Comparative International Accounting

	[2011]
	[Hafiz M Abubakr Bsc & Msc Accounting & Finance,ACCA]

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General introduction: 

This paper deals with a critical analysis of the similarities and differences between IFRS accounting standards and US GAAP accounting standards.  There are some advantages and disadvantages, which are faced by these two accounting standards board domestically. However, this paper is not intended to be a tedious list of similarities and differences or the IFRS requirements. Basically, IFRS is issued by international accounting standards board (IASB) in connection with FASB and other global accounting standard-setters. To date, more than 100 countries use IFRS for preparing public accounts. Global companies which follow IFRS accounting standards for preparing their financial statements do face problems in its interpretation or application since it differs from country to country due to domestic issues including political lobbying, pressure groups and economical health of the country. Similarly, US GAAP is only applicable in USA but US GAAP is also encountering some problems. US GAAP accounting standards are issued by two bodies first one Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC), (PWC, 2010). Both accounting standard boards use same conceptual framework and share general principles ⁽¹⁾. However, IFRS is more principles based, whereas US GAAP is more rules based. The main difference between US GAAP and IFRS in short is ‘’ IFRS delivers much less detail’’ (Hlaciuc Elena 2009). In USA, organisations will spend 0.125% and 0.13% of their revenue on making transition. Nevertheless, comparative analysis of these different types of standards requires a study of two companies from two different countries. Thus, Pakistan Telecommunication Company Ltd (PTCL) from Islamic Republic of Pakistan and AT&T Inc from United State of America have been selected. Since from 1970s ICAP and council of the institute has been adopting International Accounting standards (IAS), in Pakistan almost all IFRS are in practice by the public limited companies which, according to securities exchange commission of Pakistan (SECP), is empowered under Section 234 of the Companies Ordinance, 1984 law for all plc.  Afzal (2007) remarks that, “Adoption of IFRS in Pakistan is a great challenge which demands different resources, great commitment and a lot of time. To face this challenge we need to develop a short and as well as long term strategy.’’ Though the institute has been in compliance with IFRS since 2009, however, after 2009 there are some IFRS standards which have not been adopted yet. These include: IAS 29, IAS 41 (agriculture, IFRS 1, 4, 7 and 8. According to SEC Pakistan all Public Limited Companies have to follow IFRS to prepare final accounts.

                                                               

 IFRS, however, is a big burden for small companies. Therefore, Medium-Sized Entities (MSEs) and Small-Sized Entities (SSEs)  in Pakistan follow two separate sets of financial reporting and accounting standards issued in 28-july-2006 by ICAP with the help of , ‘council of institute’. The names of these standards are 'Accounting and Financial Reporting Standards for Medium-Sized Entities and Small Sized Entities. Therefore, PTCL uses IFRS to prepare final accounts to fulfil the (SECP) requirements.

In a snapshot, PTCL was established in 1962. PTCL still is the largest telecommunication company in Pakistan after privatization took place in 2006 and provides different services to their customers include wireless phones, cable phones, internet services and IPTV. According to The 2010 PTCL auditors’ report, all financial statements use interpretation of some standards according International Financial Reporting Interpretations Committee (IFRIC) notes; since 2009 all Pakistani public limited companies still have been using IFRS to  prepare final accounts but due to Islamic laws prevailing in the country and some other domestic problems which includes bad economy, law and order situation and the corruption, public limited companies are also using interpretation of some IFRIC accounting standards with the combination of Islamic laws. According to Secretary-General of UNCTAD , December 2006; ‘’ UNCTAD monitoring team is currently involved in evaluating the implementation of IFRS  and audit standards in Pakistan to avoid recent accounting scandals in the country for non-compliance with accounting standards and auditing practices’’.

Nevertheless, the question remains How PTCL uses IFRS? And, which standard this company applies in final accounts preparation? Which standards interpretation it use in the final accounts? All these questions have been answered in the firm’s published 2010 final annual accounts. According to that, PTCL use some ‘Revised’ accounting standards in preparing final account, for examples; IAS 1 presentation of financial statements, IAS 16 (property plant and equipment), IAS 23 Borrowing costs, and IAS 38 (Intangible Assets) and IFRS 3 Business combinations. Additionally, some standards and some standards interpretations were not effective in 2010. For examples IFRS 5,IFRS 8,IAS 17 and  IAS 19 , IFRIC 14, IFRIC 19’’. (Ptcl final accounts for Ptcl 2010 page no 43-44). PTCL prepare their final accounts according to IAS 1 (Revised effective January 01,2009) guidelines provided by IFRS. According to (IAS 1.60), items must be presented on the face of the statement of financial position (SOFP) and additional information regarding the items must be either in the note or the face of SOFP. PTCL also prepared their company accounts at least once a year (IAS 1. 36). This standard does not guide specifically the format of the balance sheet, for example, write short term asset or long term asset first or vice-versa.

Secondly, with respect to standard IAS 16, its objective is accounting treatment for (Property, plant and equipment (PP&E). PP&E are tangible assets that are firstly expected to be used for more than one accounting period (Irene M. Wiecek, Nicola M. Young - 2009); and are secondly, considered for use in the production of goods or services, hire others, or for administrative purposes (Barry Elliott, Jamie Elliott – 2010). The cost of an item of PP&E shall be recorded as an asset if the cost of the asset can be measured reliably or it is probable that future economic benefits associated with the asset will flow to the entity (IASB committee , 2010 , p2183). According to IAS 16, paragraph No.15, PP&E should initially be recorded at cost. Cost of the PP&E comprises all necessary costs of the asset to bring an asset into a working condition. For example, “initial price, import tax, site preparation, delivery and handling, professional fees for engineers and architects and the estimated cost of dismantling and removing the asset and restoring the site” (paragraph 16.17). If we look into PTCL’s final accounts about the use of IAS 16; the following applications are evident: long term fixed assets excluding freehold land are recorded at cost minus accumulated depreciation and identified impairment loss; furthermore, the value of land is recorded in SOFP at cost minus any impairment loss, where cost element include the cost of overhead, and borrowing costs that are directly attributable to the bought asset.

Subsequently, the borrowing cost policy for this company is that borrowing cost is recorded at the time when proceeds are received. If there is a difference between net of transaction costs (proceeds) and the redemption value then the profit for the year is recorded in the period of borrowing applying interest effective method.  PTCL use almost same policy for borrowing cost (IAS 23) published by IFRS.  On the other hand, depreciation policy for this company is that straight line depreciation method applies to allocate the cost of the assets over their economic lives. For the new additions of the assets, depreciation is charged proportion wise (not charged for the whole year but in the month of purchase. However, full year depreciation is charged for the assets at time of disposal. In addition, profit or loss on sale of assets is calculated as the difference between the net book value of the assets and the proceeds received at time of assets disposal which is recorded as an income for the year in statement of comprehensive income. Accordingly, IFRS revaluation is allowed for whole of the entire class of the assets. Therefore, revaluation carries on fair value of the assets on a regular basis (Irene M. Wiecek, Nicola M. Young , 2009, p143).

With respect to IAS 38 (Intangible Asset), an intangible asset is defined as “an identifiable non-monetary asset without physical substance’’. The main objective of this standard is to describe the accounting treatment for intangible assets that are not dealt with specifically in another accounting standard. This standard also provides the recognition criteria for intangible assets (IAS38 Para No.1). IAS 38 does not apply on following assets; minerals, oil, gas, leased asset, financial assets, films projects, goodwill (IAS 38 .Para 2 to 3). An intangible asset is an asset which is controlled by the entity as a result of past events (such as buying or self-created) and from which future economic benefits (inflows of cash or other assets) are expected (IAS 38 Para No.8). The three vital characteristics of an intangible asset is firstly, control; secondly, foreseeable future economic benefits for example, reduce future costs or revenue (IAS 38 Para No.11. ) According to IAS 38, paragraph No. 12, An intangible asset is identifiable when it arises from other legal rights or contractual regardless of whether those rights are transferable or is separable, that is, capable of being transferred separated and sold, either together with a related contract or individually. An intangible assets recognition criterion is also similar to IAS16, that is, the cost of the asset can be measured reliably and it is probable that future economic benefits will follow to the entity (IAS 38 Para No.21). PTCL follows almost all above criterion to record intangible assets in their final accounts. To date, the firm only has two intangible assets, that is, licences and computer software. Both intangible assets are recorded in SOFP at cost minus accumulate amortization and any impairment where straight line amortisation method is applied for charging these assets. Hence, in accordance to final report of PTCL the total worth of the assets is as follow:

2009(Rupees in thousands)	2010(Rupees in thousands)
90888021.00	91298316.00

Having discussed the application of the above standards by PTCL we now move to the regulatory bodies in Pakistan and their functions towards diligence of these standards. Firstly, the Ministry of Economic Affairs & statistics is responsible for programming and negotiations for external economic assistance from foreign governments and organizations, relating to IFRS, IBRD, IDA, IFC, ADB and IFAD. Secondly, SECP is accountable for the development of modern and efficient corporate sector and capital market based on sound regulatory principles that provide impetus for high economic growth and foster social harmony in the Country. Then, the State Bank of Pakistan is charged with the supervision of the banking sector and has been making efforts to align the accounting norms with IFRS and local standards for SMEs. Lastly, the Institute of Chartered Accountants of Pakistan (ICAP) is supposed to rregulate the auditing and accounting profession in Pakistan with the collaboration of different accounting bodies.

In spite of the efforts by these agencies, accounting scandals were occurring frequently in Pakistan before 2009, however, after the convergence of IFRS and due to tight check and balance imposed by the above regulatory bodies these scandals now appear less frequently in Pakistan. Of the most prominent scandals, the first was related to the Bank of Credit and Commerce International (BCCI) which was founded in Karachi, Pakistan in 1972 but was registered in Luxembourg, London by Aga Hasan Abedi. It was a major international bank with 30,000 employees and had operations in 78 countries and also enjoyed the position of the seventh largest private bank up to 1991 until it was closed in 1991. This was because the bank was involved in one of the largest scandals in the financial history with a $20-billion-plus-heist. More than $13 billion funds were unaccounted. Other allegations include bribery, support of terrorism, money laundering, smuggling, and the sale of nuclear technologies etc. Then, the second largest scandal in Pakistan in which the country’s government was also involved was the Pakistan Steel Mill Scandal which happened in 2006. Chief justice of Pakistan took a ‘suo motto’ action against the privatisation citing irregularities in the process. The verdict was delivered on 8 August 2006.

With respect to US GAAP, in September 2008, the FASB issued proposed amendments to ASC 205-20, Presentation of Financial Statements. Regulation Sarbanes–Oxley Act (S-X) also deals under US GAAP (presentation of financial statements). According to these regulatory requirements, there are no specific requirements for the layout of balance sheet and income statement under US GAAP, but listed companies have to follow S-X regulation. However, there are not many differences between IAS 16 and ASC 410-20 Asset Retirement Obligations (formerly FAS 143) Codification 360 US GAAP.  Initially PP&E (asset) are recorded at historical cost, PP&E cost includes corresponding  to the purchase price plus directly attributable costs of bringing the asset  to working condition for its intended use or to production cost. Borrowing costs are also capitalized as part of the cost of the PP&E asset (Gary A. Porter, Curtis L. Norton – 2010, p780).  The same standard method applied under both standards but some key difference between two standards are that estimates of residual value and the depreciable lives of the PP&E assets may be assessed differently. Also, revolutions of the assets are also prohibited. If we look into the final accounts of AT&T Ltd., we can look at the company policy about the measurement of PP&E which is exact same according to ‘Codification 360’. Cost of the new purchase assets and major improvements in PP&E is also part of the cost of the asset, “except for assets acquired using acquisition accounting, which are initially recorded at fair value” (AT&T ltd ,final account , p66).

With respect to intangible assets, according to FAS 142 and FAS 141 (Revised) Business Combinations, the definition of intangible asset is same as in IAS 38, that is, ‘’ non-monetary assets without physical substance.’’ Therefore, in short there are no big differences between IAS 38 and FAS 142, IFRS 3 and FAS 141.  But some differences between above standards include no allowance for revaluation. Secondly, promotional and advertising costs are expensed during advertisement period or after advertisement or realization of promotional event (dependent on company policy). In addition, development cost is generally expensed unless reported by a separate standard. AT&T capitalised specific costs incurred in connection with making or getting internal use of software. Software capitalized costs are included in PP&E in consolidated balance sheets and amortized over a three year period (AT&T ltd , final accounts, p66-67).

The correct implementation of the above standards in the US is ensured by a variety of regulatory bodies. Of these, the most prominent is the U.S. Securities and Exchange Commission (SEC) which is responsible to protect investors against fraud, keep check and balance on the listed companies functions etc. Then, Financial Accounting Standards Board (FASB) is endowed the responsibility of creating accounting standards and improving accounting standards etc. Lastly, the Central Bank of the USA, commonly known as ‘the Fed’ Located In Washington, D.C., is  accountable for making the national monetary policy, maintaining financial system stability, supervising & regulating banking institutions, etc. Inspire of the efforts by these organizations, US saw a number of accounting scandals. Of these, the most significant remains the AOL Time Warner which occurred in July 2002. AOL’s made a purchase time Warner loomed, inflated sales figure etc. Then, Arthur Andersen is worth mentioning since it was involved in the destruction of documents related to audit clients. Other than these two scandals, Enron made top headlines after SEC sent investigation for the firm in Oct 2001. The firm boosted profits and high debts totalling more than $1 billion by improper use off-the-books partnerships, manipulation of the revenue of the company etc. Kmart, the chief accountant of this organisation mislead the investor by presenting wrong information in published accounts etc.

Due to the above mentioned scandals and others throughout the world, finally the convergence from US GAAP TO IFRS was greatly felt. Subsequently, the US GAAP was questioned and regarded as untrustworthy (Maqbool, FCA, 2011). As such, The SEC, USA issued a document in Feb’2008 which contained the information about the plan of convergence of USA GAAP to IFRS which is discussed as follow:

According to above diagram ‘’Staggered adoption is possible based on earliest adoption in 2015 or 2016.’’ After 02-2008 SEC USA did not issue any further documents which described the process of convergence in details. In essence, IFRS is principle based accounting approach and US GAAP is rule based, and IFRS have been using partly or fully in more than 100 countries. ‘’We cannot give any specific or exact time line to complete convergence process in USA. Therefore, conversion process from US GAAP to IFRS is more than an accounting exercise’’ (Sir David Tweedie, Chairman of the IASB, DT, 2011).  Convergence process involves two important things for any US company, ‘cost’, and ‘time’ (Khurshid, 2010). According to SEC for a public limited company average cost of preparing final accounts after adoption of IFRS will be increased around $32,000,000. IT sector of every company is also going to be effected after adoption of IFRS in USA. For example new accounting standards require new accounting program and data transfer from old accounting system to new accounting system is also hard and there is a chance of losing some data during the process of transference (Leslie Seidman, Chairman of the FASB (LS), 2011).

Conclusion

At the end of this assignment, we realize some benefits of having one accounting standard. By having one accounting standard an accountant can work globally and try to mitigate the level of fraud. Following a single standard will also enable the profession to attain public confidence and will create harmony in the sector. It would also be beneficial for both Pakistan’s and US economies to attract international investors by adopting IFRS. By adopting IFRS, multinational companies in these territories can save their cost of compliance. However, what is more significant is that preparation of company’s final accounts will follow the same ethical code and will, thus, give a more ‘true and fair view’ of the firms which will also impede creative accounting techniques.

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