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The Specialist in IFRS and U.S. GAAP

The Specialist in IFRS and U.S. GAAP

“… the most comprehensive handbook covering transition issues… an absolute ‘must have’ companion in order to deal with the complex transitional issues faced by companies moving over to IFRS. It should be on the desks of all accountants preparing for IFRS.” Steve Collings FMAAT, FCCA , Audit and Technical Partner at Leavitt Walmsley Associates Ltd.

“… an encyclopedic work by an author who gives executive seminars for CFOs on dual reporting under U.S. GAAP and IFRS.” Professor Stephen A. Zeff, Herbert S.Autrey Professor of Accounting, Jesse H. Jones Graduate School of Business, Rice University, Houston, Texas, and Book Review Editor, The Accounting Review.

“Not only has the author addressed the informational needs of the players in the accounting industry, he has also drawn, based on his vast experience, practical implications of reporting under both standards.

Noraini Mohd Nasir, Journal of Financial Reporting and Accounting.

“… excellent and eye-opening. … An understanding of the functions that various reserves serve for companies … is invaluable to a financial statement user” Patricia Doran Walters, Journal of International Accounting Research

“I am not aware of any other book that deals with the accounting for equity and other comprehensive income as comprehensively as this text.” M. Humayun Kabir, Pacific Accounting Review.

What is Dual Reporting under IFRS and U.S. GAAP?

Dual reporting under IFRSs and U.S. GAAP consists on a strategic and operational approach for multinational companies to benefit from IFRSs and U.S. GAAP convergence.  It comprises the set of systems and techniques (e.g., guidelines for designing chart of accounts or reconciling financial statements for different GAAP) to prepare and present financial statements under two comprehensive bases of accounting. There are several situations where this concept may apply.

Example in a Context of Regulatory Compliance

Assume that an IFRS first-time adopter must also report under local GAAP and maybe statutory accounting principles.  Would you restate to IFRSs every year? Dual reporting transforms manual restating effort into an ongoing reporting practice.

Example in the Context of Strategic Positioning

Assume that you want to expand abroad or acquire foreign entities or that you are in the process of being acquired by a foreign company. You may also need an IFRS book history in preparation for an Initial Public Offering. Although you must report under local GAAP, you want to adopt IFRS as an international strategy. This might support you in raising foreign finance, reducing costs of global investment and of restating financial statements, improving corporate image, competitiveness, financial transparency and international visibility with customers and financial markets, or achieving favorable property revaluation or contractual impacts.

Example in the Context of IFRS First-Time Adoption

Assume that a company adopts IFRSs for the years ending on December 31, 2015. Its transition date would be January 1, 2014. This means that the company must prepare the opening IFRS statement of financial position as of January 1, 2014, 2014 comparative financial statements and current year (2015) financial statements. The company will have to prepare an additional comparative year if the regulator requires so. Would you go live as one-off exercise? The company will very likely still refer to previous GAAP in restating financial statements to IFRSs even beyond these three or four years. Why not embed the transition situation in a company’s accounting systems, process and organization design so to make restatement automatic, as opposed to considering this migration as a one-off distressing circumstance?

Example in a “Condorsement” Context

On May 26, 2011, the SEC published an update concerning the work plan to IFRSs. After analyzing the difference between enforcement and convergence, the SEC’s paper addresses the so-called “condorsement” approach. This approach intends to lead to IFRS compliance by U.S. issuers that are compliant with U.S. GAAP. At the end of a transitional period, U.S. GAAP would incorporate IFRSs. In this respect, this is similar to an enforcement approach. During a transitional period of five to seven years, differences between IFRS and U.S. GAAP would be addressed. In this respect, this is similar to a convergence approach. The transition period could permit a staged or phased implementation. Finally, the FASB would also have a role to issue supplement or interpretative guidance, adding disclosure requirements, or setting requirements on issues not addressed by IFRSs. If the “condorsement” approach is followed, there will be a transitional period of at least five to seven years plus the transition year and required comparative years during which IFRSs/U.S. GAAP dual reporting might be a typical situation. Again, would you replicate a manual reconciliation every year?

Example in a Cross-Jurisdictional Context

Assume a U.S. domestic parent company with foreign subsidiaries that already report under IFRSs. Until IFRSs become mandatory or permitted in the U.S. for public companies, the parent must be able to prepare U.S. GAAP consolidated financial statements from subsidiaries IFRS financial statements on a routine basis. Otherwise, the individual subsidiaries must prepare two sets of accounts.

As another example, think of subsidiaries in the U.S. reporting under U.S. GAAP that must enable their EU parents to make IFRS consolidated financial statements.

Finally, imagine companies recently acquired or to-be acquired by a U.S. parent that will have to report under IFRS in their own countries and under U.S. GAAP to their parent company.

What is the Difference between Dual Reporting and IFRS First-Time Adoption?

Dual reporting might apply in a context of IFRS first-time adoption (fully reporting for primary statements purposes for external use under at least two comprehensive bases of accounting). It may also cover all circumstances that under IFRS 1, First-time Adoption of International Financial Reporting Standards would not be considered a first–time adoption:

What Is the Advantage of Dual Reporting from a Company’s Perspective?

IFRS migration often involves transition costs and implementation difficulties for which companies may seek external support. A large accounting firm typically involves its foreign branches and affiliates that are expert in the other set of GAAP, a fact that results in expensive professional charges to clients. By engaging a multi-chartered accountant you will save the cost of large teams of people. By using dual reporting ready-made tools and techniques, you will shorten project time and cost. By embedding restatement in accounting systems and processes you will do the job once for all, without asking for consultancy every year. Most importantly, you will learn!

How to Take This as an Opportunity to Improve My Business Processes?

Have you lived the business process re-engineering movement that in late ‘90s was enabled by ERP packages such as SAP? Why not take advantage of the transition to IFRS?

A tremendous opportunity arises to shift business processes from report production to streamlined and cost-effective data capture and generation. Expanded disclosure and judgment requirements in IFRSs make you re-think your business processes. Comprehensive data warehousing could comprise data for financial reporting and ensure that internal controls are expanded to the issues of the new standards. Benefit from a GAAP specialist who has also worked as a professional re-engineer.

What is the Competitive Advantage of Dual Reporting for an Accounting Firm?
From the perspective of the accounting industry, the competitive advantage of the Dual Reporting approach derives from a better time and result for money achieved through a multi-disciplinary and multi-chartered accounting environment that capitalizes on different reporting practice, as opposed to the traditional and costly approach of mobilizing staff from the U.S. and European branches of a professional firm.

Why Should I Understand the Differences between IFRSs and U.S. GAAP?

The analysis of differences between IFRSs and U.S. GAAP is necessary whether or not you choose dual reporting and irrespective of any model of convergence or incorporation of IFRSs in the U.S. systems. This is why you will find the above books more detailed and operating in the differences between IFRSs and U.S. GAAP than most IFRS books.

Market Trends concerning IFRSs

Massive first-time adoption of IFRSs happened in 2005 and 2006. This involved many countries outside the United States, and in particular the European Union in connection with EC Regulation 1606/2002. Such a move by the EU has been estimated to have affected approximately 8,000 companies from January 2005 to the beginning of 2007.

The SEC amended Form 20-F and Regulation S-X, and other regulations, forms and rules under the Securities Act and the Exchange Act, to accept IFRS financial statements without reconciliation to U.S. GAAP from foreign private issuers, effective for financial years ending after November 15, 2007 and interim periods within those years contained in filings made after the effective date. However, this is limited to English language financial statements prepared under the IASB (International Accounting Standards Board) version of IFRS.

As of May 18, 2008 the Council of the AICPA designated the IASB as the body to establish international financial reporting standards for both private and public entities pursuant to Rule 202 and Rule 203 of the AICPA Code of Professional Conduct. In three to five years the Council will reassess this decision.

On August 27, 2008 the SEC proposed a “roadmap” to IFRS that would require all U.S. public companies to file their financial statements under IFRSs by 2016 and would also allow some U. S. companies, based on some criteria, to use IFRSs for their filings for fiscal years ending on or after December 15, 2009. However, on February 24, 2010, the SEC issued a statement calling for more study of IFRSs and setting 2015 as the earliest possible date for the required use of IFRSs by U.S. public companies. The SEC withdrew the proposed rules for limited early use of IFRS by certain U.S. issuers, although it is not foreclosing the possibility of early use or adoption. The statement is not excluding the possibility in the future that issuers may be permitted to choose between the use of IFRS or U.S. GAAP. The work plan addresses six specific areas of concern.

On May 26, 2011, the SEC published an update concerning the work plan to IFRSs, discussing a possible “condorsement” approach (see above). On July 13, 2012, the SEC Staff published a Final Staff Report. The Report highlights many issues that the U.S. might face when transitioning to IFRS. However, the Staff Report clarifies that it does not imply that the SEC has made a decision on whether or not incorporating IFRS into the U.S. financial reporting system. The Report to the Trustees of the IFRS Foundation published on October 22, 2012 analyzes the process of adoption of IFRS followed by several jurisdictions to show that the issues raised by the SEC Final Staff Report  are not unique to the U.S. and have been successfully overcome in other countries.

Canada has announced IFRS convergence by 2011.

In 2006, China promulgated a new set of accounting standards substantially in line with IFRSs.

On July 24, 2007, the Council of the Institute of Chartered Accountants of India announced its IFRS convergence plan for listed entities, other public interest entities such as banks, insurance companies and large-sized entities from the accounting periods commencing on or after April 1, 2011.

On January 28, 2010, the Brazilian Federal Council of Accounting and the Brazilian Accounting Pronouncements Committee signed a MOU with the IASB to converge fully to IFRS.

On August 1, 2008, the Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB) announced their plan to bring Malaysia to full convergence with IFRSs by January 1, 2012. For the time being, private entities will continue to apply Private Entity Reporting Standards (PERS).

In November 2008, the National Banking and Securities Commission of Mexico together with the Mexican Board for Research and Development of Financial Reporting Standards communicated a plan to adopt IFRS for listed entities starting for periods ending on 31 December 2012.

Public companies in Argentina will be required to adopt IFRSs starting in 2012, with an option to file financial statements in accordance with IFRS starting in January 2011.

The South Korean government has approved mandatory adoption of IFRSs by 2011 for all listed companies and unlisted financial institutions in certain sectors. All companies except financial institutions could voluntarily adopt IFRSs from January 1, 2009.

On December 11, 2009, the Japan Financial Services Agency (FSA) announced regulatory changes to allow certain qualifying domestic listed companies to apply IFRSs in consolidated financial statements, starting from the fiscal year ending on or after March 31, 2010.

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