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