IFRS and the Rules of Sport
BLOG: To understand international standards, look at baseball vs. soccer rule books. IFRS requires more judgment, and that showcases our skills.
I have just finished teaching a continuing education class on International Financial Reporting Standards in Tulsa, Okla. And it’s helped me develop a perspective of the IFRS-GAAP issue that involves a comparison of the rules that applying to baseball, and those that apply to soccer.
Interested? Read on.
IFRS is taking center stage in the financial community, of course, as the U.S. wrestles with the timeline and roadmap to move to a more uniform set of global financial reporting standards.
My full-time job gives me some insight into the transition to IFRS, since I work as a financial analyst for a defense contractor headquartered in the United Kingdom. We use IFRS as our financial reporting standards, which presents a unique set of challenges compared to U.S. Generally Accepted Accounting Principles. IFRS returns the accounting profession to principles-based accounting, while GAAP is very strict and rules-based.
The transition to principles-based accounting presents a great opportunity for our profession to become a trusted interpreter of business results. For many years, business leaders have perceived accountants as rigid, "check-the-box" compliance employees. We have a set of rules, and we simply look at our rule book to determine how to report results. IFRS focuses on the economic substance of transactions instead of applying a specific rule to the situation. The difference in accounting literature is striking. U.S. GAAP covers nearly 25,000 pages, while the IFRS “rule book” is 2,500 pages, and its rule book for small and medium-sized entities is less than 250 pages long.
Here’s where that sports comparison comes in.
I equate the IFRS-to-GAAP comparison to looking at the rule books of baseball and soccer. As a long-time official for both sports, I was fascinated by the size of the two rule books. Baseball has a specific rule for every game situation. It takes a very long time to study the rule book, but you then apply a rule to the given situation. Baseball umpires watch the play and apply the correct rule to the situation. Soccer's rule book is much smaller and gives the official more room to interpret the rulebook. The "laws" of soccer are principles like "don't push, don't trip, don't use your hands." Soccer officials can interpret these more general rules/laws in their own way to ensure the game runs smoothly and the players stay safe.
IFRS will give accountants more insight to economic reality and substance instead of checking a specific rulebook. We will be required to understand our business operations, which will give us the insight to interpret the rules and apply our judgment to drive business results.