The Bilingual CPA: Are You Fluent in IFRS and U.S. GAAP?

Accountants preparing and auditing financial statements for U.S. companies stand a good chance of encountering IFRS. The SEC requires financial statements to be filed in U.S. GAAP, and U.S. users of financial statements, particularly lenders, tend to follow the SEC preference, but IFRS is an integral part of U.S. business. U.S. multinationals with significant holdings in more than 100 countries use IFRS in financial filings. That includes an increasing number of small and medium-size companies, which in turn affects their auditors. Also, a fair number of private U.S. companies require IFRS because they are owned by foreign stakeholders. Fluency in both accounting standards may be needed to assess a competitor, to check the financial stability of a supplier, to conduct due diligence in a merger or acquisition, or to answer questions from a foreign investor. Clients, potential clients, competitors, suppliers, and customers of CPAs prepare financial statements using IFRS. Companies have subsidiaries and/or joint ventures that use IFRS. Even SMEs (small and medium-size enterprises) are involved in global settings with suppliers and/or customers. IFRS is used in numerous instances in which accountants encounter the need to compare, contrast, and reconcile IFRS to U.S. GAAP.  Foreign private issuers filing a Form 20-F with the SEC no longer have to provide a reconciliation of their financial reports to U.S. GAAP.That makes IFRS the accepted standard for SEC reporting for more than 450 international companies such as Unilever, a British-Dutch multinational consumer goods company, and requires that accountants be fluent in IFRS and U.S. GAAP. In 2007, the last year in which the SEC required reconciliations, Unilever reported in SEC filings a 2006 net income of 5.015 billion [euro] in IFRS and 4.385 billion [euro] in U.S. GAAP, a difference of 630 million [euro], or 13%. In a world where an earnings-per-share difference of 0.01 [euro] was significant, it seems likely that a difference of 0.21 [euro] per share was significant, though IFRS and U.S. GAAP have gotten closer since then. COMPETITIVE ANALYSIS Due diligence in the form of a competitive analysis is key to a merger, acquisition, or divestiture. Accountants working on such an analysis are likely to run into competitors, buyers, and suppliers that report their financial results in IFRS. Given the speed needed in M&A deals, financial reporting differences take on a higher level of intensity. Only adequate preparation and fluency in U.S. GAAP and IFRS offer any hope to keep the quality of the analysis within the time pressures. Another aspect--that of divestiture--is where U.S. GAAP and IFRS become intertwined and disentangled repeatedly over time periods. Operating units from either accounting standard need to be accounted for in statutorily defined accounts yet consolidated into the host country's standards. So, the more than 450 firms filing with the SEC use IFRS, but their operating units in the United States use U.S. GAAP and then are consolidated into IFRS. Similarly, U.S. firms with operating entities in countries where IFRS is the statutorily defined reporting system must be reconciled and consolidated into U.S. GAAP consolidated statements.  The five forces competitive analysis is a strategic framework developed by competitive strategy expert Michael E. Porter to determine the attractiveness, or profitability, of an industry. Used as a guide to assess the necessity of being fluent in IFRS and U.S. GAAP, each element of Porter's framework is considered in the context of making business decisions that are informed by the financial competence of being bilingual. See the chart, "Porter's Five Forces." Rivalry among existing competitors In the Unilever example, a competitive analysis would look at how the multinational's competitors Procter & Gamble and Nestle are doing in comparison. …

Field of study: Business