

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7 replies
  1. Anonymous
    Anonymous says:

    I guess the Big 4’s lobbying efforts are paying off. I have a theory that this has to do with more than just business development for the large firms. I believe also that the Big 4’s international constituents are pushing for this so that their work is seen as on par with the US Big 4 firms. FM do you agree?

  2. Francine McKenna
    Francine McKenna says:

    Actually, I think that this will be a rare instance where the international firms will be one up on their US partners and the US partners will have to listen to them. I agree there is often a bias by US partners that everyone else is a hick. But when it comes to IFRS, the US firms are really deficient. You’re hard pressed to find any real number of native US partners that have significant experience in preparing IFRS financials. I remember at the Compliance Week 2007 Conference, they had to bring in someone from London to talk about IFRS. None of the firms had anyone at a partner level in US they could volunteer, let alone armies of staff people.. Better start setting up some more focused international rotations fast.

  3. Brennan
    Brennan says:

    There’s a quote in knowledge and decisions by Thomas Sowell that goes, “The huge costs saved by not having to duplicate given knowledge and experience widely through the population makes possible the higher development of that knowledge among the various subsets of people in the respective specialties.” It’s like Adam Smith’s division of labor applied to knowledge.

    I think the implications of that are being felt now. Accounting is complicated. So complicated that accountants can specialize in different forms of accounting. And this allows us to to further develop our knowledge of accounting. However, the cost of that development is the difficulty accountants have in explaining new concepts to financial statement users.

    I think we need to do something like Google did with blogger. You don’t need to be a web designer to create a blog. But you act like one when you customize your layout. I think we should be finding a way to apply that concept to financial statements. I don’t know what that’s going to look like. But I think that’s where value in the future will come from.

  4. Independent Accountant
    Independent Accountant says:

    Francine:
    I read this article in the WSJ and will post on it. That said, that the Big 87654 favor anything means nothing. Most likely, a number of large Big 87654 clients said they wanted IFRS, so they Big 87654 say, “yes sir”. As to their favoring IFRS, of course. Why? It will reduce their ability to get sued. Everything in the name of “judgment”. When I was a wee little CPA decades ago, I favored standards like the IFRS, with a lot of judgment in them. Then I saw what went on in practice and concluded more detailed standards are necessary.

  5. Edith
    Edith says:

    Thanks for the cite Francine. I don’t always see eye to eye with you on everything and you take a pretty hard line on some issues (as does Tom Selling in his Accounting Onion blog who you also reference) but it’s good to see a range of views and expression on topics of interest from people with diverse backgrounds who have something to add based on their particular insights and experience. Just joined your ‘readers of Re:The Auditors” group on LinkedIn, will be interested in your book (have you gotten a movie deal yet?)

  6. The IFRS Exorcist ©
    The IFRS Exorcist © says:

    Hi Francine

    I am happy to find this blog I am new to blogging. I am also a follower of Edith’s blog. Blogging is addictive.
    I write a blog on IFRS implementation in Canada and call myself “The IFRS Exorcist”. I deal with pesky devils n the details.

    I need to lighten up a bit just like Edith. Perhaps if I write at one in the morning. Or 3 am?

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