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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Axel Depeux for Financial Week
LOTS TO TALK ABOUT Claude Draillard of Dassault Falcon Jet (left) and Jerome Devillers of accounting firm Mazars.
October 26, 2008 12:01 AM ET
The push for global accounting standards will create more difficulties than companies may anticipate, experts warned at a conference earlier this month on the transition to international financial reporting standards from U.S. generally accepted accounting principles. Because IFRS is based more on general principles than U.S. GAAP, the international regime lacks specific guidance on how to comply with the rules. As a result, experts believe auditors will require more public disclosure of the basis for a company’s accounting before signing off on results compiled under IFRS than under U.S. GAAP, and that will make many companies uncomfortable. At a minimum, compliance with IFRS will mean more time spent with auditors trying to determine how to apply a specific accounting principle. It may also mean more involvement on the part of the operations department in accounting matters, to determine the intent behind specific transactions. That, experts say, will require companies to walk a fine line between disclosing enough information for accounting purposes and revealing secrets to competitors. “IFRS embodies the notion of professional judgment,” said Barry Melancon, chief executive of the American Institute of Certified Public Accountants, speaking at a seminar organized by accounting firm Weiser earlier this month. And that notion presents challenges to companies. “I don’t think they like it,” said Kathryn Byrne, a partner with Weiser, regarding U.S. companies’ view of IFRS being more principles-based. “But they have to get used to it.” It took Areva NP, a U.S. subsidiary of Areva SA, a Paris-based company focused on nuclear power generation and electric transmission and distribution, some time to do that when it went through the transition process to IFRS from GAAP a few years ago, according to Richard Stewart, manager of accounting and reporting. “We had this mind-set of rule-based accounting,” he said, also speaking at the Weiser seminar. “Sometimes it’s different to solve a problem. Some people may ask, ‘Where’s the specific rule?’ Well, there’s no specific rule.” He added that as a result of the increased need for interpretation of IFRS standards, his company required accountants’ guidance to get comfortable with the new system. Even now, three years after the company transitioned to IFRS, communication internally and with accountants is more frequent than under GAAP. “There’s a lot more discussion between accountants and CFOs,” echoed Jerome Devillers, a principal with Mazars, an accounting firm headquartered in France that partners with Weiser. He thinks it’s a positive change since it forces auditors to understand the economics of a transaction rather than just how it needs to be accounted for. But he also acknowledged that it requires more time. Not only will accounting departments within companies have to increase their dialogue with their auditors, they’ll also have to get help from operations managers to determine the purpose of a transaction. Consider the treatment of leases. Operating leases are expensed on the income statement while finance leases are capitalized on the balance sheet and then amortized under both IFRS and GAAP. But GAAP contains specific rules to help companies distinguish the two types of leases, while IFRS substitutes judgment for the bright-line tests that GAAP’s guidance provides. Under GAAP, a lease is treated as an asset on the balance sheet if it meets any one of four specific criteria. If it doesn’t, it is expensed. But under IFRS, the company needs to disclose its intent in entering into the lease. If a company leasing a machine ultimately intends to own it, then it’s an asset. If, on the other hand, it intends to return the equipment at some point, then lease payments can be expensed. But intention is subject to interpretation, and auditors may require input from operations before they’ll accept management’s view. Claude Draillard, director of financial reporting for Dassault Falcon Jet, a U.S. subsidiary of Dassault Aviation, said his company, which makes jets, struggled with these questions regarding aircraft leases when it first moved to IFRS from GAAP. “The difference between finance lease and operational lease became a huge issue,” he said. “IAS 17 [the IFRS standard on accounting for leases] was a nightmare for everybody.” He added that such discussions can bring up even more fundamental questions for a company, such as whether it really wants to be financing customers, as Dassault does. Mr. Draillard, who spoke at the seminar, also said that this increase in disclosure can be detrimental to the competitiveness of a company, especially one as intensely focused on technology development as his. For instance, development costs are treated as expenses on the income statement under GAAP, with the exception of software and website development costs, which are capitalized. But under IFRS, development costs are capitalized only when certain criteria are met, for example if the technical and economic feasibility of a project can be demonstrated. That means that a company has to disclose its plans to use a certain technology in the future. “When you have a lot of technology in your business, disclosing development costs, for instance, that’s a lot to disclose to our competition,” said Mr. Draillard. “You have to be a little careful,” said Ms. Byrne. “You could be disclosing proprietary secrets. You may be giving more information than you want to.” FW
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