Dr. Yvonne Hinson discusses the need for educators to address differences between IFRS and GAAP

Differences Between IFRS and GAAP Could Create Challenges for Educators
Originally Posted on Monday, October 19, 2009 | by Dr. Yvonne Hinson
Reposted from www.corporatecomplianceinsights.com

International Financial Reporting Standards:
Where are We and What is the Role of U.S. Educational Institutions?

International Financial Reporting Standards (IFRS) are financial standards set forth by the International Accounting Standards Board (IASB). These standards are the international equivalent to the U.S. Generally Accepted Accounting Principles (GAAP) set forth by the Financial Accounting Standards Board (FASB). Both sets of standards provide authoritative literature for public companies under their jurisdiction.

Discussion of adopting IFRS for U.S. public companies has generated a lot of discussion over the last several years. The U.S. Securities and Exchange Commission detailed a proposed roadmap for conversion on November 14, 2008. While the new administration has not embraced the roadmap at this point, the general belief is that some form of convergence or conversion will occur as we move forward, but that the timeline may be pushed back from the proposal.

This decision, regardless of the timing, may ultimately add to the massive amount of material educational institutions will need to cover in accounting programs.

Differences in IFRS and GAAP

While some describe IFRS as purely principles-based and GAAP as purely rules-based, this characterization is actually not appropriate.

IFRS does tend to provide less precise guidance, but there are most certainly rules embedded in the international standards. On the other hand, anyone schooled in accounting knows that GAAP are based on the Conceptual Framework; which is a set of guiding principles. The difference is that the U.S. standards have grown to include many rules due to requests by constituents for guidance.

For example, in the area of revenue recognition there are numerous standards under GAAP while IFRS has fewer revenue recognition standards. The FASB and the IASB Boards issued a Discussion Paper in December 2008 on revenue recognition and plan to have an Exposure Draft in 2010. This is one of many projects that the two Boards are working on together.

However, one must keep in mind that the U.S. standards are older than their international counterparts. Therefore, a question that is often asked is “Will IFRS look like GAAP in 40 years”? In other words, over time will companies desire more guidance that leads to more rules in the international standards? This is a question that only the future can answer.

Convergence or Conversion

Another looming question is “Are we going to convert or converge the two sets of standards, assuming the move to IFRS will occur?”

The FASB and the IASB met in September 2002 and agreed to a memorandum of understanding (MOU) know as the “Norwalk Agreement”. This agreement states that the two boards will work toward making standards as compatible as possible and that they will work together to coordinate future projects. Additional MOUs were issued in 2006 and 2008 indicating short term and long term projects. The first converged standard was Business Combinations (FAS 141R) on the U.S. side and IFRS 3 in the international standards. Additional convergence projects remain underway.

There has also been discussion of the U.S. adopting IFRS though a conversion. People on both sides of the argument have valid points. Some fear that if convergence is the ultimate decision we could end up in a situation much like we did in the 1960s with the metric system…convergence just simply fails to happen. These people feel that if we are to move toward IFRS in the U.S. then we should either have a convergence plan with an ultimate conversion date or just set a conversion date outright. Others fear that conversion to IFRS without planned convergence will lead to a weaker set of standards without guidance they feel is needed in the U.S.

The U.S. system is different in many ways from international systems and these differences must be considered. The one most often discussed difference is the U.S. legal environment. The U.S. is known for having a much more litigious environment. The fear is that if the U.S. is forced to convert to IFRS without some form of legal overhaul or agreement then we could find ourselves with lawsuits due to the increased use of judgment required under IFRS. This argument is a valid one and must be considered prior to a decision on possible conversion.

Another issue facing potential conversion is the funding of the IASB versus the FASB. Sarbanes-Oxley requires that the FASB be funded through dues paid by public companies and accountants. It prohibits the acceptance of contributions. The IASB, on the other hand, relies on contributions as a primary source of funding. The fear is that contributions can lead to increased pressure from special interest groups. This source has also led to questions regarding stability of the IASB. Funding source is most certainly an issue that must be addressed before a serious discussion around conversion can take place.

Educational Institutions and Their Responsibility

Accounting educators are charged with preparing their students for a profession that is constantly changing. These changes, in turn, lead to a need to continuously update curriculum. Educational institutions are now at a crossroads with the profession. They are left with a choice between 1) incorporating IFRS into the curriculum now before it is adopted in the U.S. or 2) waiting a while to gauge a better adoption picture in the event it does occur. Still another choice to be made if IFRS is to be integrated into the curriculum is whether a single course or complete curriculum integration is more appropriate. These choices are difficult ones with the future of IFRS in the U.S. so unsure at this point.

Include IFRS or Not?

The decision to include IFRS or not should be a relatively easy one.

Accounting educators are increasingly being told that they need to prepare their students for the global marketplace. That global marketplace, by definition, includes a world where IFRS is already in use. Virtually every other developed country in the world uses some form of IFRS. Not including IFRS in the curriculum to some degree definitely fails the global marketplace yardstick.

In addition, at least one of the Big Four accounting firms is requiring some level of knowledge during the interviewing phase. This firm is now requesting that interviewers ask IFRS-specific questions and interviewees must display some level of knowledge based on the courses they have completed. Students who have had a principles or accounting course must display knowledge of what IFRS stands for and that the IASB governs these standards. Students who have had intermediate accounting course should be able to list differences between IFRS and GAAP.

Therefore, at a minimum, those institutions preparing students to work with the public accounting firms need to consider some form of IFRS education in their curriculum.

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