subject: Globalization's Continuing Impact on American Accounting [print this page] Globalization's Continuing Impact on American Accounting
Globalization is effecting the accounting profession more than it ever has before. The most recent impact has come from the imminent change from U.S. GAAP to IFRS. Although the change isn't expected to happen for several years, the switch is already starting to have an effect on accountants. Besides the CPA's preparing the new financial statements, accounting majors and companies' IT departments also need to prepare for IFRS.
The proposal from the Securities Exchange Commission (SEC) for the United States to stop using Generally Accepted Accounting Principles (GAAP) and adopt International Financial Reporting Standards (IFRS) is one of the biggest impacts that globalization has had on the accounting profession. The reasoning behind the switch is to have one single set of global accounting rules. Many countries are already reporting financial statements using IFRS, and more are planning to adopt the standards in 2011. These territories include Korea, India, Japan, Canada, and much of South and Central America. Although the SEC originally proposed that the United States would adopt IFRS in 2014, the year 2016 is looking more probable. The main difference between GAAP and IFRS is that GAAP is more rule-based, while IFRS is principle-based and the standards are broader.
Even though there are some differences between the two, there are also a lot of similarities. In regards to financial statements, both standards require a balance sheet, an income statement, other comprehensive income for GAAP and a statement of recognized income and expense for IFRS, a statement of cash flows, and accompanying notes. The financial statements for both GAAP and IFRS must be prepared on an accrual basis of accounting, except for the statement of cash flows. According to both accounting models, depreciation of a long-lived asset is required on a systematic basis. GAAP and IFRS both state that changes in depreciation method, residual value, and useful economic life are changes in accounting estimates.
There are differences between GAAP and IFRS with respect to financial statement presentation, and inventory among other things. Under GAAP, companies are required to classify expenses based on function, such as cost of sales or administrative. IFRS enables entities to present expenses based on either function or nature. If function is selected, certain disclosures about the nature of the expense are required within the notes. Reporting extraordinary items on the income statement is restricted to items that are both unusual and infrequent in nature according to GAAP, but they are prohibited under IFRS. Costing methods in reference to inventory are significant differences between GAAP and IFRS. LIFO is an acceptable costing method for companies using GAAP standards, but it is prohibited according to IFRS. Based on GAAP, inventory is carried at lower of cost or market, but IFRS states that inventory is carried at lower of cost or net realizable value.
The changes from GAAP to IFRS will not only effect companies' financial statements; it will also change the way accounting majors are being taught in school. So far, there is no standard for professors to follow when it comes to integrating IFRS into their course load. According to a survey of 500 professors taken by the American Accounting Association and KPMG in 2009, 62% of the professors said that they had not taken any significant actions to incorporate IFRS into their programs. While some of the professors believe that they won't need to begin teaching IFRS until 2011, about 72% of them responded that they are unsure of how to fit it into their curriculum and only 16% stated that their schools will fund training for the professors to learn about IFRS in order to teach it to students.
Realizing the challenges that the students and professors are facing, the Big Four accounting firms are each doing something to help prepare them for IFRS. Deloitte introduced the University Consortium, a tool designed to help bring IFRS into college curriculum. They provide tapes of lectures and transcripts from Deloitte subject matter leaders, case studies and case solutions. Similarly, KPMG has launched the KPMG IFRS Institute. It is an open forum with Webcasts, podcasts, surveys and publications designed to teach about IFRS. PricewaterhouseCoopers will award $700,000 in grants to colleges to help them prepare for IFRS integration. The grants are part of the $1 million that PwC is dedicating to IFRS education. The grants, which will be awarded to 26 different U.S. schools, should go towards updating accounting programs, transform textbooks, and strengthen the focus on international business. Ernst & Young has also donated $1 million to the Ernst & Young Academic Resource Center.
The change to IFRS will also develop problems for companies' IT departments. Since the new standards will require different accounting procedures, new software and controls will need to be put in place. These changes can take years until they are put into effect and if they are not done properly, they could be very costly to the company. A study conducted by KPMG found that IT expenses are usually more than 50% of the cost of an IFRS conversion. European countries that have recently made the switch to IFRS suggest implementing the IT changes in various phases. The procedure is lengthy and time-consuming, but it eliminates the margin for error.
The switch from U.S. GAAP to IFRS will be one of the most prominent impacts that globalization has had on American accounting to date. The change will not only affect current CPA's, but those studying to be one and the IT departments within these accounting firms. The effect of IFRS on America is not yet known, but it will leave a lasting impression.
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