Inside the growing footprint of IFRS lies something many small and midsize CPA firms may be overlooking—rich opportunities for business development.
IFRS-related work in the United States has largely been the domain of major accounting firms thus far. While national firms are filling many of the needs, there’s a large space that small and midsize firms can occupy given the right positioning, knowledge and resources.
To carve out an international niche, firms must be realistic about the challenges. Reaching critical mass as you grow your IFRS client base will take time. Building IFRS bench strength inside your firm will likewise take a commitment. The effort may mean an outflow of cash for the first couple of years. Yet for small and regional firms willing to put in the work, developing that kind of niche can ultimately drive profit.
FILLING A VOID
Many U.S. subsidiaries of foreign-owned companies are changing to IFRS for their reporting standards. Our firm of 100 professionals saw this repeatedly as we visited management of our German-owned clients in 2008. They were excited about the prospect of having common reporting standards among parent companies and their subsidiaries throughout the world.
Likewise, U.S.-based companies with foreign subsidiaries will also benefit by having all entities report under one common international accounting system, saving considerable time, effort and cost related to managing operations and reporting consolidated results. The first wave of transition is happening now.
With the AICPA’s recognition in 2008 of the International Accounting Standards Board (IASB) as an accounting standards setter, the door is open for U.S. private companies to adopt IFRS.
The SEC’s proposal to transition issuers to IFRS beginning in 2014 (see sidebar, “IFRS in the U.S.: The Road Ahead,” for more on what the SEC has proposed) will take significant resources and manpower. Many companies will tap external sources to bolster their staffs to make the shift. Businesses will need expertise and/or capacity to:Make a preliminary assessment of the impact of adopting IFRS, including identifying areas that appear to be most sensitive to conversion.
Quantify the impact of adopting IFRS on the financial statements.
Develop a strategy, including a timeline, to properly implement the conversion.
Develop systems to properly accumulate and report financial information in accordance with IFRS.
Determine how a move to IFRS would affect regulatory agency policies and contractual arrangements (including debt covenants) that are currently based on U.S. GAAP.
Perform the conversion, including adjusting historical financial statements for comparative purposes.
Implement IFRS 1, First-time Adoption of International Financial Reporting Standards.
Sean Lager, CPA, an audit partner of the Atlanta firm Frazier Deeter LLC, says his firm, which employs about 100 CPAs, has been working for the past five years with companies that report under IFRS. “Based on our experiences, there is a huge void in our marketplace of IFRS knowledge,” Lager says. “There is already a demand in the U.S. for IFRS knowledge (due to 100-plus jurisdictions moving to IFRS), and once the SEC requires IFRS for U.S. issuers, there is going to be a major opportunity for all firms to assist in the transition to IFRS. We have already positioned ourselves to take advantage of that void.”
Case Study: The Learning Curve
For our firm, the first exposure to IFRS came in 2003 when one of our clients, publicly traded in Germany, was moving to IFRS from German GAAP. While we had previously taken a number of years to build confidence in our knowledge of German GAAP, with its numerous differences from U.S. GAAP, we felt the transition to IFRS would be significantly easier as we generically read about the convergence process and the few differences with U.S. GAAP. We were in for a surprise.
As we began to dig deeper into the international standards, we identified subtleties that needed to be considered, such as inventory valuation and deferred taxes. Our initial assessment of inventory concluded that there would be no difference since the client did not value its inventory under the lastin, first-out inventory valuation method (IFRS does not permit the use of LIFO). However, the client held some older inventory with a market value less than cost. In accordance with U.S. GAAP, those items were valued at market. IFRS states this inventory should be valued at the lower of cost or net realizable value (that is, market value less selling costs). This slight difference in wording resulted in a significant difference in reporting value.
We had a similar experience with deferred taxes. The two standards on income taxes, IAS 12, Income Taxes, and FASB Statement no. 109, Accounting for Income Taxes, appear to be very similar. But as we read more closely, we found presentation issues not initially considered. For example, the client had deferred tax assets that were not expected to be fully recoverable. Under U.S. GAAP, the gross amount is recorded and offset with a valuation allowance. In accordance with IAS 12, deferred tax assets are presented at the net probable amount to be realized, and deferred taxes are shown as long term as opposed to U.S. GAAP’s requirement to classify based on the nature of the related asset or liability.
ACQUIRING THE SKILLS
Making the shift to IFRS at times can feel like learning a foreign language. Many CPAs are approaching this transition by starting with what they know—U.S. GAAP—and attempting to identify the differences without reading the original pronouncements. Spend the time and energy to learn the new standards by reading the consolidated IFRS text issued annually by the IASB and publications such as: Interpretation and Application of International Accounting and Financial Reporting Standards, by Barry Epstein and Eva Jermakowicz, and/or subscribing to an electronic service such as the Deloitte Accounting Research Tool (DART). Looking beyond the surface and reading the pronouncements thoroughly is critical in acquiring the needed skills because subtle differences can have a significant impact.
Outside training is invaluable, and small and midsize firms must be willing to invest time and money in educating staff if they hope to capture IFRS work. Sharing knowledge across the firm (and across multiple offices for firms with more than one location) through meetings and training helps deepen the bench. Many smaller firms also turn to associations of firms for advice and to pull in expertise or personnel needed to fill gaps. Our firm, for example, serves as the concurring reviewer for IFRS for an engagement in Hawaii as a result of our association in CPAmerica. We perform the technical/concurring review of the financial statements that are prepared in accordance with IFRS. We are a supplement to their bench strength. We also use white paper development to expand IFRS expertise on our staff. At our monthly international niche meetings, we assign a team member an area of international standards to study and ask him or her to compose a white paper on the topic.
For example, a team member assigned to study inventory would research IAS 2, Inventories, by reading the summary and the standard and writing the white paper, which is then presented to the group and posted on our Web site. The white papers touch on the differences between the international standard and U.S. GAAP, but only at the close of the paper. Placing the differences on the back end helps reinforce the necessary change in mind-set and helps take CPAs beyond the differences. As a result of this process, our team members develop expertise on certain sections of international standards rather than trying to learn everything all at once.
Another tactic is for auditors in an IFRS engagement to review the disclosure checklist as part of the audit planning. The checklist helps auditors identify specific elements that must be addressed during the audit process.
Some Opportunities for IFRS Education
AICPA—The AICPA held its inaugural International Issues Conference in Washington, D.C., in 2008. The conference highlighted international accounting issues, but also spent significant time on international auditing issues. Conference attendees were a variety of well-trained, highly educated professionals who live and breathe international accounting. The 2009 conference will be held in Washington April 30–May 1.
IFRS.com—The AICPA, in partnership with CPA2Biz, launched this site in May. The site offers IFRS overviews tailored to accounting firms, financial managers and executives, boards, audit committees and investors, as well as CPE self-study courses and IFRS updates from the IASB, the SEC and FASB. A number of Wiley resource guides are available through the site. There’s also information for CPAs interested in volunteering on convergence projects.
Seminars—The AICPA has teamed up with IASeminars to offer its members a comprehensive range of IFRS training solutions worldwide. The courses range from one-day overviews to eight-day immersion courses.
IASB—Purchase International Financial Reporting Standards (IFRSs) 2008 from the IASB. The annual publication is a consolidated text of the IASB’s authoritative pronouncements. It costs £60 (about $90). A Guide through International Financial Reporting Standards (IFRSs) 2008 contains cross-references and other annotations. It costs £90 (about $135). Both can be ordered at www.iasb.org.
Publications from the Big Four accounting firms highlight the major differences between U.S. GAAP and IFRS. These resources are free and available on their Web sites. Deloitte has comprehensive information online about international financial reporting at www.iasplus.com. The site is free, extensive and updated constantly. It is an excellent resource to gain a basic understanding of IFRS.
SHIFTING BUSINESS DEVELOPMENT GEARS
Growing an IFRS niche requires adapting business development and marketing efforts. For our firm, one successful strategy has been to participate in local organizations that have an international focus. Collaborating with the local government on economic development projects aimed at recruiting foreign-owned businesses has also helped us connect with potential clients.
Our firm sponsors the German-American Business Circle to support the economic development infrastructure needed to attract and retain German companies in Pittsburgh. Members of the firm’s international group are also involved with the regional British American Business Council.
Such groups are often a source of member databases that firms can mine for new business opportunities. Our firm regularly divides target lists up among the international group members, who research the financial metrics and geographic location of both the parent and subsidiary. For small and midsize accounting firms, the best opportunities may be with subsidiaries whose parents are not overly large, are family owned or have a limited number of investors. We target subsidiaries whose parent company has revenue ranging from $500 million to $5 billion, where it’s easier for the parent to envision us as the accounting firm and for us to forge relationships with management at both the parent and subsidiary.
Market research can also include looking at the attorneys or bankers working with the foreign-owned companies in your region. Existing relationships with those contacts can help open doors for small and midsize firms.
A willingness to initially take on startup or small foreign subsidiaries as clients can help deepen a firm’s IFRS practice. One of our earliest foreign clients began in the 1970s as one man with a suitcase full of product. He was charged with establishing a U.S. company to sell items manufactured by the European parent. As with many startup entities, our early services consisted of simple accounting and business advice.
As the company matured and prospered, our services also evolved to include consulting on complex merger/acquisition and tax matters. Today, that company has blossomed into a manufacturer/distribution company with more than $100 million in annual revenue and subsidiaries in Mexico and Canada. Patience often pays off in growing an international practice.
IFRS work isn’t for every firm. Nor is it only for national firms. Small and midsize firms can have a big role to play given the correct strategy and skill-set. Smart firms will begin now to consider their path, acquire knowledge and adapt their business development processes. Demand for U.S. CPAs with IFRS knowledge will only accelerate as more businesses move from U.S. GAAP to IFRS.
IFRS presents opportunities for small and midsize firms to grow. Developing an IFRS niche means more than learning the standards. It also requires adapting business development and marketing efforts.
Many U.S. subsidiaries of foreign-owned companies are changing to IFRS for their reporting standards. Likewise, U.S.-based companies with foreign subsidiaries will also benefit by having all entities report under one common international accounting system. The first wave of transition is happening now. With the AICPA’s recognition in 2008 of the International Accounting Standards Board (IASB) as an accounting standards setter, the door is open for U.S. private companies to adopt IFRS.
The SEC’s proposed transition of issuers to IFRS beginning in 2014 will take a significant amount of resources and manpower. Many companies will tap external sources to bolster their staff to make the shift.
Collaborating with local government on economic development projects aimed at recruiting foreign-owned businesses can help firms connect with potential clients. Chambers and other business alliances that bring together foreign-owned companies in the U.S. are also good sources of business development leads.
Jeffrey T. Deane, CPA, and Stephen H. Heilman, CPA, are partners at Malin, Bergquist & Co. LLP in Pittsburgh. Their e-mail addresses, respectively, are email@example.com and firstname.lastname@example.org.
JofA articles“How Will IFRS Affect Tax Practitioners? ” (From The Tax Adviser ) June 08, page 100
“Interest Capitalization: One Small Step Toward Convergence ,” May 08, page 80
“Simplifying Global Accounting ,” July 07, page 36
“IFRS: Coming to America ,” June 07, page 70
CPEThe International Financial Reporting Standards: An Overview , a CPE self-study course (#739750HS or #157220)
International Versus U.S. Accounting: What in the World is the Difference? , a CPE self-study course (#731666)
Are You Ready for IFRS? Moving Beyond the Basics , a CPE self-study course (#741600)
PublicationsInterpretation and Application of International Accounting and Financial Reporting Standards 2008 (#WI135166)
IFRS: Practical Implementation Guide and Workbook (#WI170229)
For more information or to place an order, go to www.cpa2biz.com or call the Institute at 888-777-7077.
IFRS in the U. S.: The Road Ahead
Under the SEC’s proposed IFRS road map, the Commission would decide in 2011 whether to proceed with rulemaking to require U.S. issuers to use IFRS beginning in 2014. Limited early use of IFRS, beginning with filings for fiscal years ending on or after Dec. 15, 2009, would be allowed where this would enhance comparability for U.S. investors. Eligibility for early adoption would be based on both the prevalence of the use of IFRS and the significance of the issuer in a given industry. The SEC estimates that a minimum of 110 companies could be eligible.
Under a staged transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014, and for remaining accelerated filers for years ending on or after Dec. 15, 2015. Nonaccelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016.
The road map spells out two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information. Under the first alternative, Proposal A, a U.S. issuer that elects to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS called for under IFRS 1, First-time Adoption of International Financial Reporting Standards, in a footnote to its audited financial statements. Under the second alternative, Proposal B, U.S. issuers that elect to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS required under IFRS 1 and would also disclose on an annual basis certain unaudited supplemental U.S. GAAP financial information covering a three-year period.
Comments on the SEC proposal should be received on or before Feb. 19. The road map is available at www.sec.gov/rules/proposed/2008/33-8982.pdf.