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[2011]
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[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:
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2009(Rupees in thousands)
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2010(Rupees in thousands)
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90888021.00
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91298316.00
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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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