Question

The article is after the questions

The July 6, 2011, edition of the Wall Street Journal Online includes an article by Michael Rapoport entitled “U.S. Firms Clash Over Accounting Rules.” The article discusses why some U.S. companies favored adoption of International Financial Reporting Standards (IFRS) while other companies opposed it.

Instructions

Read the article and answer the following questions.

(a) The articles says that the switch to IFRS tends to be favored by “larger companies, big accounting firms, and rule makers.” What reasons are given for favoring the switch?

(b) What two reasons are given by many smaller companies that oppose the switch?

(c) What criticism of IFRS is raised with regard to regulated companies?

(d) Explain what is meant by “condorsement.”

Ford Motor Co. has a special room for it.

It isn't a new hybrid car. The auto maker is preparing for a possible switch by U.S. companies to a new set of accounting rules already used in most of the rest of the world.

Ford supports the move to International Financial Reporting Standards, or IFRS, saying the company would save money by simplifying and standardizing its accounting across all 138 countries where Ford operates.

Charts, posters and other details about how Ford would make the switch fill the company's "IFRS Energy Room," a converted conference room at the company's headquarters in Dearborn, Mich. "For two days, we were thinking of it as the IFRS 'war room,"' says Susan Callahan, Ford's manager of global accounting policies, "but we couldn't think of who we were at war with."

The answer: companies like Hallador Energy Co., a small Denver coal-mining company that doesn't do business outside the U.S. and opposes moving to the international standards.

"We didn't join the metric system when everybody else did," says W. Anderson Bishop, Hallador's chief financial officer. U.S. accounting rules are "the gold standard, and why would we want to lower our standards just to make the rest of the world happy?"

The clash between big and small companies is likely to come up at a discussion session Thursday at the Securities and Exchange Commission in Washington.

U.S. and global rule makers already have worked for years to eliminate many of the biggest differences between IFRS and the U.S.'s generally accepted accounting principles, or GAAP. The SEC is expected to decide by year end whether to require U.S. companies to shift to IFRS altogether.

If U.S. companies are required by the SEC to move to IFRS, which wouldn't happen until at least 2015, some numbers on their financial statements will have to be calculated differently. (For example, a widely used method to value inventory under GAAP isn't allowed under IFRS.) Accounting could become simpler and more flexible, since IFRS is based on guiding principles rather than GAAP's detailed rules.

Larger companies, big accounting firms and top rule makers favor the switch. They contend that global unity would save companies money by consolidating their bookkeeping and make it easier to raise capital around the world. Investors would have less trouble comparing companies based in different countries, and global securities-law enforcement would improve, supporters say.

"It puts everybody on the same language and gives everybody a chance to coalesce along the same standards," said Joel Osnoss, Deloitte & Touche LLP's global IFRS leader for clients and markets. "The quality of financial reporting is going to improve globally."

But some smaller U.S. companies complain that the change will be a costly headache. Estimates for how much the move would cost vary. James Barlow, chief financial officer of drug company Allergan Inc. and an opponent of IFRS, estimates the change could cost companies as much as 1% of revenues.

Smaller companies also are less likely to have operations outside the U.S., or to have aspirations to expand or raise money globally.

"We don't see why the current reporting framework is insufficient," says Jim Lynch, chief financial officer of SJW Corp., a water utility in San Jose, Calif. IFRS lacks the specific rules GAAP has to deal with regulated companies like utilities, he adds.

Shannon Greene, finance chief of Tandy Leather Factory Inc., says the leather-products maker in Fort Worth, Texas, "won't get any benefit whatsoever" from switching to IFRS, though she accepts it as "one of those necessary evils." Once more small firms find out about the potential change, "you're going to see an outcry."

Given the sluggish economy and the far-off nature of the change, some companies have paid little attention to the debate. "I'm not only the CFO, but I'm also the 'OFO': the only financial officer," says Stephen Kuchen, chief financial officer at PacificHealth Laboratories, a Matawan, N.J., nutrition-technology company. "I'm not really thinking about 2016. I'm thinking about making payroll next week and making sure we have a sound business plan."

Not all small companies are opposed to IFRS. For instance, Cuisine Solutions Inc., an Alexandria, Va., maker of prepared gourmet foods, has a subsidiary in France, so standardized accounting would help the company, says Ron Zilkowski, its finance chief. Mr. Zilkowski and Ms. Greene are scheduled to speak at the SEC on Thursday.

SEC officials are concerned about IFRS's potential impact as well. "There are immediate questions when you talk to smaller companies as to whether they have the same benefits," SEC Chief Accountant James Kroeker said. Some of them also think the costs of a switch can't be scaled to their company's size, he said, so the expense would be a greater burden on them than on large companies.

There might be a compromise. Under an idea dubbed "condorsement"--a combination of "convergence" and "endorsement"--floated by the SEC, U.S. companies would stay under GAAP but efforts to move GAAP closer to IFRS would continue. At the same time, the Financial Accounting Standards Board would consider absorbing new IFRS rules into GAAP, based on whether each rule is in the best interest of U.S. investors and financial markets. The SEC says such a method would help align rules, while keeping down the costs of an accounting change.

One way or another, the U.S. needs to adopt the global accounting standards in IFRS or else "the whole idea of having one single global market starts to fall apart," says David Tweedie, who stepped down last week as chairman of the International Accounting Standards Board.

Write to Michael Rapoport at [email protected]

Credit: By Michael Rapoport

Word count: 946

(c) 2011 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.

Answer 1

(a)
Larger companies, big accounting firms and top rule makers favor the switch.
The reasons are -
Global unity that will save companies money by consolidating their bookkeeping.
It makes easier to raise capital around the world.
Investors will have less trouble comparing companies based in different countries.
Global securities-law enforcement will improve.

(b)
The reasons given by smaller companies that oppose the switch are -
1. The change will cost companies as much as 1% of revenues.
2. Smaller companies also are less likely to have operations outside the U.S., or to have aspirations to expand or raise money globally.

(c)
With regard to regulated companies, IFRS lacks the specific rules GAAP has to deal like utilities.

(d)
Condorsement - It is a combination of "convergence" and "endorsement".
Companies would stay under GAAP but efforts to move GAAP closer to IFRS would continue.
Absorbing new IFRS rules into GAAP, based on whether each rule is in the best interest to investors and financial markets.