Tuesday, May 8, 2012
Throughout the years auditing has changed. According to one of the interviewees in the
article The New Breed of Auditor by Bill Carlino, auditing
was far simpler thirty years ago than it is today. In
that era of auditing, "you found out what an asset cost and figured out how to
get the income statement properly matched with revenue.” They also used historical cost instead of
Throughout the years auditing has changed. According to one of the interviewees in the article The New Breed of Auditor by Bill Carlino, auditing was far simpler thirty years ago than it is today. In that era of auditing, "you found out what an asset cost and figured out how to get the income statement properly matched with revenue.” They also used historical cost instead of fair value.
Obviously the field of auditing is not for the weak of heart. It is a field that is now under public, governmental and agency scrutiny. Progressing into the future, it is easy to see that regulations are going to continue to get stricter and the auditor’s role will become more and more difficult as it has become more and more important. At one point I had considered doing auditing, but this one little article makes it sound a bit more difficult than I’d originally thought. Hopefully an auditing class will help me decide if it is something I should try outside academia.
Tuesday, March 13, 2012
The Federal Accounting Standards Board (FASB) as well as the International Accounting Standards Board (IASB) have decided to create a single standard for recognizing revenue. Lamoreaux says under a the new standard a company will recognize revenue from contracts as soon as it transfers goods and services. This is not much of a change from how accountants already handle revenue under GAAP.
According to Lamoreaux the boards also included guidance on how to know a good or service is tranferred over time. They also simplified proposals on warranties, how to determine transaction price, and modified the test to apply to long term service as well as provided some expemptions from some disclosures for private companies.
The accounting model they have proposed would be:
1. Indentify the contract with a customer.
2. Identify the seperate performance obligations in the contract.
3. Determine the transation price.
4. Allocate the transaction price to the separate performance obligations in the contract.
5. Recognize revenue when the business satisfies a performance obligation.
This model is scheduled to go into effect on January 1, 2015 except for private companies, who have an extra year to implement as well as being exempt from some mandatory disclosures.
I personally can't tell the difference between this new standard from what I have already practiced in the professional sphere. I did however find it interesting that despite the FASB's refusal to adopt or even converge with IFRS, it felt the necessity to write a new standard with the IASB on the recognition of revenue.
They are also handling implimentaion differently as well. FASB is not allowing early implimentation which means that people will have to collect data for two years and then retroactively apply the new standard to it. Whereas the IASB is allowing companies to implent the new standard as soon as they are ready.
I can understand why the IFRS vs GAAP debate has gone on for so long, FASB continues to send mixed signals whether it wants to be part of the international community or not.
Tuesday, March 6, 2012
In the article One Size Does Not Fit All, Judith Kamnikar and Ashley Burrowes assess why the Financial Accounting Standards Board (FASB) should create a seperate set of standards for private companies. It boils down to the end users of private companies being quite different from public companies, thus their needs are different. Why should a private company have to figure its Earnings Per Share if they don't publicly sell their stock?
The FASB was created in 1971. It took quite some time, however, for the FASB to decide to do something about the disparate reporting needs of private companies. Finally in 2004 they created the Small Business Advisory Committee (SBAC) to begin the process of developing reporting and financial standards for small businesses. The SBAC is still providing input private company reporting issues.
A seperate task force created by the AICPA (American Institute of Certified Public Accountants) in 2005 produced a report that concluded, "the users of private company financial statements have different needs than users of public company fiancial statements (and) that GAAP exceptions and OCBOA should not be the resolution to the private company financial reporting problems." This report thus generated yet another committe, the Private Company Financial Reporting Committee (PCFRC) for the purpose of providing recommendations to the FASB about how prospective and existing GAAP rules would affect small businesses. Unfortunatley, the PCFRC has not enjoyed much attention from FASB.
In response to this the AICPA again created another committee who issued another report in 2011 claiming that GAAP for private companies is "urgent and growing".
Internationally, the IASB has been a bit more receptive to the needs of small businesses and has implimented IFRS for SME's (International Financial Reporting Standards for Small and Medium-sized Entities).
Some of the changes in IFRS for SME's include:
- Some topics are omitted from small business reporting
- A more simplified accounting method
- Substantially fewer disclosures
- Omitted Earnings per share
Kamnikar, J., Kamnikar, E., & Burrowes, A. (2012). One Size Does Not Fil All. Journal of Accountancy, 213(1), 46-49.
Monday, March 5, 2012
In the article, International Adoption Issues: A View From the IASB, Patricia McConnell lays out the different types of acceptance of IFRS as well as explains why it should be adopted. Her differing ideas stem from her work with the International Accounting Standards Committee (IASC) since the 1980's and as a financial analyst for Bear Stearns. She has spent a great deal of her 40 year career as a Certified Public Accountant (CPA) viewing the accounting world through investor-tinted glasses.
McConnell lays out a lot of information we have already heard or discussed. She believes that a "high-quality global financial reporting standards are essential for the transparency an comparability that is critically important to the effective functioning of today's global capital markets." Which is, as stated in previous articles, the reason that IFRS should not be a pipe dream.
She also goes on to state that despite the stereotype, the International Accounting Standards Board (IASB) is not a British organization. Instead it consists of 15 members from 12 countries, and 1/4 of the members, trustees and technical staff are American. Unfortunately, whether or not IASB is a multi-cultural organization was never in question by its opponents.
She believes that IFRS will result in a common financial reporting language that will improve transparency and enable investors to make comparisons among similar entities across jurisdictions. Several more times throughout her commentary she describes how IFRS will help investors. Miller and Bahnson in their article however pointed out that for many countries investors aren't the point of financial accounting. Never once does McConnell address the cultural diversity issues that IFRS must overcome for the implementation she so strongly desires.
She also does not mention that recently the IASB has begun to appoint politicians, not accountants, to its regulatory board. In the end her article discusses how the world should be with a global policy for investors without ever once discussing who is going to make sure that each country is giving IFRS its due diligence and ensuring it is implemented the same throughout various nations with various cultural perceptions of the purpose of financial reporting.
These are the issues with IFRS, not its base premise, a global financial standard. In the end she simply reiterates the hope and promise of what IFRS could be and disappointingly never addresses how, other than people adopting it, IFRS is to be maintained or regulated, or any other opposing arguments.
McConnell, Patricia. "International adoption issues: a view from the IASB." The CPA Journal 81.12 (2011): 6+. General OneFile. Web. 27 Feb. 2012
Tuesday, February 21, 2012
According to Paul Miller and Paul Bahnson of Accounting Today, in their article, The Demise of the Drive to Bring International Standard-setting to the U.S., the SEC's announcement in December that the commission would not in fact make a decision on this topic by the end of the year was not just a a setback but its death knell. Miller and Bahnson explain this opinion to be based on of their understanding of the issue as well as the actual wording used in the SEC's Chief Accountant Jim Kroeker's statement. Some of the points they present are reminiscent of last week's article, and some are new and previously, at least for me, not considered.
They start off by explaining the differences in what was expected and what was said. Kroeker's announcement was "I'm encouraged for the prospect of incoporation of IFRS." Obviously incorporation is not the same same as adoption. The largest difference is that incorporation is not using the IFRS in whole, but instead it would integrate acceptable pieces into the U.S's existing system, Generally Accepted Accounting Principles (GAAP). Adpotion on the other hand would use IFRS exactly as it is without a single change.
Miller and Bahnson believe this soft wording with no pre-determined date of an answer is a way to introduce the idea to IFRS's die-hards that the SEC will never adopt IFRS. Their reasoning for this is:
1. Adopting IFRS is legally impossible. I had not considered that the SEC can't give up its legal obligation to set the accounting standards for the U.S. Adoption of the IFRS would remove the SEC's power and give it to International Accounting Standards Board (IASB).
2. Allowing U.S. companies to choose between GAAP and IFRS is ridiculous. The entire point was to create a single accounting standard, not confuse the issue more.
3. Expecting the IASB and the Financial Accounting Standards Board (FASB) to agree on key issues is optimistic at best.
This is further complicated by the IASB's recent political tilt. The newly appointed chairman of the IASB was a career politian with Master's degrees in history and international relations, not accounting or even business. The IFRS Foundation then followed up the politician's selection with the selection of a French lawyer with extensive political experience. In the U.S. it is hard to fathom how political knowhow could surpass the need for accounting or business qualification for a board that wants to set international accounting standards. But as David pointed out in last week's article, many European countries see financial reporting as a political tool instead of an investor's.
I must then, under the weight of such well thought out and persuasive arguements, change my previous assessment that IFRS is something acheivable with the correct application of want and will. As an accountant, I want my accounting standards to be set by men who understand the struggles of accounting for the myriad of different customers I will face upon graduation. I want the accounting standards that I follow be set in place by men knowing the difficulties companies face competing in the expansive global market. And much like the FASB I am not ready to hand over the power to decide what these rules are to politicians.
Bahnson, P. R., & Miller, P. R. (2012). The demise of the drive to bring international standard-
setting to the U.S. Accounting Today, 26(2), 16. retrieved from http://wichita.edu.
Tuesday, February 14, 2012
On the surface, a single, binding international accounting standard is a provocative and lofty goal. It would allow accountants, companies, and investors world wide to speak a common accounting language where the rules of reporting structure were known and followed by everyone. It would easily allow comparability between companies the world over. And it would make the accounting for multinational companies much simpler by eradicating the question of which nation's accounting principles to use during the reporting process. However, in his commentary against the practicality of the U.S. adopting IFRS, David brings up a number of valid points that, as a fledgling member of the accounting community, I had not considered.
It seems, as with many of the global issues that all nations now face, cultural context is an important factor of the reporting standards that different nations now use. Unbeknownst to me, not all countries view the purpose of markets in the same light. In some European countries, it is believed that the point of markets is to help companies, which is often another way to further national policy while the Anglo-American view believes the purpose is investors. With these different consumers in mind, David asks us, how does one create a singular reporting system that caters to both?
Another reason that he believes IFRS may be more pipe dream than reality is who is going to police or watchdog companies and ensure they are meeting the IFRS's standards? Auditors, whose internal and legal structure hampers such behavior? The countries themselves? There is no system set up to ensure that all participants of the IFRS are actually doing the things they are supposed to with equal quality across all nations.
In academia, where the concept of international standards was first introduced to me, the adoption of IFRS appears like an obvious choice. It's a fairly elementary decision. All of us doing different things and generally making accountants lives more difficult or everyone doing the same thing and easing the lives of corporate accountants everywhere? In reality, however, the adoption of IFRS is a more complicated implementation that I originally considered it.
While David brings up very good points, ones that the international accounting community will have to address if IFRS is to work, I still feel that a singular accounting system shouldn't be a pipe dream. We should be able to come together, the change the global rules and find common accounting ground. We should be able to find ways to regulate, adapt and police global accounting practices. And after reading David's article, I also believe we may be a long way from that eventual dream come true.
Reilly, D. (2011). Convergence Flaws. Accounting Horizons, 25(4), 873-977.