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The Business and Accounting Advisor

Business survivability in this economy is difficult at best. This blog will offer useful business and accounting advise and ideas for ongoing business and competitive advantage.

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The New International Reporting Standards Board – Will it affect you?

January 13th, 2012 at Fri, 13th, 2012 at 1:23 am by glennsmith

In my teaching of accounting and finance classes potentially nothing is more important than the inexorable shift the accounting profession is going through away from United States Generally Accepted Accounting Principles to the new International standards. With the importance of factors in consideration when both large, medium and even small businesses are going global as is the nature of many businesses today both accounting and finance factors are facing new challenges and obstacles. The largest two groups of bodies working on bringing these standards together are the Financial Accounting Standards board and the International Accounting Standards Board.

 In finance the ability to raise capital in order to further the future of the business (or individual) is essential. There are basically two ways to raise capital in the capital market. These are owners’ equity and liability generation. Liability generation is debt capital. Owners Equity is generated by selling stock and profits created by the business. One of the largest changes taking place is in the revenue recognition and new standards of recognizing revenue have been released by the FASB and IASB.

 FASB and IASB released in conjunction a single revenue recognition standard. This actually is a good place to start with my own person dissertation topic which, while I won’t reveal the entirety of it here is concerning economic principles and how they play on the principles of accounting. This standard was designed for three reasons. First it was needed to streamline accounting across industries. Second it was needed to correct inconsistencies and finally it aids by forcing businesses to reveal more information. My first concern would be that this revelation of business data may actually hurt a company and aid its competitors. Fortunately IASB and FASB released detailed guidance along with this section. This was non surprisingly completed because of receipt of over 1000 letters to the outreach activities.

 These revisions were largely brought about by the AICPA’s comment letter urging the boards to re-expose and deliberate. This speaks volumes to me about the pressure that the United States is able to place upon International Regulations and I can’t say I am sorry that this is possible.

 Revenue’s core definition is the same in the old as the new draft, “A entity would recognize revenue from contracts with customers with it transfers promised goods or services to the customer.” (Lamoreaux, 2012)

 My question about this particular issue is if there is so little change between the old definition and the new does this not simply show the capability of a single nation to object and insist on a change in code? Is it simply a rattling of sabers so to speak?

 There is, however, some excellent additions to this change including guidance on how to determine when a good has been transferred creating revenue. Simplification has also been added making report preparation easier. The bad side of this is that simpler does not necessarily mean better. Another problem may be in the need to maintain different information including POS software changes.

 The changes do not take place until 2015 but early adoption has been permitted by IASB.

 The five step process will be:

1.) Identification of the customer contract.

2.) Specification of contractual performance obligations.

3.) Price determination of the transaction.

4.) Allocation of the price to the performance of the contract duty.

5.) Revenue recognition as the business satisfies performance.

 As stated previously:

 Net profit creation is part of the capital consideration through owners’ equity. Businesses not earning a profit or operating at a loss have a tendency to lose shareholders and have a more difficult time raising capital through stock sales. The other logical options then are creation of financial capability through sales of assets or the raising of debt. The regulations in the capital markets are also changing and the IASB and FASB are making important changes especially if we consider how much of the financing taking place in the United States today is taking place from monies raised from organizations, individuals, businesses and governments outside the United States of America. When considering the raising of capital for business faithful representation and full disclosure importance cannot be overestimated in my opinion and this is why it is so important to know what the IASB advisory board the Capital Markets Advisory Committee is doing. The release of GMAC final 2011 meeting minutes happened on the 6th of January. Some of the highlights that I found important are as follows:

 The London meeting took place on October 12, 2011. Four IASB members and staff were in attendance. Rita Ogun and Thomson Reuters presented the Thomson Reuters’ model for taxonomy where Reuters cautioned the committee not to compare the US GAAP taxonomy with around 13,000 tags to the IRFS taxonomy which has only 3,400. It seems that much of the chaff has been cut through by the IFRS but the problem may be that with so many different types of entities in existence today all of these tags may be essential and cutting them down may or may not be the best idea. While these tags may be important they do reduce cross entity comparability.

 Reuters is not wrong. When companies present their financial information differently comparability is diminished. This has been the reason for the creation and importance of the IASB and an International GAAP standard. The push and pull is therefore between flexibility, which according to Reuters is gained by a child parent relationship to understand where varied entities relevancy stands, and rigid rule creation. IFRS is after all more principle based than US GAAP although this is an opinion. Potentially global tags could be used to make up the difference but these global tags would not have strict definition. (Mintz, 2011)

 Other discussions took place including the risk free rate of return, financial instruments impairment, transition disclosures in the time between when IASB standards are issued but are not yet mandatory. As can certainly be seen from this information this committee will be an important one to watch and changes and advisory suggestions coming out of this committee to the IASB will be essential.

 One thing to watch in the upcoming future will be an online survey that CMAC staff will be using to obtain input from users. I strongly suggest those interested parties pay strong attention to this survey because it will play a large part of what will happen in regulations over their financial reporting requirements in the future.

 IFRS. (2012) Meeting Summary of the Capital Markets Advisory Committee. Retrieved from http://www.ifrs.org/NR/rdonlyres/12B6079D-B68C-4087-86BD-875C12403D12/0/CMACMinutes12October2012.pdf

  Mintz, S. M. (2011). Ethics, Professional Judgment, and Principles-based Decision Making Under IFRS. [Article]. CPA Journal, 81(1), 68-72.

 

Mintz, S. M. (2011). Ethics, Professional Judgment, and Principles-based Decision Making Under IFRS. [Article]. CPA Journal, 81(1), 68-72.

 

 

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