A glimpse of IFRS and the really big players in the accounting world from the world of really small players

Today I’ll provide a brief glance at the huge end of the accounting world. I’m intentionally a one-person firm providing attestation services. My market is small nonprofits. I perceive most of the visitors to my blogs are from small CPA firms and small NPOs. As a result, all the readers here and I have a view of the small end of the accounting world.

Today’s questions: will US GAAP ever converge with IFRS, and what do financial statements look like for a really big company.

Will convergence with IFRS ever happened?

Jim Peterson at Re:Balance thinks not. The announcement in early April that the deadline for full convergence between US GAAP and IFRS will be postponed beyond June 30, 2011 prompts some skeptical comments from him. His post is here. He spends a lot of time monitoring such things, so it’s worth reading

I commend his full post to you. There are two key paragraphs discussing why it is not a surprise to hear of a delay:

First is that the still-unfinished workload of four pending priority projects – the individually challenging topics of leasing, revenue recognition, financial instruments and insurance – had long been recognized as impossible of accomplishment within the resources of the two bodies and the politicized obligations to their antagonistic constituents (here). And that’s even if there had been agreement between the bodies themselves, which on these highly-complex subjects, there is not.

Second and more fundamentally, the tediously-reported proclamation of real convergence commitment has never been more than a smokescreen behind which the divergent interests of the Americans and the Europeans have knocked heads to the point of insensibility. (For which, recall the continued fudging of the SEC as to whether, if ever, that agency is even going to confirm a date certain on which to decide if to weigh in or not (e.g., here and here).)

Summary? The boards are completely overwhelmed with four individual massive projects. I have discussed leasing and revenue recognition. The other two are equally significant. So, if the deadline for those is slipping, how can the two boards possibly converge everything?

His second point is suggesting there is extremely serious unresolved conceptual differences between the two boards. Since this is an area I have no knowledge on, it is very helpful to read his perspective.

Complexity of GAAP is increasing

In case you were wondering if GAAP requires a lot of stuff, his answer is yes. Random exhibit is the HSBC annual report, located here. Although the full report is 392 pages long, I was interested in the audited financial statements.

The audit opinion starts on page 236, the financial statements start on page 238, the notes start on page 250 and end on page 370. That’s 135 pages for the audited financial statements, of which the basic financials take up 12 pages and the notes consume 120 pages.  The summary of significant accounting policies is 18 pages long just by itself.

Also of interest is the audit fee. KPMG was paid US$78.3 million for the 2010 audit. Of this $2.4M is for tax services and $6.0M is for everything else. Thus the assurance services were $69.9M.  My totally wild guess of an average going rate of $250 (like I said totally wild) means this was just under 280,000 staff hours, or around 140 staff years (at 2,000 hours per year – yeah, Big 4 staff wish they only had that many billable hours per year).

To put this in perspective, net income was US $14.2B (that’s billions).  Since HSBC is a financing company, their income statement is presented accordingly. That means their revenue is split amongst several lines in order to provide operating measures. Adding up all of the income amounts indicates total revenue is in the range of $102B.  Total assets are $2.45T (as in trillion).

Like I said, a very different world than where my clients, readers of this blog, and I spend our time. Still, its fun to take a peek at that world once in a while. At least its fun for me. Occasionally.

(Hat tip to Going Concern, who is a super headline writer – What Are the IASB and FASB Smoking?)

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