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April 30, 2008

A global language for accounting

As the US grapples with whether to adopt IFRS, the rest of the world has largely embraced the international standards. The International Accounting Bulletin investigates the challenges faced and lessons learned as IFRS spreads through developed and developing financial markets.

Early preparation is the most stern advice the UK is sending to jurisdictions working towards convergence with, or adoption of, IFRS. The global rush to embrace IFRS was initiated by the EU’s decision to make the use of the international standards mandatory for reporting in its capital markets from 2005.

Two Big Four partners speaking with the International Accounting Bulletin agree it is vital the finance profession has sufficient time to get up to speed with IFRS before reporting begins. Ken Williamson, leader of the financial reporting advisory team at Ernst & Young (E&Y) UK, says the biggest challenge regarding the implementation is the level of technical competence in the marketplace.

However, he warns preparing for the transition to IFRS could be more problematic in the US than it was in the UK. “It was more within the control of the profession in the UK because we take graduates from any discipline and put them through training in the UK,” Williamson says. “In the US… usually you have an accounting degree before you join an accounting firm. So the colleges and universities are going to have to get to grips with IFRS first as well as the accounting profession and the corporates. There is going to be a massive skills shortage and if the corporate world is given a very short time to implement, then it is going to be difficult to get the competency up in time to deal with it proficiently.”

PricewaterhouseCoopers UK head of assurance Richard Sexton adds: “I think you need to take the changeover very seriously, whenever you do something as big as adopting a completely new set of accounting standards, some of the principles may be the same, some of the disclosures may be the same, but the devil is always in the detail.”

The consensus among several US IFRS experts who spoke with the International Accounting Bulletin is that IFRS is coming but whether the nation is prepared in time remains to be seen. Bruce Pounder, president of consultancy Leveraged Logic, says he believes it is “virtually certain” the US Securities and Exchange Commission (SEC) will decide as early as this year to allow US registrants the choice of using either US GAAP or IFRS, with the change perhaps effective from 2009. Pounder suggests adoption will be voluntary and interest the largest companies to begin with.

“Over a period of years, more and more companies will find it beneficial and they will have gotten philosophically comfortable with the idea of making the switch from US GAAP to IFRS,” he says. “For a market as large as the US it will be titanic in scale. Fortunately, with the concept of the option [to adopt], I think we will see a classic adoption curve. The good news is not everybody is going to rush to switch at the same time and the most eager companies are going to be the ones with the most to gain and most resources to devote.”

The professional service firms that serve large multinational clients are invariably members of international networks and can draw on the resources of international counterparts that already use IFRS. KPMG US audit department of professional practice partner Paul Munter says KPMG began training staff on IFRS in 2004. Munter estimates that the US firm has more than 1,000 audit partners and managers who have IFRS training.

Mid-tier challenge

Outside the Big Four, however, it is a different story. Crowe Chizek is one of the largest mid-tier firms in the US but most of the firm’s clients are domestic entities. Assurance and financial advisory services executive Hans-Peter Rudolf said he is a little sceptical whether many clients would voluntarily switch to IFRS and predicts most clients will adopt a ‘wait and see’ approach. Crowe Chizek recognises the need for IFRS capacity due to its strategy to push upmarket and is training staff. Rudolf said inadequate IFRS training could provide a barrier for prospective clients.

Asian demand

China is another nation on a path towards  IFRS convergence. As it progresses, the demand for qualified personnel with international expertise is rising exponentially.

lChinese firms, often backed by their global network partners, professional accountancy bodies, the government and neighbouring countries, are all providing assistance in IFRS-related training to the country’s rapidly evolving profession. Chinese firms also rely on secondees to boost IFRS expertise.

BDO China regional co-ordinator Floyd Chan says the firm has drawn on BDO International’s infrastructure to provide IFRS resources and training. BDO established an IFRS resource centre which provides IFRS tools, technical materials and publications for all staff members. Chan says: “We have conducted basic training in each office, event training courses and have tried to update every training material as the IFRS convergence process continues. We have also established IFRS country leaders, what we call IFRS champions. Each country would have one person in some way responsible for IFRS implementation and its training.”

PricewaterhouseCoopers (PwC) India will also utilise IFRS-trained secondees from other firms in the international network. Listed entities in India will be required to use IFRS from 2001 and other public-interest entities such as banks, insurance companies and large-sized entities are also expected to be subject to IFRS following confirmation from the Indian government and other regulatory authorities.

PwC India expects to draw on the experience of other countries in its global network that have already made the change to IFRS to help its transition. A system of training secondments has already begun at the Indian firm. PwC India, along with the Indian Institute of Management, is looking to create a special IFRS module to educate clients. Internally, the firm has nominated its IFRS experts and their training is due to begin shortly.

The costs

The most significant cost of implementing IFRS in the UK was training, Williamson and Sexton agree. During the three years leading up to 2005, E&Y UK put all its auditors through four or five days of intensive IFRS training annually, which Williamson says was one of the larger training exercises the firm has conducted. He estimates the IFRS training investment was about three times the size of what E&Y would usually invest in training each year.

Sexton says that while the cost of getting people up to speed is now defrayed, there is an ongoing cost in maintaining competence levels for two sets of standards as UK GAAP is still used for non-public interest entities.

“We have to maintain two languages, and that has a cost because UK GAAP is, if you like, now the orphan child. It is not the primary public reporting language,” he says.

The potential of Japan retaining two languages is the greatest concern of Nexia Japan managing partner Sosuke Yasuda as the nation’s convergence with IFRS by June 2011 draws closer. Nexia Japan has already begun engagements that include reviews of financial statements prepared under IFRS, both for inbound subsidiaries of foreign companies in Japan and for outbound subsidiaries of Japanese companies, Yasuda says.

How costly the implementation of IFRS will be, will depend on the manner in which it is adopted, he adds. If IFRS becomes the only standard in Japan, it will be easy, however if Japanese GAAP is retained and the two sets of standards are used, “it will cost too much for us”, Yasuda says. “In this case we have to not only study both, but also study all cases of adjustment for converting both standards.”

The benefits

Williamson says it is difficult to quantify specifics on revenues and impacts associated with IFRS, not least because there were several significant concurrent events affecting the volume of work the firm experienced at that time, including the implementation of the Sarbanes-Oxley Act in the US and a buoyant transactions market in the UK.

One-off work in the year of conversion earned PwC UK about £10-15 million “in the grand scheme of things”, Sexton estimates. There was also a very significant increase in the amount of work for a company to produce IFRS-compliant accounts, he adds.

“We think [audited financial statements prepared under IFRS] are probably about 30 percent longer, given the disclosure requirements. Therefore, there is necessarily quite an uptake in the amount of work. That is ongoing and it now gets imbedded because IFRS rarely takes disclosure requirements away.”

The future

Nigel Sleigh-Johnson, head of the Institute of Chartered Accountants in England and Wales financial reporting faculty, predicts the IFRS implementation process could be easier for jurisdictions adopting the standards now and in the future than it was to for the EU.

“The standards at the moment are fairly stable, although there are inevitably changes happening all of the time,” he says. “[In the EU] people were waiting for the standards that they had to apply and it made the transition more difficult. So maybe there were some challenges more acute for 2005.

“I think it was quite a challenge for all concerned to get up to speed and there were major risks for the credibility of the profession and for the credibility of financial reporting generally. [However,] the transition was challenging but successful… It was generally a success story, but a very challenging one for everybody and no doubt about that.”

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