The rules for accountants look like they are going to go through some big changes, and the effects could be far-reaching for U.S. businesses, lenders, investors – and accounting students.
The U.S. Securities and Exchange Commission in late August outlined a “road map” that would eventually mandate that publicly traded companies switch from generally accepted accounting practices – otherwise known as U.S. GAAP – to international financial reporting standards (IFRS) in filing statements with the SEC.
The proposal is in response to the blurring of international borders in the business world, where foreign companies frequently acquire U.S. interests and vice versa, and where investors often look overseas for better returns.
With U.S. companies and many foreign ones under different sets of rules, comparisons by investors can be difficult. The accounting standards can have an effect on issues such as taxes, valuations, executive compensation and investor perceptions.
Under the SEC timetable, the largest public companies will be able to file under IFRS – which already has been adopted by more than 100 countries – as early as next year, with the agency making a decision by 2011 whether to commit fully to the move to international standards. If that happens, all public companies could be discarding GAAP by 2014.
Most accountants believe the adoption of IFRS is a foregone conclusion.
The two standards have been converging for several years, and the American Institute of Certified Public Accountants has already formally recognized IFRS as an acceptable accounting standard, according to Arleen Thomas, the trade group’s senior vice president.
The SEC also has given foreign companies with U.S. interests the option of filing in either GAAP or IFRS.
“The profession has accepted the fact that the world has become a smaller place when it comes to business and that we should be all playing on the same field,” said John Mathias, partner at Piccerelli, Gilstein and Co. LLP and chairman of the Rhode Island Board of Accountancy.
While the SEC “road map” deals with public companies only, a standards switch would likely effect privately held businesses, according to most of the local accountants contacted by Providence Business News.
“There’s going to be a trickle down,” said Claire Iacobucci, director of quality control at Kahn, Litwin, Renza & Co. Ltd.
For example, lenders may require in loan agreements that private businesses keep their books following international standards in order to monitor performance more easily.
“It’s my opinion that both private and public companies will be dealing with this issue,” Mathias said.
What are the differences between the standards?
The change from rules-based GAAP to the principles-based international standard will mean there will be less detailed direction and more interpretation, accountants say.
Iacobucci said whereas GAAP has countless pages of rules – about 25,000 pages – IFRS standards aren’t nearly as voluminous.
In some cases, the changes will be huge. Where GAAP allows for last-in-first-out inventory valuation, that’s not allowed under IFRS, said Anthony Pencek, an accounting instructor at Bryant University.
“Anytime changes in accounting standards could impact your bottom line, then it can impact stock valuation, investor perception and relations with your lender and creditors,” Mathias said.
The effects of a switch to international accounting standards would be limited in Rhode Island – at least at first.
Steve Geremia, a partner at Lefkowitz, Garfinkel, Champi & Derienzo PC, noted that there are not many public companies based in Rhode Island. Outside of the Big Four accounting firms and a few other locally based agencies – including his own – most firms in the region do little business with public companies.
Geremia said CPAs at his firm have already started training for IFRS.
On the academic front, some business schools are struggling with how to integrate IFRS lessons into the curriculum, enough though the switch is a few years away and it’s unclear how private companies will be affected.
“Discussions are currently under way to evaluate the courses where IFRS integration is of greatest value,” said Dennis Bline, chairman of Bryant’s accounting department.
Pencek said the international standards are sure to be a big part of students’ coursework in the future. “They have to have training in it,” he said. “That is what accounting firms are going to demand.” •
