Our company was established in the Czech Republic in 1994.
Its focus was US GAAP training for (the then newly established) subsidiaries of US companies.
Why was training so important?
While double entry accounting is double entry accounting, accounting standards are not accounting standards.
In the nineties, practically every European country had its own national accounting standard, a.k.a. national GAAP.
Even in the member states of the newly formed EU, national GAAPs varied considerably.
The European union has had an accounting directive(s) since its formation. However, as the directive gives member states a degree of flexibility, the resulting national legislation, while similar, is not identical.
Fast-forward 30 years. Most European countries still have a national GAAP.
While the recipe has been harmonized over the years, each retains its unique, national flavor.
For example, CZ GAAP still has no concept of a functional currency, requiring accounts to be kept in CZK even if a company's operations are predominantly in another currency (though this is expected to change by 2024).
This requirement can have a significant effect.
For example, one of our clients, a local subsidiary of an EU based company, experienced over 25% profitability swings in the early 2020s because its books were in CZK even though practically all its revenue, over 80% of its expenses and a large part of its debt was in EUR.
While these were “paper” differences, CZ GAAP serves as the basis for determining taxable income.
The result was that the subsidiary's parent had to fend off the subsidiary's creditors, who demanded additional guarantees because they were disquieted by the fluctuations in the subsidiary's after tax income.
In 1999, we added US GAAP advisory services.
Among the services we provide: CZ GAAP to IFRS | US GAAP reconciliation.
Not that it always yields the desired result.
For example, some time ago a Czech company decided to list on a US exchange.
After retaining an underwriter, the underwriter retained us to draft a report consistent with US GAAP.
As, unlike CZ GAAP, US GAAP distinguishes revenue/gains and expenses/losses, this was one the first adjustments.
After reviewing our preliminary results, the underwater decided against pursuing a listing.
Our first step was to eliminate the major differences and draft a preliminary report.
Up to then, the company had only applied CZ GAAP.
As CZ GAAP does not differentiate between revenue and gains, when a company sells (factors) its receivables, it recognizes revenue in the amount received and an expense in the receivables' book value.
Eliminating this difference caused almost half its previously reported revenue to disappear.
In and of itself, this would have been enough to dissuade a listing, but there was more.
- In addition to the revenue eliminated by applying US GAAP guidance to factored receivables, revenue further declined because, at the time, CZ GAAP required increases in inventory and self-manufactured asset costs to be capitalized with a credit to revenue.
- The company also did not recognize the full value of its lease assets nor any associated liabilities because CZ GAAP does not require leased assets to capitalized nor liabilities to be recognized. It only requires the capitalization of advance payments, which are amortized over the lease term.
- The company also did not recognize all of its leased assets because CZ GAAP does not require capitalization of operating leases even if their term is for substantially all the underlying asset's economic life.
- The company also did not recognize all its contingent liabilities because CZ GAAP does not generally require recognition of constructive obligations.
- The company also failed to distinguish between cost of sales, selling and administrative expenses as this distinction is not required by CZ GAAP.
- The company also capitalized both development and some research as well as employee training which, at the time, was consistent with CZ GAAP.
- The company also misapplied CZ GAAP guidance, for example by using tax depreciation periods for financial reporting purposes, but an examination of these issues was beyond the scope of our engagement.
A second step was not necessary.
After reviewing our preliminary report, the underwater decided to terminate its relationship with the company, which eventually wound up in receivership.
We continued to focus on US GAAP until the European Union decided to adopt IFRS (IAS) in 2002.
IFRS first appeared in 1970s, while US GAAP has been around since the 1930s.
The original IFRS, comprising 31 standards known as IAS, was published in 1975 (link: ifrs.org).
It was not, however, widely used until 2005, when it was adopted by the European Union.
In the twentieth century, US GAAP was, by default, the world's only internationally accepted set of accounting principles.
As this did not sit well with the European Commission, in 2002 it decided to adopt IAS (link: europa.eu), which later became IFRS.
"[In 1995, the Commission] recognized that the existing Directives as such were not suitable for the information needs of international capital markets and consequently large companies were increasingly being drawn to use U.S. Generally Accepted Accounting Practices (U.S. GAAP) in addition to their local Generally Accepted Accounting Practices (GAAP). This increased costs and sometimes resulted in confusion when comparisons were made to local GAAP. Furthermore, at a political level, the European Union had no influence on accounting standards adopted under U.S. GAAP, nor were the standards necessarily appropriate in an E.U. context.
"For these reasons, the Commission proposed that the European Union should place its full weight behind the international standards being developed by the International Accounting Standards Committee with the objective of establishing a set of standards that would be acceptable in capital markets world-wide."
Alexander Schaub, The Use of International Accounting Standards in the European Union, 25 Nw. J. Int'l L. & Bus. 609 (2004-2005)
Since then, IFRS has spread to most countries (link: ifrs.org) and listed companies (link: ifrs.org).
The IFRS standards adopted by the EU are available on its server.
Being quasi law, E-IFRS is available from the EU (link: europa.eu).
While the IFRS standards published by the IASB are not law, the IFRS standards republished in the European Union's Official Journal are.
As part of its agreement with the IFRS Foundation, the EU has the make IFRS standards it has adopted (European-IFRS) available for free both in the original and in translation.
IFRS does, however, continue to be the copyrighted property of the IFRS Foundation.
Obviously, the main advantage of accessing IFRS through the EU is that access is free.
But, as always, one gets what one pays for.
Firstly, the EU only publishes those standards it has adopted.
Secondly, it does not publish supplemental ("B") guidance, such as the Basis for Conclusions, nor does its server have any features that make researching IFRS easier.
Thus, anyone who is serious about IFRS uses the full, IASB version (link: ifrs.org).
While not free, subscription has its benefits.
In addition to full access to all standards and all supplemental guidance, plus an archive of all published standards back to 1975, the site's robust search function is especially useful.
More importantly, subscribing bolsters the IASB's independence, helping it further its mission to make IFRS universally accepted throughout the world.
One reason the US SEC has not embraced IFRS is the influence the European political establishment exerts on IASB through its contributions (link: iasplus.com).
Obviously, £200 per year will not pay for the IASB's independence, but every little bit helps.
The first US GAAP comprised 51 standards published over 20 years starting in 1939.
While primarily a US system, it has been used worldwide the 1950s.
US GAAP's development has been somewhat convoluted, so its full text has only been freely available since 2009.
The first GAAP comprised the Accounting Research Bulletins created by the American Institute of Certified Public Accountants' Committee on Accounting Procedure (link: olemiss.edu).
The CAP was followed by the Accounting Principles Board, which took over standard setting in 1959.
The APB's opinions were GAAP (link: olemiss.edu) until 1973, when the current standard setter, the Financial Accounting Standards Board, started issuing its Statements of Financial Accounting Standards.
Unfortunately, the AICPA also issued its own Statements of Position (link: olemiss.edu) and recognized even more guidance.
A summary of US GAAP's pre-codification structure:
FAS, FIN: Financial Accounting Standards Board’s Statements of Financial Accounting Standards and Interpretations
APB, AIN: Accounting Principles Board’s Opinions and Interpretation
ARB: Committee on accounting Principles’ Accounting Research Bulletins
EITF: Consensus positions
SEC: SAB Staff Accounting Bulletins, SEC rules and interpretive releases
FTB: FASB Technical Bulletins
SOP: AICPA Statements of Position
AICPA: Industry Audit & Accounting Guides
EITF: Emerging Issues Task Force Consensus positions cleared by the FASB.
AICPA’s AcSEC Accounting Standards Executive Committee Practice Bulletins
FASB Implementation guides and Q&As.
AICPA accounting interpretations
Practices widely recognized and prevalent either generally or in the industry
This structure could only be simplified after the Sarbanes-Oxley Act gave US Securities and Exchange Commission the ability to finally decide who has the right to create US GAAP.
Specifically, SOX.SEC. 108 (link: gpo.gov) gives the SEC the right to designate a standard setter, not ratify individual standards.
This provision was included to prevent the SEC from cherry-picking standards, and so limits the influence of politics and politicians on standard setting.
Before then, it was the AICPA's Council that had this ability.
Unsurprisingly, the AICPA's Council used this ability to also recognize the AICPA's pronouncements (even though they were unavailable to the lay public)
In the past, the AICPA's pronouncements were generally available to AICPA members (family and friends) only.
Like the Liturgical Latin of old, this allowed AICPA members to project an aura of Ecclesiastical like infallibility that not only enhanced their prestige, but proved quite lucrative.
Obviously, in a post Enron/WorldCom world, such an approach to standard setting is no longer consistent with standards of transparency and objectivity to which the profession is now held.
As a result, the AICPA no longer sets accounting standards.
Instead, it concentrates on its roles as the guardian of the CPA exam and profession's chief lobbyist (link: aicpa.org).
Unfortunately, some traditions die hard.
Like the AICPA of old, in addition to the FASB's standards, the SEC also recognizes its own pronouncements.
Fortunately, unlike the AIPCA of old, the SEC makes its pronouncements freely available on the ASC.
On July 1, 2009, the Accounting Standards Codification (link: fasb.org) made all US GAAP freely available to the general public.
Being quasi law, US GAAP's full text cannot be sold for profit.
While US GAAP standards are not law, their use is (indirectly) mandated by law.
This implies, like law, they must be available to those they govern at no charge.
Consequently, US GAAP is available for free, even though it is, in fact, a copyrighted work, and the property of the FAF.
However, the FASB is free to charge for premium services (such as search or copy functions).
While not absolutely necessary, these services make researching US GAAP much easier.
More importantly, they give those who use US GAAP the opportunity to directly support a standard setting process that is, without question, second to none.
As the use of IFRS grew, so did demand for IFRS training and advisory, until it comprised almost 80% of our business.
After the convergence project wound down and the SEC put IFRS adoption on hold, demand for US GAAP resurged.
Convergence reached its peak with IFRS 15 and ASC 606. It has been down hill ever since.
For example, even the best online summary link: iasplus.com fails to mention IFRS 16 and ASC 842 because, while similar, they are not converged.
However, like any rational couple with children, divorce does not mean the IASB and FASB did not stay friends.
For example, in 2022 the FASB decided to drop the idea of goodwill amortization more or less because the IASB made the same decision link: iasplus.com earlier.
While the SEC never explicitly said IFRS was out, this staff report link: fasb.org left little doubt of its true intentions.
Today, our services are divided practically evenly between IFRS and US GAAP.