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IFRS reporting & equality in reporting . . . .

October 6th, 2008 Comments off

I’m a bit off in the last week as I have not been reading all the info that has been getting published with respect to the pending IFRS standards. However, one of the primary drivers in the adoption of IFRS is to have standardized reporting for public entities, whether there in Italy, France, or here in the U.S.. So once these new standards have been rolled out then we’ll be able to view each company in the same light and make equal comparisons? Wrong. A reader of SEC reporting for a handful of companies in a similar industry can easily start to see the differences in the manner in which those companies report. Yes, there are standards that they all need to follow, but that doesn’t mean those standards extend to every section of a 10-Q or K.

Let’s jump into a very simple example, and with some brands that most consumers are pretty familiar with . . . K-Swiss, Skechers, and Heely’s. As I read through each one of their most recent 10-Q filings, I wanted to learn a little more about how each one of these companies was tracking their Cost of Goods. The observation that prompted my curiousity was the drastic differences in Gross Margins between these three entities.

The worst performer of the group appeared to be Heely’s, but they also took the approach of burdening their COGS with every cost element that touched the flow of product through the design & manufacturing process. These costs included all freight, warehousing, tooling, tooling depreciation, royalty expenses, shrinkage, quota fees, and agent fees/commissions. This same approach is also taken by Skechers. However, compare this to K-Swiss, who didn’t break out the different elements of COGS, but recorded their warehousing fees within their SG&A expenses. Ultimately, you have Gross Margin levels that range from the mid-30% to high-40% range. While some of the discrepancies can be attributed to performance levels and buying efficiencies, it’s clear from the K-Swiss example that not all margins are created equal.

While all of this ultimately flows to the bottom line and it’s only a mapping issue prior to the EPS calculation, there’s the management of perceptions when it comes to comparisons with your peers. “You’ve got a lower Gross Margin so you can nearly be performing as well as Company XYZ….”. Not necessarily the case so make sure you know how you’re presenting your financials in comparison to your competitors.

Thanks for reading . . . .

Jeffrey Ishmael

IFRS – potential rollout after 12/15/09

August 27th, 2008 Comments off

As expected, the SEC announced a preliminary overview of the roadmap that would be put into place for the transition of financial reporting to IFRS. Overall, the Commission expects that there will be a full transition by 2014, but that there will be further details released with respect to the milestones needed achieve the goal.

Specifics of the information released this morning outlined the ability of certain companies to be able to begin reporting under IFRS after December 15, 2009. Companies that are considered to be in the Top-20 for their industry will be allowed to begin reporting after this date. There are approximately 110 companies in 34 industries that would be able to begin reporting after this date. This is probably a bit quicker than some might have anticipated, since this is only 16-months out.

Although the milestones have yet to be released, the Commission has tentatively scheduled a review of these milestones in 2011 to gauge the progress and determine if they will open up the ability to report under IFRS to a larger population of companies. There are also proposals for companies to provide reconciliations between prior GAAP reporting and the revised reporting under IFRS. The proposal calls for a 3-year reconciliation. This should be more than just a proposal at this point but an absolute requirement for investors to see the “walk” between the two reporting structures.

Even for a later date of 2011, this is not a very large window for governing bodies and schools to organize appropriate curriculum to cover the topic. The Commission requested that the AICPA and States add questions to existing exams for IFRS. Rather than add questions to the exam it would seem that there should be the introduction of a new module (?) that would cover IFRS. I still have a hard time believing that we are potentially looking at a 100% conversion to IFRS with no carry forward of GAAP. Not with the energies that have been expended over the last decade on new regulations, and prosecution of those regulations.

Time will tell. Thanks for reading . . . .

SEC set to announce IFRS dates. . .

August 25th, 2008 Comments off

The SEC has announced that on Wednesday it will release the tentative target dates for U.S. companies to convert to IFRS. There has already been quite a bit of speculation regarding the potential dates that might be rolled out, which ranged from initial targets of 2011 to coincide with Canada, India, and Japan, to 2015 for adoption by small companies. This change will involve more than just a simple restructuring of reporting standards. It will also have a huge ripple effect through accounting/finance curriculum and professional training standards.
In the coming weeks I’ll also be posting commentaries outlining the differences between IFRS and GAAP on a variety of subjects, including Revenue Recognition, Fair Value, and others. Until then, I’m eagerly awaiting the news on target dates.

The text of the article is listed below:

The long-awaited deadline will come in the form of a roadmap that the SEC commissioners will consider whether to propose — and which would open up the conversion date to public scrutiny and debate.

The SEC also plans to consider proposing amendments to various rules and forms that would allow “a limited number of U.S. issuers” to prepare their financial statements using IFRS rather than GAAP earlier than the roadmap proposes, the commission announced on Friday.

For the past year — ever since the SEC began allowing foreign companies to submit their SEC-prepared filings without reconciling them with GAAP — companies, academics, and accounting firms have been waiting to hear when U.S. publicly traded companies would be given a similar allowance. In the meantime, the Big Four accounting firms have been telling their clients that an SEC mandate for IFRS use is inevitable.

In Europe, companies were given three years to change over their financial reporting systems from their home-country GAAP to IFRS — an enormous switch that was completed in 2005. The experience has given large multinationals domiciled in the U.S. fodder for persuading the SEC that the largest of U.S. registrants could make a similar conversion by 2011. In that year, Canadian, Indian, and Japanese companies are expected to begin using the global standards.

Accounting firms also have predicted that the year 2013 could be cited by the SEC as an IFRS-switchover date for large U.S. companies, with 2015 being the deadline for small companies to begin using IFRS. Earlier this summer, Conrad Hewitt, the SEC’s chief accountant, said the U.S. shouldn’t be left behind while the rest of the world makes the switch to IFRS within the next three years.

While IFRS has become the most popular accounting language worldwide, it’s looked at speculatively by accounting experts based in the United States. Some say it’s more principles based and than the more time-tested GAAP, which provides accountants with more guidance for each of its rules.

For the better part of this decade, the Financial Accounting Standards Board and the International Accounting Standards Board have working on harmonizing U.S. GAAP and IFRS. Accounting experts say the standards are not yet close enough to ignore the quality differences between the two and the need for U.S. accountants to be schooled in IFRS.

Late stage questions for IFRS . . . .

August 6th, 2008 Comments off

Only two days ago it was announced that the SEC had filled two vacant commissioner posts and those individuals would be making their debut at the IFRS Roundtable. While I noted that this was a subtle signal towards the IFRS initiatives, it didn’t take much to read into the accompanying statement that the SEC had a much larger list of issues to deal with before scheduling a definitive effort towards IFRS conversion. I’ve also commented in previous postings that as a participant in an early IFRS conversion, I would have never thought that these new standards would trump those that the U.S. has spent decades establishing and refining. It seems that in yesterday’s release that there may be some new considerations by the SEC towards IFRS and making the firm commitment to adopt.

As noted in the new commissioner press release, the SEC is currently working on reforms in naked short selling, municipal-securities rulemaking, SEC registrations, along with two dozen other financial reporting issues. These topics are currently on the plate for the SEC and we’re going to fully commit to an IFRS conversion? Not too mention, some of the general considerations as of late is that too accommodate such a conversion, there would be a three-year moratorium on new accounting standards or revisions. Hard to say what the next financial “crisis” will be, but three-years seems quite a window to say that there will be no new updates. During the Roundtable discussion, there were also six other key questions raised regarding an IFRS conversions.

•Do international standards produce the same quality of reporting as U.S. GAAP does?
•Would the application and enforcement of international standards in the United States be as rigorous as they are in the case of U.S. GAAP?
•Does IASB have an adequate and stable source of funding that’s not dependent on private donors?
•Does IASB have enough full-time, technically capable, and independent staff members?
•Does IASB pay the most attention to the views of customers of financial reports–that is, investors?
•Does IASB have a structure, process, and adequate governmental support to keep its standards work from “being overridden by political processes?”

This is really an interesting topic and one I’m keen to follow. It’s going to be interesting to see whether the U.S. essentially forgoes standards that have been developed over the decades and adopts a global set of standards, which might mean a softening of rules.
Read the entire article at: Global Standards: Jilted at the Altar?

Thanks for reading . . . .

SEC proposing long-term changes on short-selling…..

July 15th, 2008 Comments off

     Hopefully this isn’t an empty action on the part of the SEC, but today they announced specific actions against the short-sellers of Fannie Mae and Freddie Mac stock.  The SEC announced that they would immediately and aggressively enforce naked short selling, in that the sellers of these stocks must pre-borrow shares to initiate their positions.  The SEC also announced that they may possibly extend this effort towards to greater market as an investigation over the last few months has shown that individual investors have been hit hard by the increased volatility caused by naked short-selling.  Fingers are being pointed at the hedge funds, who many say are a major contributor to this situation.

      This action comes on the latest news that short interest had reached a record high of 17.7 billion shares in June.  While they’re at it, perhaps the SEC should also look at bringing back the “uptick rule” for short-sellers…..

Thanks for reading…..

Jeffrey Ishmael

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