Differences Between IFRS and GAAP Could Create Challenges for Educators

International Financial Reporting Standards:

Where are We and What is the Role of U.S. Educational Institutions?

International Financial Reporting Standards (IFRS) are financial standards set forth by the International Accounting Standards Board (IASB).  These standards are the international equivalent to the U.S. Generally Accepted Accounting Principles (GAAP) set forth by the Financial Accounting Standards Board (FASB). Both sets of standards provide authoritative literature for public companies under their jurisdiction.

Discussion of adopting IFRS for U.S. public companies has generated a lot of discussion over the last several years.   The U.S. Securities and Exchange Commission detailed a proposed roadmap for conversion on November 14, 2008.  While the new administration has not embraced the roadmap at this point, the general belief is that some form of convergence or conversion will occur as we move forward, but that the timeline may be pushed back from the proposal.

This decision, regardless of the timing, may ultimately add to the massive amount of material educational institutions will need to cover in accounting programs.

Differences in IFRS and GAAP

While some describe IFRS as purely principles-based and GAAP as purely rules-based, this characterization is actually not appropriate.

IFRS does tend to provide less precise guidance,but there are most certainly rules embedded in the international standards.  On the other hand, anyone schooled in accounting knows that GAAP are based on the Conceptual Framework; which is a set of guiding principles.   The difference is that the U.S. standards have grown to include many rules due to requests by constituents for guidance.

For example, in the area of revenue recognition there are numerous standards under GAAP while IFRS has fewer revenue recognition standards.  The FASB and the IASB Boards issued a Discussion Paper in December 2008 on revenue recognition and plan to have an Exposure Draft in 2010.  This is one of many projects that the two Boards are working on together.

However, one must keep in mind that the U.S. standards are older than their international counterparts.  Therefore, a question that is often asked is “Will IFRS look like GAAP in 40 years”? In other words, over time will companies desire more guidance that leads to more rules in the international standards?  This is a question that only the future can answer.

Convergence or Conversion

Another looming question is “Are we going to convert or converge the two sets of standards, assuming the move to IFRS will occur?”

The FASB and the IASB met in September 2002 and agreed to a memorandum of understanding (MOU) know as the “Norwalk Agreement”.  This agreement states that the two boards will work toward making standards as compatible as possible and that they will work together to coordinate future projects.   Additional MOUs were issued in 2006 and 2008 indicating short term and long term projects.  The first converged standard was Business Combinations (FAS 141R) on the U.S. side and IFRS 3 in the international standards.  Additional convergence projects remain underway.

There has also been discussion of the U.S. adopting IFRS though a conversion.  People on both sides of the argument have valid points.  Some fear that if convergence is the ultimate decision we could end up in a situation much like we did in the 1960s with the metric system…convergence just simply fails to happen.  These people feel that if we are to move toward IFRS in the U.S. then we should either have a convergence plan with an ultimate conversion date or just set a conversion date outright.  Others fear that conversion to IFRS without planned convergence will lead to a weaker set of standards without guidance they feel is needed in the U.S.

The U.S. system is different in many ways from international systems and these differences must be considered.  The one most often discussed difference is the U.S. legal environment.  The U.S. is known for having a much more litigious environment.  The fear is that if the U.S. is forced to convert to IFRS without some form of legal overhaul or agreement then we could find ourselves with lawsuits due to the increased use of judgment required under IFRS.  This argument is a valid one and must be considered prior to a decision on possible conversion.

Another issue facing potential conversion is the funding of the IASB versus the FASB.  Sarbanes-Oxley requires that the FASB be funded through dues paid by public companies and accountants.  It prohibits the acceptance of contributions.  The IASB, on the other hand, relies on contributions as a primary source of funding.  The fear is that contributions can lead to increased pressure from special interest groups.  This source has also led to questions regarding stability of the IASB.  Funding source is most certainly an issue that must be addressed before a serious discussion around conversion can take place.

Educational Institutions and Their Responsibility

Accounting educators are charged with preparing their students for a profession that is constantly changing.  These changes, in turn, lead to a need to continuously update curriculum.  Educational institutions are now at a crossroads with the profession.  They are left with a choice between 1) incorporating IFRS into the curriculum now before it is adopted in the U.S. or 2) waiting a while to gauge a better adoption picture in the event it does occur.  Still another choice to be made if IFRS is to be integrated into the curriculum is whether a single course or complete curriculum integration is more appropriate.  These choices are difficult ones with the future of IFRS in the U.S. so unsure at this point.

Include IFRS or Not?

The decision to include IFRS or not should be a relatively easy one.

Accounting educators are increasingly being told that they need to prepare their students for the global marketplace.  That global marketplace, by definition, includes a world where IFRS is already in use.  Virtually every other developed country in the world uses some form of IFRS.  Not including IFRS in the curriculum to some degree definitely fails the global marketplace yardstick.

In addition, at least one of the Big Four accounting firms is requiring some level of knowledge during the interviewing phase.  This firm is now requesting that interviewers ask IFRS-specific questions and interviewees must display some level of knowledge based on the courses they have completed.  Students who have had a principles or accounting course must display knowledge of what IFRS stands for and that the IASB governs these standards.  Students who have had intermediate accounting course should be able to list differences between IFRS and GAAP.

Therefore, at a minimum, those institutions preparing students to work with the public accounting firms need to consider some form of IFRS education in their curriculum.

Single Course or Curriculum Change?

This is a more difficult question to answer than whether to include IFRS or not.  Some institutions are running a separate IFRS course.  Others are integrating it throughout their curriculum.  The choice between these two, or some combination, is a matter of resources and program beliefs.

Incorporating IFRS though a single, stand alone course is in place at some institutions.   This course usually discusses the major areas of difference between the two sets of standards and allows students to concentrate on IFRS after they are well grounded in GAAP.  This course is generally taught at the master’s level and may be a required or elective course.  While this may be easier to implement than an all-out curriculum integration, it does come at a cost. Students may interview for full time positions or internships before having this course.

Therefore, to comply with the IFRS interview knowledge requirements noted above, IFRS may need to be discussed earlier as well or may need to be incorporated through some other mechanism.  Fortunately, all of the Big Four and many of the other international firms have IFRS materials accessible by faculty and/or students on their websites.  One benefit of this method is that a single, or maybe two, faculty members are all that need to be well versed in IFRS.

A more radical change is to incorporate IFRS throughout the entire curriculum.  IFRS touches almost all of the courses that are taught in some way or another.  The perception is that teaching IFRS is primarily a financial accounting issue.  However, IFRS issues may also be taught in tax, accounting information systems, auditing, and other accounting courses.

Teaching IFRS in a standalone course may not make the best use of area expertise as it is difficult for a financial expert to understand all the nuances faced by the tax expert, etc.  The cost to complete curriculum integration is that most, if not all, of the accounting faculty must understand how IFRS will impact their particular area.  In addition, choices must be made as to what will be limited or excluded from the old course content as accountancy courses are already packed full of content.  Without extending the length of a course material coverage choices must be made.  The benefit in the long run to this path is that, if IFRS is fully adopted, those universities that have opted to integrate throughout the curriculum will be ahead of the learning curve.

Summary

IFRS will most likely come to the U.S. in some form but the timeline is still unknown.  The differences between IFRS and GAAP are something that educators need to be addressing now as they send students out into a global marketplace.

IFRS may be integrated into the curriculum through a single course, a complete curriculum change, or some combination of these two.  The single course or limited combination method are the least costly in the short run but the most costly in the long run.  Integrating IFRS throughout the curriculum means that faculty must get up to speed on IFRS and how it relates to their area now but could save the institution time and curriculum reform in the future.

Each institution needs to weigh the costs and benefits of these paths but all accounting programs need to look at some form of IFRS integration into their curriculum.

**********

About the Author

Dr. Yvonne Hinson is the PricewaterhouseCoopers Faculty Fellow and Associate Professor of Accounting at Wake Forest University. She received her undergraduate degree in accounting from the University of North Carolina at Charlotte in 1986, her MBA from from the University of North Carolina at Charlotte in 1990, and her Ph. D. in accounting from the University of Tennessee in 1997.

Ms. Hinson’s areas of research and teaching interest and experience include: tax policy; financial statements; analysis and valuation; and, financial accounting. She has been published numerous times on accounting topics (list available here) and can be contacted via email at: hinsonyl [at] wfu [dot] edu.

Tags: Accounting, differences between ifrs and gaap, education, fasb, GAAP, iasb, IFRS, ifrs v gaap, Yvonne Stinson