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To find out what the convergence of Generally Accepted Accounting Principlesand International Financial Reporting Standards will mean for U.S. accountants, we sat down with Glen Schmidt, FCGA and former chair of the Ontario Certified General Accountants Association, a provincial affiliate of CGA Canada who frequently lectures about IFRS. Canada plans to fully move to IFRS by January 1, 2011, which has given Schmidt - president of GTS Seminars in Milton, Ont., a ringside seat as accountants adapt to the changes.
What's the Canadian convergence process been like for individual accountants?
Part of the issue for many is what they learned versus where the IFRS is going. We have accountants who'e been practicing for 20 or 30 years and it' been the same basic principles.
For example, the cost principle: On the financial statement, an asset is shown at cost and if it's not for sale, fair value concepts don't mean much under current accounting standards. Fair value means a lot to the banks but it hasn't been a strong financial statement concept overall.
Under IFRS, you can do property, plant and equipment at cost or use fair value with sufficient regularity and pick up that difference in your equity or, in some cases, your income statement.
That also goes against how we learned the income realization principle. We don't earn income or recognize a loss until we sell it. The challenge is to the mind-set.
Sounds like the line between finance and accounting will grow thinner.
IFRS influences the usefulness of financial statements for making economic decisions. Many feel the way we've done financial statements in the past has not been that useful, and that's why we've seen the rise in the number of financial analysts that corporations and investors use to look at concepts like fair value. The concepts of relevance, reliability and comparability have become much more important to both standard setters and financial statement users. There is also significantly more disclosure under the IFRS.
Over the last couple of years, we've seen finance issues come into play much more in IFRS than they do in GAAP, concepts like discounting future value and net present value concepts in measurements. It's like when the rules changed with regards to stock option benefits to expensing them. How do we value them? Recommended methods include using Black-Scholes and Binomal Tree methods - both are heavy finance principles.
So IFRS has more finance in it, but it’s still got rules, right?
Everything has to have rules and some form of principals behind the rules. The fact is, ALL principle-based systems use rules to operationalize their standards, and ALL rule-based systems must rely on principles in order to derive the rules. The real issue is where you ought to be on the continuum. Canadian and international GAAP were described as being more at the principle-based end of the continuum while the U.S. was said to be more rule-based
How has the convergence process changed the certification exam process?
When people get their accounting designation, they get it on the basis of passing an exam based primarily on rules, versus an exam that's heavily principles based.
Accounting exams in both Canada and the U.S. have been moving to more competency based examinations. The IFRS are more principles-based versus rules-based. There's a lot of places where there's not a heavy rule. You exercise more professional judgment with more disclosure. If you think of the average accountant, that's a significantly different mindset. If you look at accounting, right now we have many bright lights that tell us what to do and when.
What should U.S. accountants do to get ready for convergence here?
Don't read IFRS. When this first started, I tried to read the actual standard. I was trying to reinterpret it as a rules-based standard. If you look instead at what the standard is trying to do, you'll have a framework for interpreting the standard. Make sure you understand the objective of the standard and the core principles. There are many guides out currently to help you with this. Get up on your skill set that helps analyze a rule within a conceptual framework.
Does this mean I'm doomed if I'm not particularly good at that?
Not doomed. I believe the competencies required of a newly designated accountant will change. The accounting bodies in both Canada and the U.S. are reviewing them currently. But do we really have just one kind of accountant? Some accountants primarily function in paration of tax returns and routine monthly reports. But, software has taken over more of that function over time. What we've tended to see is that interpretation is one of four or five categories of accountants. We're going to see more accountants in the interpretation and planning aspects. And then, there's the auditors, but that is another story.
What's the bottom line?
Accountants who heavily rely on the rules to make decision for them are going to have challenges. Those that have a greater understanding of the conceptual framework are going to have a better time.
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