At-A-Glance
With the United States SEC
having taken a step back from IFRS
consideration during the election
season, the IASB put the ball right back
in the SEC’s court, with a detailed
response to the SEC staff’s July report.
The IASB staff made their case for the
importance of moving forward, agreeing
with the SEC in some cases and offering
strong rebuttal in others. Our first
article covers the main points in these
ongoing exchanges.
Recognizing the importance of this
development, Integra International
Global Board members, Mark Saunders and
Steve Austin, as announced at Integra’s
World Conference in Madrid, met with a
senior member of the IASB staff in
London on November 1st, shortly after
the release of the IASB response. Both
Integra Global Board members walked away
with a much better understanding of the
current status of the IFRS process, and
of the remaining challenges faced by the
IASB, as global standard setting
adoption moves toward completion while
at the same time addressing concerns
raised by the SEC. The Global Board
members were also able to invite the
IASB representative to serve as our
keynote Speaker at Integra’s Bristol
England EMEIA conference in June 2013.
Realizing that IFRS in any form
will not be practical for many smaller
companies, the AICPA presented a
simplified financial reporting framework
blending accrual and US-tax-based
principles, as highlighted in our second
article.
Finally, even as IFRS gains
acceptance, the goal of worldwide
comparability in financial reporting
will only be realized if the technology
tools are in place for accurate and
uniform implementation. Our third
article describes the status of some of
these endeavors.
Editor Gerald E. Herter, CPA
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In This Issue
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IFRS: Moving Forward or Backward?
International Board Weighs in on SEC Staff
Report
The Worldwide movement toward global
accounting standards has received broad coverage
in this publication during 2012. As evident from
the discussions concerning leases, revenue
recognition and financial instruments, the
myriad of challenges and controversies
surrounding IFRS have led to further delays and
uncertainties. Consequently, the lack of a
definitive recommendation by the SEC staff in
its July report, while disappointing, should not
have been a surprise.
After careful consideration of the SEC
report, the IFRS Foundation staff published a
response at the request of their Trustees that
evaluated the report from an international
perspective, and sought ways to enhance the
Foundation’s work, taking into account academic
research and results from other jurisdictions.
The 85 page document analyzes the SEC’s take
on:
- the functioning of the IASB as a global
standard setter,
- IFRS as global accounting standards,
- transitional challenges of adoption and
endorsement of IFRS, and
- other jurisdictional challenges
involving regulations, investors, entity
size, people readiness, and cost.
1) The functioning of the IASB as a
global standard setter
While the SEC staff felt that from a
governance standpoint, there is a reasonable
balance between oversight and independence of
the IASB, the US may still need its own means of
protecting US investors and capital markets with
regards to the impact of future pronouncements.
The IASB staff reiterated several substantive
steps that have been taken over eleven years to
assure independence.
The SEC staff questioned funding. Since the
IFRS Foundation cannot compel financial support,
the SEC staff contends that the IASB relies
heavily on the large public accounting firms,
along with less than 30 of the more than 100
countries that use IFRS. The IASB staff
countered that 69 countries financially support
the IFRS Foundation, and that the US financial
contribution is far less than its size and
representation would call for.
The SEC staff reviewed favorably the
comprehensiveness of the IASB standard setting
process, which the IASB staff appreciated and
further noted that its Due Process Oversight
Committee provided additional assurance that the
process was following the prescribed framework
in an independent manner.
2) IFRS as global accounting
standards
Both SEC and IASB staff acknowledged the high
quality of standards issued as US GAAP and IFRS.
The SEC staff emphasized the number of
differences that still exist, while the IASB
staff noted how much less the differences are
than when the convergence process began a decade
ago. However, frustrations have grown over this
lengthy period, straining relations between the
IASB and FASB. They now each appear to be going
their separate ways in finding solutions for
remaining differences, which could serve to
unravel the gains that have been attained.
US GAAP has extensive industry-specific
guidance, most significantly for utilities that
engage in rate-regulated activities, oil and
gas, investment companies and broker-dealers.
The IASB opposes industry-specific guidance as
adding unnecessary complexity and potential
conflicts. Also, the SEC is accused of
contradicting its earlier commissioned report
that recommended elimination of
industry-specific guidance.
The need for more timely IFRS interpretations
was agreed to, as had been noted to the IASB in
a prior Trustees’ review. The recommendations of
that review have been implemented according to
IASB staff.
The SEC staff recommended that the IASB
expand the work it already does with national
standard setters, to have greater involvement in
standards development and implementation.
Responding to a similar recommendation from the
prior Trustees’ review to formalize these
relationships, an Accounting Standards Advisory
Forum is being formed. The IFRS Foundation
recently issued an Invitation to Comment on a
proposal for the Forum.
Both staffs recognize the importance of
consistent enforceability in order for a global
IFRS to be effective. While clear,
understandable standards are a start, the
authority for enforcement lies with the
individual countries. Therefore, cooperation
between national regulatory agencies will be
critical for success.
3) Transitional challenges of
adoption and endorsement of IFRS
The IASB staff affirmed that the method and
timing for individual countries to make the
transition to IFRS was for each country to
decide based on its own circumstances. The SEC
staff discussed the pros and cons of a “big
bang” method, versus a gradual transition,
versus an indirect incorporation approach to
IFRS. These alternatives were considered from
the standpoint of regulators, preparers and
users of financial statements, taking into
account the cost, knowledge and awareness,
legalities and availability of resources.
Having taken so long to arrive at this
juncture, the SEC has the benefit of learning
from the experiences of the over 100 countries
that have gone through the process of changing
over. The IASB staff spells out some of the
methods and results. Fast or gradual transitions
can work, but the IASB staff feels that a
piecemeal or standard-by-standard approach may
be more costly and problematic over the long
run, since the lack of comparability and the
need for reconciliation between standards will
continue for an extended period, leading to
confusion and misunderstanding.
4) Other jurisdictional challenges
involving regulations, investors, entity size,
people readiness, and cost.
The SEC staff reported the concern of various
industry regulators that have specific financial
reporting needs that are not envisioned in IFRS.
Acknowledging that this concern is not limited
to the US, the IASB staff presented examples
from Brazil, the European Union, Australia, and
Canada to describe how they have dealt with
these regulatory issues. Similarly, differences
between tax and financial reporting have been
addressed in various countries, and can be in
the US as well.
Investor preparation for a change to IFRS is
a concern throughout the world. Institutional
investors tend to be more familiar with the
prospect of IFRS than the small, private
investors. Time and education are called for in
order to equip the investment community for the
ramifications that come with a move to IFRS. The
IASB has an Investor Liaison Programme set up to
provide resources for investors, as well as
various committees and councils to provide
ongoing connections to the investor community.
Addressing company size and cost, the IASB
staff indicated that the experience with the 120
or so countries that have required IFRS has not
found the cost to be prohibitive or problematic,
as the SEC staff suggest. Similarly, finding and
preparing the human resources needed to
accomplish the transition also has not been a
significant problem in other countries.
Finally, the IFRS Foundation commissioned an
academic study to quantify the benefits that
have accrued from adopting IFRS. Generally, that
study found that capital markets benefitted in
the areas of market efficiency, investment
decisions, quality of financial information,
foreign investment, capital market integration,
and development of the infrastructure to support
IFRS.
For further information, see
Trustees publish IFRS
Foundation Staff Analysis of SEC Final Staff
Report on IFRS
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AICPAs Unveils New Financial Reporting Framework for
SMEs
Exposure Draft would free companies from GAAP
complexities
This past month, the AICPA made good on President
Barry Melancon’s earlier declaration that a new resource
would be forthcoming to provide long sought relief for
smaller companies. With the continued trend toward
standards that bear less and less relevance, coupled
with unimaginable complexity for all but the largest
companies, the AICPA could no longer stand idly by, but
had to respond to the calls from the multitude of its
constituents and their clients.
The Exposure Draft, Financial Reporting Framework for
Small-and Medium-Sized Entities (FRF for SMEs), was
issued for comment on November 1. No lightweight
endeavor, the ED weighs in at 252 pages and will be
available for review through January 30, with a final
release expected in the second quarter of 2013.
Developed by a task force drawn from CPAs and AICPA
staff experienced in the SME arena, the FRF for SMEs
presents a comprehensive resource, substantial portions
of which are drawn from the Canadian Institute of
Chartered Accountants’ CICA Handbook.
Though the FRF for SMEs will not be authoritative,
the AICPA is hopeful that it will gain wide acceptance
from preparers and users who do not require GAAP or IFRS
reporting standards. FRF for SMEs will be considered a
“special purpose framework” (SPF), the term that
replaces “other comprehensive bases of accounting”
(OCBOA). Using historical cost as the basis, the AICPA
states that “familiar traditional accounting and accrual
tax accounting principles will comprise the FRF for SMEs
and only financial reporting topics that are pertinent
and have meaning to most SMEs and their financial
statement users will be included.”
While not specifically defining SME, the FRF for SMEs
is targeted at owner-managed entities whose financial
statement users “have direct access” and where “the
owner-managers rely on a set of financial statements to
confirm their assessments of performance, and of what
they own and what they owe, and to understand their cash
flows,” according to the AICPA’s list of Frequently
Asked Questions.
The FRF for SMEs approach follows the common sense
accounting that prevailed prior to the myriad of
complexities of recent decades. Fair value accounting,
variable interest entities, other comprehensive income,
and similar modern concepts are left behind. Leases,
goodwill, and inventory, for example, can follow methods
allowed for tax purposes, to minimize differences
between financial statements and tax returns. The
general idea is to record economic transactions when
they occur and follow the matching concept. Disclosures
are reduced to presenting only the relevant and
understandable. The framework is principles based so
that preparers will still need to exercise judgment in
its application. However, FRF for SMEs is not to be
confused with IFRS for SMEs, since FRF for SMEs is
intended to be more focused on the needs of U.S.
companies, will be more tax friendly, and hopefully
better understood, since it is not tied to GAAP.
The AICPA is hopeful, that by exposing the FRF for
SMEs for public comment, the process will instill
credibility. Also, the expectation is that changes will
be infrequent, enhancing the sense of stability. Three
or four years are expected to pass prior to considering
any significant changes. A companion volume is in the
works to provide examples, checklists and other tools.
For further information, see
Financial Reporting Framework for Small-and Medium-Sized
Entities
The Role of Technology Tools in Global Accounting
Standards Implementation
XBRL, ADS, CA/CM continue to evolve
The logistics of implementing global accounting
standards has not received nearly the attention as the
debate over concepts. But the ultimate success in
attaining comparable financial reporting across
continents will depend as well on the effectiveness of
the technology tools in place to accurately reflect the
standards. Some of the tools in various stages of
development are eXtensible Business Reporting Language
(XBRL), Audit Data Standards (ADS), and Continuous
Auditing/Continuous Monitoring (CA/CM).
XBRL is basically a standardized method of converting
financial statement information into a computerized
language format that can be accessed, sorted, processed
and then returned to a readable format in order to
facilitate analysis and comparison to similar
information from other companies or established
benchmarks and evaluation tools. Specific items of
financial data are identified by “tags” that are drawn
from a standard dictionary, called a “taxonomy.”
XBRL has been in development for about 15 years, with
significant support from the AICPA. It has matured to
the point that all U.S publicly traded companies are
required to report their financial statements to the SEC
in XBRL format. However, the development of XBRL for
companies issuing IFRS based financial statements is
further behind, and consequently, has not yet been
approved by the SEC or the European Union for filing
purposes. The delay may have to do with different
perceptions of responsibility between the SEC and the
IFRS Foundation, and the fact that the GAAP taxonomy has
over 15,000 tags, which is about four times the number
currently found in the IFRS taxonomy.
A concern with XBRL is the proper tagging of data, so
as to produce correct, usable results. SEC studies have
shown a frequency in errors. Some data may not have been
tagged, or was given the wrong tag, or the tag was
inconsistently applied. To address the problem, a new
Technical Practice Aid, AICPA Principles and Criteria
for XBRL-Formatted Information, provides guidance for
designing and maintaining XBRL files. Also, the AICPA
SOP 09-01, Performing Agreed-Upon Procedures Engagements
that Address the Completeness, Accuracy or Consistency
of XBRL-Tagged Data, originally issued in April 2009, is
being updated to track with the new Technical Practice
Aid.
While the AICPA’s Assurance Services Executive
Committee (ASEC) tackles the XBRL issues through its
XBRL Assurance Task Force, a related endeavor directed
at the audit process is the focus of ASEC’s Emerging
Assurance Technologies Task Force. This task force
established the Audit Data Standard Working Group, which
according to the AICPA is “to help develop new
technologies that will contribute to the effectiveness,
timeliness, and efficiency of the audit process.” In
July, the Audit Data Standard Exposure Draft was issued
with the specific purpose “to establish a standardized
data model… that management, as well as internal and
external auditors could utilize for enhanced analytics
that would contribute to the timeliness and
effectiveness of the audit process. The challenges that
auditors face, in the effort to obtain needed data in an
automated technology environment, are addressed by
offering a detailed set of uniform structures for data
that both IT and accounting personnel can jointly work
from.
The comment period for the Exposure Draft has ended.
A sampling of comments has the New York Society of CPAs
supportive with some suggested changes, while the
Pennsylvania Institute of CPAs feels that acceptance
will be lacking, since the cost of implementing would
fall on audit clients.
Taking a look back and forward, an October AICPA
white paper explores the status and prospects of CA/CM,
Continuous Auditing and Continuous Monitoring. This
topic had been introduced by the AICPA in 1999. The
current study indicates that while not much has been
done in this area since 1999, the potential is even
greater now. The concept is to move away from
traditional auditing techniques, which focus on sampling
and that take place after the fact, and evaluate data as
it is produced and by monitoring that data throughout
the year.
The reality today that can have an impact on the
future of CA/CM is the advent of “Big Data.” Big Data is
the immense wealth of data that is generated daily by a
multitude of sources, and the technological capabilities
to “slice and dice” that data in increasingly
sophisticated ways, all at a breathtaking pace. No need
to sample. All of a company’s data are put in the mix,
and trends, ratios, unusual occurrences and exceptions
are exposed for immediate evaluation, on an ongoing
basis.
What is obvious in all the technologies described in
this article, is the increasing need for more and better
trained professionals who can use these new and
developing tools to best advantage.
For further information see
AICPA Resources for XBRL, ADS
and CA/CM
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
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Women on Corporate Boards Encourage Better Financial
Reporting
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Credit raters, regulators failed MF Global
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U.S. sees talks with China on audits
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Diamond Foods: When Accounting Goes Wrong
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Emergence-of-social-stock-exchanges-and-other-market-drivers-of-sustainability
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KPMG conducted due diligence of Deloitte audit at
Autonomy
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