Keith Peterka

Keith Peterka, a member of Mayer Hoffman McCann's Professional Standards Group and expert in IFRS was featured in the February 2012 issue of Financier Worldwide. Keith was a panelist for the magazine's Roundtable Q&A discussion on IFRS along with others with expertise in this field.

Keith's excerpts are below. The full article is available on the Financier Worldwide website to subscribers of the publication.

Q. How much closer has the world come to shared accounting standards over the last 12 months? What developments have you seen in various regions?

A. There were several important developments in 2011. Most importantly, the FASB and the IASB made substantial progress on both the revenue recognition and leasing projects. These two projects, which will impact virtually all businesses, are expected to be finalized in 2012 and will have a significant impact on convergence and the goal of achieving a single, high quality global standard. However, there have been some delays in the global convergence movement. Certain countries have pushed back their adoption date of IFRS due to the current economic environment. In addition, the SEC's announcement in December 2011 to delay a decision on when the US might adopt IFRS has also tempered momentum of the convergence movement.

Q. Could you explain the benefits to businesses, fund managers and investors of convergence and financial comparability that come with the adoption of IFRS around the world?

A. The benefits of adoption are dependent on one's own perspective. Companies with significant multinational locations such as the Global 1000 would benefit from a single set of standards, as would international investors and fund managers. What is less clear is the cost benefit for US domestic companies. Additionally, while one set of standards may be a benefit to fund managers and investment advisors, the benefit for the average individual investor is not as apparent.

Q. To what extent are shared standards at risk of being diluted or derailed by political interference? Is there a danger that regulators in different countries will modify the way IFRS is applied — even when retaining the same overarching principles — to coincide with their local agenda?

A. The important factor is for the FASB and IASB to continue working on the convergence of standards. Looking at the converged standards you'll see that, with topics such as business combinations, certain differences still exist. I believe that for the standards to work effectively, regulators and accounting and legal bodies will need to closely examine certain aspects of the converged standards for acceptability in their respective marketplace. However, it is an issue for companies that must furnish financial statements in other jurisdictions where their home regulator has provided a modification to the standards. I believe it is important for regulatory authorities to have the ability to shape how accounting standards are being applied in their respective jurisdiction, however, regulators should work to harmonize the acceptability of the standards.

Q. In your opinion, what challenges exist when implementing IFRS in developing economies, where legal and regulatory frameworks may be slow to adapt, or contain conflicting requirements? Can such complexities be surmounted by incorporating IFRS standards directly into local GAAPs, rather than requiring the adoption of IFRS?

A. In regards to developing economies, the challenges can be addressed when considering the difference between full IFRS and IFRS for small and medium-size enterprises (SMEs). The SME Standard provides a fundamentally solid framework to meet the needs of most private companies. Full IFRS provides developing countries a platform that is well understood in most major financial markets and is a platform in which investors have familiarity and confidence. The second part of the question regarding the mechanism for adoption exists whether the jurisdiction chooses to adopt IFRS or use an endorsement mechanism. The bigger issue will impact how regulators and others will view the standards.

Q. Is the success of IFRS adoption ultimately dependent on effective education and training of preparers, auditors and regulators? In your experience, could more be done in this area to smooth the transition?

A. For IFRS to be the standard of the global marketplace, it is imperative that investors, regulators, preparers, business owners, and all stakeholders understand the standards and how they may impact and change current practices. I believe the boards have done a tremendous job on the convergence project and the outreach that they have done, especially as it relates to both the revenue project and leasing project. Perhaps the biggest question from a US perspective is about the timing of adoption of the new standards.

Q. In terms of enforcing financial reporting under IFRS, do you expect to see national regulators and oversight bodies cooperate closely with each other to develop a uniform approach? Is this an essential part of the move towards global standards?

A. This is a huge challenge to the goal of establishing one high quality financial reporting set of standards. Often overlooked is the fact that the boards are the standard setters, and not the security regulators who often set precedent. There has to be consistency among global regulators if they expect the standard to be established in practice in a consistent manner. One of the main reasons for having one set of standards is the objective of comparability; if global regulators don’t ensure consistent application then the benefit is lost.

Q. Broadly speaking, in what ways can a switch to IFRS affect a company’s tax liabilities and financial planning?

A. The issue of taxes will vary by jurisdiction. For many adopters, the impact may be minimal due to the tax regulation being closely aligned with financial reporting, thus minimizing the timing differences. For other jurisdictions, such as the US with its complex tax code, the effect could be material. For example, IFRS does not permit the use of the Last In First Out (LIFO) method of valuating inventory. This is still a fairly popular method for many manufacturers and dealerships in the US.

Q. What asset valuation issues continue to spark debate when it comes to accounting standards? Why has fair value accounting received so much criticism in recent years?

A. Financial instruments continue to be perhaps the most controversial subject which the joint boards are dealing with. Obviously any changes to financial instrument accounting will greatly impact banks, mutual funds, and other investment companies. It is interesting to note these are often the most regulated industries as well. This is an area where the boards would be well served to work together on a joint standard, but the regulatory pressure has not allowed that to happen. Looking at valuation issues, there are strong opinions on both sides of the camp — those who favor a fair value approach and others who support an amortized cost approach. It is unfortunate that fair value accounting has been so heavily criticized in the banking community. Too often fair value accounting has been the scapegoat for poor lending practices.

Q. When comparing IFRS to local GAAPs, what complications often surround specific areas such as revenue recognition, lease accounting and the treatment of financial instruments?

A. From a US perspective, the FASB and IASB are working jointly on both the revenue recognition project as well as the lease accounting project, which will eliminate most of the differences that currently exist. Both boards are also working on financial instruments, which unfortunately they did not address as a joint project. However, the boards should be commended on their continued convergence efforts. On the two projects that they are working on jointly, the boards have done a tremendous job on outreach to the user community and have made significant changes to their original exposure drafts where warranted, though I am not certain that this effort has been fully recognized in the user community. One area that the boards would be astute to make a higher priority on the convergence agenda is the conceptual framework project, so that consistent solutions could be achieved for similar transactions respective to industry or standard.

Q. In what ways can a switch to IFRS affect M&A activity, such as target evaluation, purchase price contingencies, facilitating cross-border deals, and so on?

A. With the convergence project between the FASB and the IASB dealing with issues such as revenue recognition and lease accounting, this will have a significant impact on the financial statement of companies which may affect the way deals are structured and valued. The revenue recognition standard potentially could impact deal evaluations which are earning based. The lease project will alter the traditional balance sheets of many companies, which could impact any leveraged based matrix. One of the positives of the convergence project that should be noted is that both the FASB and IASB have converged the Business Combination Standard, making comparability much more relevant.

Q. For companies transitioning to IFRS, how important is it to outline a roadmap that prioritizes key steps and helps to manage the associated costs? What is your general advice to companies undertaking this task?

A. In these uncertain economic times I believe it is imperative that companies are actively involved in the conversion process. In an effort to find cost savings, many companies will look to do much of the conversion in house. However, it is important to have a partner who understands IFRS and the issues that companies will have to understand, not only from a financial reporting perspective but from the conversion process as well. I would recommend that even if a company intends to do the majority of the work in-house, they set up a steering committee with the right outside professionals to partner with them throughout this process.