IFRS - Implications For Education

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Presentation at the PHASE 2009 Prentice Hall Symposium for Educators in San Diego

Presentation at the PHASE 2009 Prentice Hall Symposium for Educators in San Diego

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  • 1. PHASE 2009 - Prentice Hall Accounting Symposium for Educators San Diego, CA February 21-22, 2009 IFRS: Implications For Education Norbert Tschakert Charles W. Lamden School of Accountancy San Diego State University http://www.sdsu.edu/accounting ntschake@mail.sdsu.edu Norbert Tschakert spoke as a panelist during Tom Hood’s Presentation on IFRS. Tom Hood is the Executive Director and CEO of the Maryland Association of CPA’s. Norbert Tschakert lectured IFRS at the Helmut Schmidt University in Hamburg, Germany, and currently lectures the Graduate Seminar in International Accounting at the Charles W. Lamden School of Accountancy at San Diego State University.
  • 2. Useful Internet Resources* *See Appendix for further Links
  • 3. Obtaining The Electronic Version Of IFRS
  • 4. Motivating Students For IFRS
  • 5. Economic Reality The globalization of business and finance has led to the successful mass adoption of IFRS in more than 113 countries. The Chairman of the IASB, Sir David Tweedie, expects that 150 countries will mandate or allow IFRS within the next three years. Canada, India and Japan will adopt IFRS in 2011. Mexico will adopt IFRS by 2012. Both of our Neighbors are adopting IFRS. Because of the comparable period requirement under IFRS 1 (First time adoption of IFRS), companies in both countries are currently working on the transition to IFRS. Dr. Norbert Tschakert 9
  • 6. Economic Reality (cont’d) IFRS are used by SEC foreign registrants without reconciliation to US GAAP. IFRS are used by foreign subsidiaries of U.S.-based multinationals. IFRS are used by U.S. subsidiaries of non-U.S. multinationals for the purpose of consolidation. SEC taking steps to allow U.S. companies to adopt IFRS (SEC Roadmap to IFRS). Dr. Norbert Tschakert 10
  • 7. Job Reality Do you want to have job security for the next 20 years? Do you want to advance quickly in your career? Do you want to have the option to have an international career? Do you want to have a ‘Certificate in IFRS’ that will be beneficial for your career? (-> www.icaew.com) Young business professionals are expected to have up to date knowledge and are relied upon as sources of ‘new knowledge’. Having knowledge where to research specific IFRS questions and having a basic understanding of IFRS will greatly distinguish you from others. Dr. Norbert Tschakert 11
  • 8. Preparation For Job-Market IFRS have been implemented into Big4 Interview Questions. Candidates are expected to have a basic knowledge of IFRS and should be able to answer simple questions regarding the History of IFRS, give examples of differences to US-GAAP and be familiar with IFRS 1 (First Time Adoption of IFRS). IFRS will be part of the CPA Exam starting 2011. Dr. Norbert Tschakert 12
  • 9. Ideas For Developing A Successful IFRS Class
  • 10. Have A Reasonable Scope Right now the goal is to get students ready for the job market, to enable them to research IFRS topics on their own and to ensure a basic understanding of IFRS. An initial limited scope facilitates the implementation in the classroom. The scope of the class can be increased as IFRS become more relevant in the U.S. Presenting the details on ‘Financial Instruments’ or ‘Impairment Testing for Cash Generating Units’ will likely lead to student frustration and should be reserved for more advanced and specialized classes. Dr. Norbert Tschakert 14
  • 11. Provide An Overview Knowledge Do not get caught up with teaching the details of only a few individual standards. Rather focus on providing a broad knowledge of IFRS and introduce more standards at a quicker pace. To establish a foundation for the class, make sure to teach the principles and core definitions first. Use the ‘Glossary of Terms’ available at the end of the IFRS Original Pronouncement. Dr. Norbert Tschakert 15
  • 12. Work With The Original Text Working with the original text will foster student understanding, will increase student acceptance of the material presented and will increase student ability to research IFRS on their own. Secondary literature and publications should be reviewed carefully for accuracy. IFRS Publications may contain errors. Due to the evolving nature of IFRS it is crucial to only use Textbooks that were updated recently. Dr. Norbert Tschakert 16
  • 13. Use E-Learning Modules Deloitte: www.deloitteifrslearning.com Ernst&Young: www.ey.com ->Services ->Assurance ->IFRS ->Web-based learning Dr. Norbert Tschakert 17
  • 14. Invite Guest Speakers And Involve Your Students In The Class Guest Speakers are able to illustrate the relevance of IFRS based on their experience. The perspective of presenters from foreign countries that already went through the adoption of IFRS is particularly valuable. These speakers are able to come to class via Internet. Confront your students with Discussion Papers, Exposure Drafts and Comment Letters available on www.iasb.org and discuss publications. This is probably the best educators can do in the classroom to enable students to develop ‘professional judgment’, a vital skill for the application of IFRS. Group Presentations on these topics are a great way of involving students in the class. Dr. Norbert Tschakert 18
  • 15. Introduce The Topic With Accounting History And Accounting Theory In 1494, Luca Pacioli published the book ‘Summa de arithmetica, geometria, proportioni et proportionalita’ . The resulting ‘Venetian method’ became the standard accounting method used amongst Italians, Dutch, Germans, and English alike. The fundamental issues in Accounting have been extensively addressed through the work on ‘Accounting Theories’. From here the transition can be made to the current situation for which I use the following controversial slide… Dr. Norbert Tschakert 19
  • 16. After Hundreds Of Years… Accounting Data is - Easy to manipulate (creative/managerial accounting) - Incomplete - Historic - Of limited relevance to verify going concern - Of limited relevance for economic decisions Financial Analysis is - Subjective - Historic - Not looking at all aspects of a company Dr. Norbert Tschakert 20
  • 17. Current Situation Accounting does not fulfill the expectations and is far from being perfect. Is IFRS the Solution? While this is difficult to answer at present, this question can be used as the ‘lead question’ that students should form an opinion on during the class. It is noteworthy, that compared to the many Accounting Scandals under U.S. GAAP, there has not been a single major Accounting Scandal under IFRS - worldwide. What is the reason for this? Thesis: IFRS forces companies to use rigor and discipline and to establish stronger business ethics and a stronger corporate governance. Dr. Norbert Tschakert 21
  • 18. Use Citations Citations make the topic interesting and enable an early class discussion. KPMG: International Financial Reporting Standards: Views on a financial reporting revolution, 2006, www.kpmg.com Current Press Articles Dr. Norbert Tschakert 22
  • 19. Former Chairman Christopher Cox Versus Successor Mary Schapiro Cox: ‘An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions.’ Shapiro: ‘When it comes to international accounting standards, it’s critical that these standards are converged in a way that does not kick off a race to the bottom. American investors deserve and expect high standards of financial reporting, transparency, and disclosure - along with a standard setter that is free from political interference and that has the resources to be a strong watchdog. At this time, it is not apparent that the IASB meets those criteria, and I am not prepared to delegate standard-setting or oversight responsibility to the IASB.’ Dr. Norbert Tschakert 23
  • 20. Michael Hughes Global Head of Audit KPMG UK ‘IFRS brings more discipline and more rigor. Companies say that if IFRS continue to base themselves on economic realities then they look at their own businesses differently and it helps them manage themselves better. Companies need to feel the figures are equally relevant for decision-making.’ Dr. Norbert Tschakert 24
  • 21. Robert Herz Chairman FASB ‘If you were to look back from the year 2020 to the year 2001 you would say ‘What chaos!’ and ‘What inefficient capital markets!’ People will look back and say, ‘How did those people get along then?’ It will be like we now say, ‘How did people get along without cell phones?’ When you are in the middle of it, it is always difficult. It is important just to keep on towards that end goal.’ Dr. Norbert Tschakert 25
  • 22. Sir David Tweedie Chairman IASB ‘We can’t have endless changes. People will become demented.’ ‘Understandability has been a bit of a casualty. We all make accounting much more complicated than it needs to be. Some of the standards we inherited are too complicated. There is now a cottage industry of technical people understanding and interpreting them. We have somehow got to return IFRS to the profession. We have got to do better than this.’ Dr. Norbert Tschakert 26
  • 23. Sir David Tweedie Chairman IASB Tweedie’s response during a hearing in the UK Parliament to a question about whether the IASB inappropriately caved in to political pressure to amend IAS 39 to allow companies to stop measuring some financial assets at fair value (Q 186): ‘I think we experienced something that, I hope, firstly, we never see again in standards setting, but I think there was just a blunt threat to blow the organization away. That came very, very rapidly… I think accounting in Europe would have been totally out of control if they had used the option to take the 'carve out'. Our problem was we originally intended to have at least a week to find out whether, in fact, we had managed to get our standards equivalent, as far as reclassification is concerned, with the United States. We did not have a week…’ Dr. Norbert Tschakert 27
  • 24. Tony Good Chair of Accounting Advocacy Committee, UK Society of Investment Professionals ‘Companies that used to tell us that they owned their subsidiaries now tell us that they don’t.’ Dr. Norbert Tschakert 28
  • 25. Charles Grieve Director, Securities and Futures Commission, Hong Kong ‘All three groups (regulators, auditors, clients) say they want principles-based accounting and financial reporting but all of them prefer the easy life and that means precise rules to get certainty. People will chant the mantra of principles while asking for ever more rules.’ ‘There are too many frolics in the accounting standards. They are too academic… It is driven by theory rather than something which serves the interests of the investor. They have got too tied up with the theoretical basis of standards.’ Dr. Norbert Tschakert 29
  • 26. Jon Symonds CFO, AstraZeneca ‘People in financial services companies are implementing almost incomprehensible standards.’ ‘With fair values you have to enter a theoretical world. I don’t know how you can manage it. Once you are beyond an observable market you are in a land of fantasy. I don’t know who can sign off over relevant, but unreliable numbers.’ Dr. Norbert Tschakert 30
  • 27. Robert Koethner Vice President for Accounting, Planning and Reporting and Chief Accounting Officer, Daimler ‘The rules need to be more practicable and more acceptable for preparers. Sometimes we feel that they only come up with answers for the academics. The higher degree of complexity boosts costs of staff, IT Systems and related processes and it is also harmful to the understandability. Financial reporting is supposed to be for the normal investor and not just for experts.’ Dr. Norbert Tschakert 31
  • 28. Sample Slides: IFRS Fundamentals
  • 29. The Strengths Of Rules-Based Standards + Increased Comparability among financial statements + Increased verifiability for auditors and regulators + Reduced opportunities for earnings management through the use of judgments + Improved communication of standard setters’ intentions + No requirement for a very strong ‘professional judgment’ on the part of accountants and auditors. Dr. Norbert Tschakert 33
  • 30. The Weaknesses Of Rules-Based Standards - Increases the overall complexity of applying a given principle - Management can structure transactions to meet the form of the rules while not conforming to the underlying substance (form over substance) - Can drastically depart from the underlying principle - The Business landscape is dynamic and ever changing, rules are not able to keep pace - Rules can be obsolete by the time they are issued Dr. Norbert Tschakert 34
  • 31. Structure Of IFRS An IFRS or IAS is typically made up of some or all of the following sections: - Introduction (IN) Use the Structure of the - Objectives IFRS for the Structure of - Scope your Lecture. Work with - Definition of terms used the Original Text. - Body of the standard (core text) - Effective date and transitional provisions - Application Guidance (AG) - Approval by IASB - Basis for Conclusion (BC), Dissenting Opinions by IASB members - Implementation Guidance (IG) - Illustrative Examples (IE) Dr. Norbert Tschakert 35
  • 32. IFRS Terminology Previously: Now: IASC - International IASB - International Accounting Standards Accounting Standards Committee Board SIC - Standing IFRIC - International Interpretations Financial Reporting Committee Interpretations Committee • IAS 1 thru IAS 41(29 are • IASC and SIC still in effect) standards carried • SICs (only 11 of 33 are still forward, plus: in effect - others have • IFRS 1 thru IFRS 8 been incorporated into • IFRIC 1 thru IFRIC 16 standards) Dr. Norbert Tschakert 36
  • 33. Compliance With IFRS Compliance with IFRS includes the following: - All active standards (IASs and IFRSs) - All active interpretations (SICs and IFRICs) - IFRS requires presentation of comparative period Must make explicit and unreserved statement of compliance Bold and plain type paragraphs have equal authority Standards and Application Guidance are authoritative, Implementation Guidance is “non-authoritative” Disclose application of standards or interpretations before effective date Inappropriate accounting treatments not rectified by disclosure Dr. Norbert Tschakert 37
  • 34. IFRS Hierarchy - IAS 8: Accounting Policies, Changes In Accounting Estimates And Errors IAS 8 establishes a “hierarchy” when choosing IFRS accounting policies: 1. Apply any specific IFRS; consider any relevant application guidance 2. Refer to other IFRSs dealing with similar or related issues 3. IFRS Framework 4. Consider pronouncement of other standard-setting bodies (with similar conceptual framework) or industry practices E.g., U.S. GAAP may be appropriate when IFRS is silent, Framework does not give additional guidance, and U.S. GAAP is not inconsistent with the guidance in standards or interpretations which deal with similar issues or the IFRS Framework. Dr. Norbert Tschakert 38
  • 35. Consistency of Accounting Policies - IAS 8: Accounting Policies, Changes In Accounting Estimates And Errors Some IFRS allow alternative Methods: Benchmark Allowed Alternative Treatment Treatment Important: The terminology ‘Benchmark’ and ‘Allowed Alternative’ does not indicate that one alternative is preferable over the other. Choose and apply one method for the consolidated entity – For all transactions/items or – If expressly permitted, for all transactions/items, etc. in a category of items – If expressly permitted on a transaction-by-transaction basis Dr. Norbert Tschakert 39
  • 36. Definitions An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. An asset is recognized in the balance sheet when it is probable that the future economic benefit will flow to the entity and the asset has a cost or value that can be measured reliably. A liability is a present obligation arising from past events. A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Dr. Norbert Tschakert 40
  • 37. SEC IFRS Roadmap: Proposed Phased Approach Targeted U.S. issuers Type First IFRS Reporting Date Limited early eligible Optional Fiscal years ending on entities or after 15 December 2009 Large accelerate filers Mandatory Fiscal years ending on or after 15 December 2014 Accelerated filers Mandatory Fiscal years ending on or after 15 December 2015 Non-accelerated filers Mandatory Fiscal years ending on or after 15 December 2016 Financial Statements will include two years of comparative Financial Statements Dr. Norbert Tschakert 41
  • 38. Milestones To Be Achieved For A Potential Use Of IFRS By U.S. Issuers 1. Improvements in Accounting Standards A Memorandum of Understanding between FASB and IASB outlines projects expected to be completed through 2011. 2. Accountability and Funding of the IASC Foundation IASCF must develop an independent and reliable funding mechanism. 3. Improvement in the Ability to Use Interactive Data (XBRL) for IFRS Reporting 4. Education and Training The SEC will consider the state of preparedness of U.S. issuers, auditors, users and educators. Dr. Norbert Tschakert 42
  • 39. Milestones To Be Achieved For A Potential Use Of IFRS By U.S. Issuers (cont’d) 5. Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors 6. Anticipated Timing of Future Rulemaking by the Commission The SEC will decide about mandatory use of IFRS in 2011. The main criteria will be, if IFRS will benefit investors & the public interest. 7. Implementation of the Mandatory Use of IFRS As mentioned in proposed phased approach. Dr. Norbert Tschakert 43
  • 40. Appendix
  • 41. Selected IFRS Internet Resources International Accounting Standards Board (www.iasb.org) American Institute of Certified Public Accountants (www.ifrs.com) Deloitte (www.iasplus.com) Deloitte (www.deloitteifrslearning.com) KPMG (www.kpmgfacultyportal.com) PricewaterhouseCoopers (www.pwc.com/faculty) Ernst & Young (www.ey.com/ifrs) European Commission (http://ec.europa.eu/internal_market/accounting/ias_en.htm) European Financial Reporting Advisory Group (www.efrag.org) The Federation of European Accountants (www.fee.be) The Committee of European Securities Regulators (www.cesr-eu.org) Chartered Accountants of Canada (www.cica.ca) The Institute of Chartered Accountants of England and Wales (www.icaew.com) International Association for Accounting Education and Research (www.iaaer.org) Association of Chartered Certified Accountants (www.accaglobal.com) Financial Accounting Standards Board (www.fasb.org) Dr. Norbert Tschakert 45
  • 42. Selected IFRS Internet Resources (cont’d) Chartered Financial Analyst Institute (www.cfainstitute.org) Securities and Exchange Commission (www.sec.gov) SEC Roadmap to IFRS (http://www.sec.gov/spotlight/ifrsroadmap.htm) American Institute of Certified Public Accountants (www.aicpa.org) Public Company Accounting Oversight Board (www.pcaobus.org) International Auditing and Assurance Standards Board (www.ifac.org/IAASB) UN Conference on Trade and Development (www.unctad.org) International Organization of Securities Commissions (www.iosco.org) Financial Stability Forum (www.fsforum.org) XBRL International (www.xbrl.org) Dr. Norbert Tschakert 46