The bilingual CPA

Are you fluent in IFRS and U.S. GAAP?
By Terry Campbell, CPA, CGMA

The bilingual CPA
Photo by teerawatwinyarat/iStock

Accountants preparing and auditing financial statements for U.S. companies stand a good chance of encountering IFRS. The SEC requires financial statements to be filed in U.S. GAAP, and U.S. users of financial statements, particularly lenders, tend to follow the SEC preference, but IFRS is an integral part of U.S. business.

U.S. multinationals with significant holdings in more than 100 countries use IFRS in financial filings. That includes an increasing number of small and medium-size companies, which in turn affects their auditors. Also, a fair number of private U.S. companies require IFRS because they are owned by foreign stakeholders.

Fluency in both accounting standards may be needed to assess a competitor, to check the financial stability of a supplier, to conduct due diligence in a merger or acquisition, or to answer questions from a foreign investor.

Clients, potential clients, competitors, suppliers, and customers of CPAs prepare financial statements using IFRS. Companies have subsidiaries and/or joint ventures that use IFRS. Even SMEs (small and medium-size enterprises) are involved in global settings with suppliers and/or customers. IFRS is used in numerous instances in which accountants encounter the need to compare, contrast, and reconcile IFRS to U.S. GAAP.

Worldwide IFRS adoption

Foreign private issuers filing a Form 20-F with the SEC no longer have to provide a reconciliation of their financial reports to U.S. GAAP. That makes IFRS the accepted standard for SEC reporting for more than 450 international companies such as Unilever, a British-Dutch multinational consumer goods company, and requires that accountants be fluent in IFRS and U.S. GAAP.

In 2007, the last year in which the SEC required reconciliations, Unilever reported in SEC filings a 2006 net income of €5.015 billion in IFRS and €4.385 billion in U.S. GAAP, a difference of €630 million, or 13%. In a world where an earnings-per-share difference of €0.01 was significant, it seems likely that a difference of €0.21 per share was significant, though IFRS and U.S. GAAP have gotten closer since then.

Competitive analysis

Due diligence in the form of a competitive analysis is key to a merger, acquisition, or divestiture. Accountants working on such an analysis are likely to run into competitors, buyers, and suppliers that report their financial results in IFRS. Given the speed needed in M&A deals, financial reporting differences take on a higher level of intensity. Only adequate preparation and fluency in U.S. GAAP and IFRS offer any hope to keep the quality of the analysis within the time pressures.

Another aspect—that of divestiture—is where U.S. GAAP and IFRS become intertwined and disentangled repeatedly over time periods.

Operating units from either accounting standard need to be accounted for in statutorily defined accounts yet consolidated into the host country's standards. So, the more than 450 firms filing with the SEC use IFRS, but their operating units in the United States use U.S. GAAP and then are consolidated into IFRS. Similarly, U.S. firms with operating entities in countries where IFRS is the statutorily defined reporting system must be reconciled and consolidated into U.S. GAAP consolidated statements.

The five forces competitive analysis is a strategic framework developed by competitive strategy expert Michael E. Porter to determine the attractiveness, or profitability, of an industry. Used as a guide to assess the necessity of being fluent in IFRS and U.S. GAAP, each element of Porter's framework is considered in the context of making business decisions that are informed by the financial competence of being bilingual. See the chart, "Porter's Five Forces."

Porter's five forces


Rivalry among existing competitors

In the Unilever example, a competitive analysis would look at how the multinational's competitors Procter & Gamble and Nestlé are doing in comparison. Sales, profitability, and asset utilization of the three competitors are affected by differing reporting standards. With little or no guidance on possible reconciliation points, the interested reader and/or analyst needs professional help. Accountants who are bilingual have an advantage in examining the differences and similarities. The typical approach will be to review the reconciliations done before 2007 and determine the possible changes.

Choosing among alternatives requires looking to the projections made as competitors make their strategies known. The deal evaluation could differ significantly depending on which standard is applied.

Even with the recently "converged" revenue recognition standard, it is no easy task to do the competitive analyses, as this standard will take several years to be implemented.

Threat of new entrants

Past and current competitors are being joined by new competitors, even to the point of disruptive innovation. With the emerging competitors come different historical patterns, including institutional aspects. These different institutional aspects include, but are not limited to, national differences, governance approaches, and cultural aspects that may impact financial statements.

Buyer power: Bargaining power of channels/end users

Buyer power may be represented in the situation where the customer/buyer of products/services requires a credit check. A credit analysis looks at the quality of the assets of the company under review, but IFRS and U.S. GAAP use different asset impairment models. The two standards also treat heavy research and development investments differently. What kind of credit analysis may be done when the underlying accounting standards differ? The wrong analysis could question the IFRS company's magnitude of spending and forget to question the quality of the investment.

Imagine a firm receiving a large order requiring some capital investment including both fixed capital and working capital. Does the firm engage in these investments without a full understanding of the buyer's financial viability? The selling firm could ask for cash upfront, but that defeats the normal business processes of credit purchasing and also changes the terms of purchase.

Supplier power: Bargaining power of suppliers

Suppliers' use of different accounting standards creates a similar issue to the buyer power situation. Imagine alternative suppliers bidding for the same business from a firm: How does the firm determine the underlying financial stability of the supplier firms? In a similar vein, contracting with a supplier for critical or noncritical components for a product/service requires an assessment of the supplier's financial stability. Getting partway through a supplier contract and discovering a financial instability that hinders the supplier's ability to fulfill its promises creates major headaches.

Threat of substitute products or services

Substitutes create similar problems to those mentioned above with the special element of the "surprise" competitor.

Auditing and assurance

Auditing/assurance of financial statements to comply with U.S. GAAP regardless of accounting standards is the present and future situation. Given the nature of auditing teams, it is likely that an auditing team in the United States could encounter an operating unit of an international firm using IFRS in the United States, so that consolidation is eased. This same audit team may then go to an assignment where the U.S. accounting standards are in place; yet, they eventually need to be consolidated with IFRS. The key is to imagine that a bilingual audit team may move relatively seamlessly from U.S. GAAP to IFRS and vice versa.

Small and medium-size enterprises

There are a number of conversations about GAAP for smaller business entities. As these committees and standard-setting organizations work on different approaches, the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) is in use by thousands of SMEs globally. With a few hundred pages of principles and standards versus the thousands of pages of U.S. GAAP, IFRS for SMEs has received positive reviews internationally. Even with the AICPA's support for IFRS in the United States, there appears to be no enthusiasm for IFRS for SMEs. The primary barrier appears to be the lack of experience in the standards by commercial loan managers for SMEs. To ask loan managers to evaluate accounting statements prepared under two standards may be too much to ask; on the other hand, bilingual CPAs could fill this space.


Educational initiatives

It has been 10 years since the SEC released its original 2005 road map to consider IFRS adoption, and the international standards are now being applied globally. But integration of IFRS into curricula has been limited. Most educators who include IFRS material discuss differences between U.S. GAAP and IFRS as part of existing courses rather than in a stand-alone IFRS course. One reason is the fact that U.S. GAAP has not gotten simpler nor has it stood still; so, the addition of another layer of complexity is not easily accepted. The second reason is that there is no driving force such as a date certain that the SEC will start requiring reporting in IFRS. In 2015, educators at most levels are giving some minimal coverage of IFRS as a secondary accounting standard to consider.

At Indiana University's Kelley School of Business, IFRS started in 2009 as a one-week intensive elective course. Student demand became so great that, in 2012, two separate one-week intensive courses were offered. One remains an elective; and the second has become a required course for the 3/2 MBA degree. Even with this commitment to making IU students bilingual, the curriculum still needs the SEC's impetus.


About the author

Terry Campbell (terrcamp@indiana.edu) is a clinical professor at the Kelley School of Business at Indiana University in Bloomington, Ind. He has more than 20 years of teaching experience in Europe.

To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, senior editor, at svollmer@aicpa.org or 919-402-2304.


AICPA resources

JofA article

"What Have IASB and FASB Convergence Efforts Achieved?" Feb. 2013, page 50

Publication

Inside IFRS: Accounting and Financial Reporting Fundamentals (#APAIFRS13P, paperback; #APAIFRS13E, ebook; #APAIFRSO, one-year online access)

CPE self-study

IFRS Certificate Program (#159770, two-year online access)

AICPA TV

"IFRS: Experts Answer Questions About IFRS," aicpa.org

For more information or to make a purchase or register, go to cpa2biz.com or call the Institute at 888-777-7077.

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