FINANCIAL ANALYSIS

Candidates have tended to struggle with questions on US Gaap versus IFRS. The examiner for paper P8 offers her guidance on the topic.
The P8 learning outcome "identify major differences between IFRS and US Gaap" has been tested twice so far. The November 2005 paper asked candidates to cite examples of the two systems' differences and similarities, while a question in May 2007 asked for a brief paper describing the progress of the convergence project. These questions were answered badly in most cases - many candidates didn't even attempt an answer. The biggest weakness was a sheer lack of knowledge. Some candidates were unaware that convergence was occurring at all. In May 2007 they were asked to describe how it was progressing, giving examples. Many did the opposite by listing the continuing differences between IFRS and US Gaap. Others repeated the few relevant points that they did know in different guises - also a waste of valuable exam time.
The use of the verb "identify" in the learning outcome means that the outcome is pitched at the level of "comprehension" in CIMA's hierarchy of learning objectives. This is a relatively low level, which means that advanced analytic and evaluative skills are not required to tackle questions in this area. So, although the differences between the sets of regulations are often extremely complex, for the purposes of P8 it's necessary only to know the key issues. At a meeting in Norwalk, Connecticut, in 2002 the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) agreed to start the convergence project. The Norwalk agreement set out their plan to reduce the differences between IFRS and US Gaap. Today, a list of standards, exposure drafts and discussion papers bears witness to their progress. Some May 2007 P8 candidates could name a few of their joint projects, but many could not.
Despite all this work, there are still many differences that are likely to last. The one that everyone seems to know is that the use of LIFO as an inventory valuation method is permitted under US Gaap but not under IFRS. Some others were described in a Study notes article in the June 2007 issue of FM*.
Currently, foreign issuers listed on the US markets must submit a reconciliation of their financia statements with US Gaap to the US Securities and Exchange Commission (SEC). But the SEC recently proposed dropping this rule, so it's likely that filing a reconciliation will no longer be required by 2009. Even more striking is an SEC proposal, now out for comment in the form of a "concept release", to allow US companies to file statements using IFRS rather than US Gaap. It's unlikely that many of them would take advantage of this change, but the fact that it's being discussed at all indicates how much more acceptable IFRS has become in the US.
Chapter 21.3 of the Financial Analysis CIMA Learning System covers the background to convergence, the Norwalk agreement, current developments and the key remaining differences. For the 2008 exams, any changes made up to and including December 1, 2007 are examinable. So, as long as you use the latest edition of the learning system, you shouldn't have a problem. For those students who wish to impress the examiner with the depth of their knowledge - and the examiner will be impressed - several other information sources can be consulted.
The following web sites are useful:
* The International Accounting Standards Board: www.iasb.org.
* The Financial Accounting Standards Board: www.fasb.org.
* The US Securities and Exchange Commission: www.sec.gov.
* Deloitte, which produces comprehensive updates: www.iasplus.com.
* PricewaterhouseCoopers, which has published a booklet entitled "Similarities and differences - a comparison of IFRS and US Gaap": http://snipurl.com/1t01q.
Once they have gained an outline knowledge of the key issues, candidates should aim to improve this by keeping their eyes open for news of developments and consulting some of the above sources.
The May 2007 post-exam guide included the following observation: "Candidates should be aware (but, on the evidence of this paper, are mostly not aware) that this is not a trivial or marginal topic. On the contrary, it could be argued that the issue of US Gaap/IFRS convergence is the most important contemporary issue in financial reporting."
The question of whether or not the learning outcome is likely to be examined again in the foreseeable future should, therefore, be relatively easy to answer.
* One of the differences identified in that article is no longer valid: changes in accounting policy under US Gaap are now handled in the same way as they are under IAS8 - that is, there is a requirement to make a full prior period restatement. (Thanks to Malcolm Greenbaum of BPP Professional Education for highlighting this development.)
P8 further reading
C Gowthorpe, Financial Analysis CIMA Learning System (2007 edition), CIMA Publishing, 2006.
Copyright Chartered Institute of Management Accountants Dec 2007/Jan 2008Provided by ProQuest Information and Learning Company. All rights Reserved.