By Anthony H. Rainey
NEW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
The best way to think of GAAP is as a set of rules that accountants follow. Each country and sector (private and public) typically has its own GAAP, but on the whole, there aren’t many differences between countries – interpretations might vary from country to country, but everyone tends to agree that a company can’t simply make up billions of dollars worth of revenue and put it on its books. Every country, in turn, influences the other countries that follow GAAP. And now, the International Accounting Standards Board (IASB) http://www.iasb.org/Home.htm is promoting International Financial Reporting Standards (IFRS).
WHAT IS GOING TO HAPPEN – IFRS AND IASCF AND XBRL
The International Financial Reporting Standards (IFRS) taxonomy was released on 12.31.08 as an exposure draft for public comment by the International Accounting Standards Committee Foundation (IASCF). It is the basis of the IASCF’s XBRL (extensible business reporting language) project intended to make private sector reporting financial results easier, more accurate, and more easily compared. This is intended to promote full and accessible financial disclosure for customers (investors, analysts, regulators).
KNOW THY TAXONOMY ‘DATA TAGGING’
This taxonomy translates the international standards into XBRL, the Internet data-tagging language that is being touted by the IASC Foundation as the format of choice for electronic filing of financial information. Think of the taxonomy as a “data dictionary” that provides all users the same definitions of data. This internet-based language will be a dictionary of “data tags” that will define each tagged number in a financial statement and how it should be treated under the International Financial Reporting Standards.
TAGGED FINANCIAL DATA MEANS SEARCHABLE DATA
This will mean that no matter where a company’s asset numbers appear in their financial statements, these assets will be defined (“tagged”) as assets enabling the reader who searches for an individual or aggregate number regarding the assets as easy as doing a search in a web browser as compared to manually combing through company financial statements or scrolling through spreadsheet documents and other attachments.
THE RELATIONSHIP BETWEEN XBRL AND IFRS
The utilization of XBRL by private companies is intended to make their transition IFRS (GAAP) more advantageous. Think about it. The “tagging” language will make it easier for companies to migrate from FASB or European or Asian GAAPs to IFRS. Both U.S. and international private sector accounting rule makers (“standards boards”) have been working since 2002 to converge their existing GAAPs with IFRS to produce one set of global standards. The outcome for preparers, reviewers and users of financial statements is more transparency to financial reporting.
PUBLIC SECTOR ACCOUNTING’S PLANS FOR IFRS AND XBRL
The public sector accounting standards boards – throughout the world – have yet to take a position on whether they will convert to something like IFRS and a common taxonomy for “tagging’” for national, state, or local government financial statements. Many public sector finance staff do not see a need for adopting the IFRS for government:
- Governments are unique
- Governments use fund accounting
- Government financial statement information, in the United States, can be easily accessed on government web sites typically in the following forms:
- Performance Accountability Report (PAR) at the federal level following applicable Federal Accounting Standards Advisory Board (FASAB) pronouncements (federal government GAAP)
- Comprehensive Annual Financial Report (CAFR) at the state and municipal level following applicable Governmental Accounting Standards Board (GASB) pronouncements (state/municipal GAAP)
- Plain Vanilla Audited Financial Statement (those federal, state and municipal governments that choose not to compile and prepare a PAR or a CAFR)
It would be interesting to find out how the public sector entities and public sector accounting standards boards in other countries plan to address IFRS and how governments throughout the world plan to address XBRL for their financial statements.
It was probably true, before TARP, that many external users of government financial statements did not see the need for converting from FASAB or GASB to another one – IFRS. Now, with many governments are “lending” capital to transnational companies and Canada, Mexico and the United States North American Free Trade Agreement (NAFTA) and the change fro the use of Standard Industrial Classification (SIC) codes to the North American Industry Classification System (NAICS), what basis will rating agencies like Moody’s, Fitch, and Standard and Poor’s use to compare the fiscal condition of governments? Some say, it does not matter what type of government GAAP is used. Others believe that government intervention in the market place and the transfer of payments to companies that may be transnational using IFRS may require a sharing of information among governments regarding debt repayments and its representation on their financial statements. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have created the Financial Crisis Advisory Group (FCAG). The FCAG is the high-level advisory group set up by the boards to consider financial reporting issues arising from the global financial crisis.
STAY TUNED
The Financial Executive’s Institute blog has a good overview for U.S. transition considerations http://financialexecutives.blogspot.com/. As for the U.S. private sector transition to XBRL, a mandate to file financial results using an interactive format has been pushed by Securities Exchange Commission (SEC) chairman Christopher Cox. The process of making the language mandatory for financial reports has been slow, however, the SEC Commissioners voted 4-1 on December 17, 2008 to adopt some proposed XBRL expected to be published in the near future. http://sec.gov/news/speech/2008/spch121708mwg.htm.
Posted by ahrainey 
