Small Firm Perspective: How Do You Talk About IFRS to Your Clients?
James C. Metzler, CPA, AICPA Vice President | August 2008
It makes sense to talk to your clients about International Financial Reporting Standards (IFRS) because even the smallest companies are increasingly doing business in the global marketplace. According to the U.S. Small Business Administration, exports by U.S. small businesses soared fourfold – to $400 billion – between 1992 and 2007. And it's expected that half of U.S. small businesses will be involved in international trade in the next 10 years. After probing their clients a bit, many practicing CPAs will quickly discover that even their smallest business clients are involved in or contemplating international transactions in some fashion. Our neighbor to the north, Canada, has called for full adaptation of IFRS in 2011 for publicly accountable entities. Thus, the many U.S. businesses that have ties to Canada will have the acronym "IFRS" suddenly appear on their radar. To date, nearly 100 countries have required or permitted IFRS for public companies, and it's expanding rapidly. It's easy to envision that IFRS will one day be adopted by private companies as the globalization of business and convergence of standards continue at today's rapid pace.
Seizing International Business Opportunities
The discussion about financial reporting on IFRS with clients is much more about their seizing international business opportunities than preparing financial statements. In fact, international opportunity is the starting point of the conversation.
No doubt your clients are already hearing about possible business ventures overseas through their trade associations, trade press and even at their local business group meetings. Most companies are being approached by foreign businesses that either want to sell to them, provide services or purchase goods and services from them. This happens either by direct contact or through the Internet by random solicitation or dedicated B2B portals. Many clients already know what products and services they can sell or buy and who to approach, but they do not know how to do it. International transactions give rise to the need for your clients to seek credit approvals from sources outside the U.S. as well as to grant credit to potential customers.
This need is not limited to supplier/customer credit but applies more significantly to bank credit, bonding agents, brokers, insurance companies and other financial institutions. With the current position of the U.S. dollar, private companies of all sizes are actively being approached by foreign acquirers. They are asking these U.S. targets to prepare their financial statements using IFRS so they can better compare the company's performance with the performance of operations in their own countries.
Your knowledge about international business will be valuable as you help them navigate through the financial aspects that would enable them to be well-positioned to seize or increase their business internationally or be acquired or merge.
Now is the time to begin or expand these conversations with your clients. The topic is perfect over lunch, coffee or any casual setting. The conversation should begin with more probing questions than answers on your part, such as:
- What sales opportunities exist for your products/service outside the U.S.?
- What supplier and outsourcing opportunities are there for your business outside the U.S.?
- What are the merger opportunities?
- If you had a capital source outside the U.S. to expand, what successes do you envision?
Turning the Topic to IFRS
Once an understanding is reached of the extent of present client activity internationally and the future opportunities are probed, the discussion can move to the financial reporting and where it is headed. Let them know that the U.S. is on a path toward moving to IFRS and that these standards could bring some benefits, such as helping everyone "speak the same language" in financial reporting, which could help make international business easier even for the smallest of businesses. Let them know that the economies of standardization of the financial reporting process would mitigate having to bear additional accounting fees by having statements prepared under two different methods. If the client asks about the differences, it only makes sense to describe the general differences that may apply specifically to their business, such as LIFO or fixed assets differences. Some of the challenges should also be pointed out, such as how existing debt covenants may be affected.
The conversation should end with a commitment to keep the client updated as developments occur. They may trigger a more in-depth discussion of evaluating the conversion to IFRS sooner rather than later.
Helpful Resources
Firms may want to consider providing clients with a copy of the AICPA IFRS Backgrounder available online from www.IFRS.com. The site also features FAQs and other informative material.
About the Author
James C. Metzler, CPA, AICPA Vice President
