Thoughts on this IFRS thing

For those of you who don’t know.  IFRS is International Financial Reporting Standards.  They are a body of professionals independent of country that create standards for all countries to follow.  They aim to create an international standard so that as the global market grows, investors can have comparability and consistency among reporting methods.  This has yet to be implemented in the United States but is up for debate.

I realize that this is an insanely huge topic.  But I thought it would be good just to throw around some common differences that I found.  

I remember back several years ago they changed the US CPA exam so that it included a lot more changes for IFRS (should be pronounced by sounding out each letter instead of making it a word – or so I’m told).  This must have made the CPA exam study people very happy.  They advertised that their review material had all the changes.

But what were these changes?  I have heard lots of things about the differences between IFRS and US GAAP.  But in general they say that IFRS is less specific.  What does this mean? Well as accountants we love rules.  It’s always easier to tell a manager that they need to change something because of a rule.  If you tell them they need to change something because you “believe” it is wrong then it’s much more difficult to get them to change it. 

For Example

Capital vs Expense is a huge debate in the company I once worked for.  It wasn’t exactly GAAP but the company had come up with a set of rules to define what should be capitalized and what should be expensed.  But the criteria were somewhat vague.  So a project manager would come up to me and ask if something could be capital and give me a quick description.  I would think about it and normally give an answer.  Then they would put together quotes and analysis and send it to me.  After further review I sometimes decided that it could not be capital and they needed to expense it.  This would enrage them because they were held to a certain budget and didn’t want to change it.  I had to come up with a way to prove to them it was a rule and not an opinion.

We don’t like opinions but looks like this IFRS thing has lots of room for interpretation.  But if you think about it that can be a good thing because it gives us more reason to create consulting gigs and show off our “expertise”.  But I think it also pushes accountants to asses each situation individually and make a better decision.  I think this is a huge difference and will require accountants to have more open discussions and understand core business ideas much more in-depth

What are some of these differences?

We like specifics. So let’s talk specifics.  Here are a few examples of the differences:

  1. Inventory Costs – IFRS does not allow LIFO (last in first out)
  2. Intangibles – recognized at fair value.  This could potentially create a huge valuation gap.  We love our historical cost approach in US GAAP but having to change the valuation each year will be very different. I’m sure many people will not want to use this approach if it affects them negatively.
  3. Write Downs – IFRS allows write downs to latter be written back up.  This kind of goes against our natural grain as US GAAP accountants.  We feel the conservative method would be to allow write downs but not write ups.  I guess we’ll just have to change.
  4. Revenue Recognition – less guidance in IFRS.  I could probably write an entire new post just about rev rec… actually probably an entire series of posts.  But in general we know that this is a sticky subject.  Most companies want to recognize revenue early but we are trained to be conservative.  Without the strict rules of US GAAP, we may lose the battle.  I’m sure as a result many companies’ revenue will rise.

Overall, it’s the specific things verses the general things.  Let’s get more firm and more direct.  We need to make decisions and explain why it’s beneficial without the rules to back us up.  We know what to do.

Counting Money and Making Money

One of the main reasons I switched from being a math major to being an accountant was the money.  To be honest I do like money.  When I did the research of the most profitable careers that required just a college education, accounting was among the top.  Actually the starting salaries are not great.  Engineers, database managers, software programmers, and consultants usually start off better than accountants.  But I like to look at the best return for my time and stress; also job availability.  With all these things in mind (and considering I was already in the math field) I chose to be an accountant.

Current starting salaries have a very large range.  Small firms in small cities can start you out at 30 to 35k per month.  Generally there will be some king of bonus included so you can add 3 to 4 percent on top of that.  For a college grade with little debt and a small apartment this may be good.  But if you have more than one mouth to feed, you may be doing the paycheck to paycheck thing.  At these small firms you can expect a 3 to 4 percent raise annually and perhaps a promotion and 8 to 10 percent bump up in pay every 3 to 5 years.  So it’s a long path but depending on the movement and transitions it may be faster than that. Hours of work here will also be not that bad.  I have a few friends who work a solid 40 hours per week during the off season and 50 to 70 per week during the tax season.  Benefits will vary but are usually minimal.

Larger firms will be about the same as the smaller firms but they will start you off a bit higher.  You can expect salaries in the range of 45 to 50k for the first year and a steady increase as you move up.  The benefits in larger firms are usually much better and may include gym memberships, discount shopping, and more.  But these firms are usually located in larger cities where the cost of living is higher.  So there may be an even trade off here.

Big 4 firms are usually the best in terms of salary and benefits.  You can expect 50 to 55k per year as a new hire in a big 4 firm.  The benefits will usually be excellent and the team will usually be the best of the best.  But you will definitely make up for it in the time you spend at work.  Go ahead and plan on making work your life for at least 2 to 3 years.  Then you can chose to either stick it out and go the partnership path or go to work for one of your clients and have a nice salary bump up.  The partnership path can be long and difficult but the partnership salary is probably close to 250k starting out and goes up very quickly.  If you are an excellent employee, learn quickly, and can communicate effectively, expect to wait at least 10 to 15 years before becoming a partner.

There is another path

If none of these sound appealing to you then you can get a job as an accountant outside of an accounting firm and in a regular company.  Most, if not all companies have accountants.  Sometimes they will be called the finance team or bookkeepers.  But these are generally accountants.  I was under the impression that if I got a job at a regular company instead of a CPA firm then I would sacrifice tremendously on salary.  This is not true.  Many companies will start an accountant in the 45 to 55 range.  This is comparable to big 4 firms.  Make sure to do your homework before making a decision. Some companies offer great benefits, great salary, and a consistent 40 to 50 hour work weeks. My recommendation would be if you are single to go for the big 4 and then make your decision to stay or not.  If you are already married then you may want to look for a good company and stay out of the CPA firm industry.

Foreign Earned Income Exclusion

Ok, so I wrote a post about my friend and the International tax exemption here [link], but I totally forgot about the Foreign Earned Income Exclusion which may be the best option.  This exclusion will allow you to exclude a certain amount of your foreign earned income to not be taxed in the US.  This is of course only for U.S. citizens or resident aliens living abroad.  Currently the limit is $95,100. You must pass several requirements to qualify:

  1.  You must be earning income in a foreign country (pretty obvious) but the catch here is that your “Tax Home” must be in a foreign country.  This means that your primary physical work location must be in the foreign country.
  2. You must be a U.S. Citizen or Permanent Resident

In addition, you must meet just one of the following:

  1.  A U.S. Citizen that is a ‘bona fide’ resident of a foreign country for an entire tax year.  This must be an uninterrupted full year.  Normally this would be Jan 1 to Dec 31 but if you have a different tax year then you would use those dates.
  2. A U.S. resident alien that is also a citizen of a country that the United States has a special agreement with. This agreement is called a tax treaty.  Also you must be a resident for a tax year.
  3. A U.S. citizen who is physically in a foreign country for 330 full days during 12 straight months. This is pretty self-explanatory.  You just check your plane ticket arrival to the country and add 330 days to pass this test.

Once you have decided on which test you may pass then be sure to have proof such as copies of boarding passes, visa stamps, or plain tickets.

Bona Fide Residence Test

It is important to note that you do not automatically qualify as a resident just by going to the foreign country and staying for one year.  A resident of a foreign country is generally defined as a person who intends on living and working in the foreign country for an indefinite amount of time.  So if you go and work on a contract for 1 year and intend on returning back to the United States at the end of that period then it would be difficult to claim that you are a bona fide resident of that country.

Here the intention is what is important.  Obviously this is up to some debate.  But if you would like to claim this benefit then be sure to have proof of your intent.  This could come in form of closing bank accounts in the United States or selling assets.  I am not sure how strict the IRS would be on this test but be prepared.

The Physical Presence Test

This one is a little bit easier to measure.  Just stay in the foreign country for at least one year and you got it.  The good thing to remember with this test is the timing.  If you live in a foreign country you will automatically get an extra month to do your taxes.  So normally taxes are due on April 15 but if you live in a foreign country you will have until May 15.  So, if you need extra time to pass this test than you have the one month.  Or you can easily extend the return to get more time.

The Benefits

The good thing about this exclusion is that it does not depend on the amount of taxes paid to the foreign country.  So if you pay a very small amount of income taxes in the foreign country then you should be able to exclude those amounts and only pay taxes on the income that you earned in the United States. This would be best if your annual income was less than the $91,500 limit.

Text to Columns

My last year at university one of my professors gave us a side lecture about some useful excel tips we will use once we start working.  I don’t remember all of the tips that he gave us but I do remember that he taught us about ‘text to columns.’  He said that we would use this function many times for sure.  I was somewhat familiar with that function but I could not think of any practical uses for it.

It wasn’t even two months in to my first job that I became a text to columns expert.  I found out that many companies are still using a dos based (greenscreen) system.  This means that data would be downloaded in a printable format that is not excel friendly.  So you may be copying and pasting from a dos screen into excel for hours.  I quickly learned that the best way to deal with this is to download the text file, import it into excel, and then use text to columns.

The basic function of text to columns is to separate items that are in just one column so that they can be manipulated.  For example if you have data that has separate columns that are separated only by a certain number of spaces then your information in text format would look very awkward:

Title 1     Title 2     Title 3     Title 4

One     Two     Three     Four

Apple     Bear     Captain     Dolphin

TeamNumberOne     TeamNumberTwo     TeamNumberThree     TeamNumberFour

In this example you can copy all this text directly into column A in excel.  Then click on the text to columns button and separate the text into columns every 5 spaces.  Then you can manipulate this data anyway that you wish.  You can put it into a table and sort and filter.

This is especially useful when you work for a company that has an older IBM system or greenscreen set up.  But there is another use for text to columns that I have discovered.  Sometimes when you have raw data that is in text format and you want it to be in number format, you can right click and change the format to number.  But this doesn’t always give you what you want.  If you highlight the column and do text to columns, but don’t separate it into any specific columns, it will change the format for you.

Accountants are usually the best at using excel from what I have seen.  At one of the companies I worked for, I became known as the local excel expert even though I knew relatively little.  I think it’s really all about searching the internet for help on how to perform a certain task and then building a library of useful tasks.  Several times during closing I would be asked by a high up manager to come to their office.  Once inside I would be asked to help them with a vlookup formula or how to sort a table.  I remember always wondering how these high up smart managers couldn’t figure out such simple tasks.

Once I told an older co-worker to “just play around with it till you figure it out.”  He told me that was how young people talk.  I asked him what he meant and he responded that young people know how to just mess around on a computer until they learn how to do things but older people need to read or ask for help to learn.  That was good advice to me as I learned to be a good business support member for the company.

Anyway, it’s always good to keep your excel skills up to par as an accountant.  It’s not often written on the job descriptions but when you get into an interview and explain that you are proficient with excel it is often a good high point.

Depreciation Expense Accounting

Depreciation seems to be very confusing to a lot of first year accountants.  This doesn’t need to be a hard subject.  Basically, depreciation is separating cost over time.  It does not affect cash flow.  For example if you buy a pencil and you use it for 2 years.  First you would record the price you paid for the pencil let’s say that is 5 dollars (premium pencil).  So your cash goes down 5 dollars the moment you purchase the pencil.  But the useful life of the pencil you know will be at least 5 years.  If you are trying to determine what detriment your organization has received due to the purchase of this pencil then you would need to divide the cost of the pencil over its useful life.  In this case you would say that your company expensed $5/5 years = $1 per year of depreciation expense.

This example is not realistic due to the small dollar amount.  Generally even if a pencil really is useful for 5 years a company would not go through the trouble of capitalizing the expense and depreciating it over time.  But we can learn the concepts easier with small numbers.

So to continue with this example you would have yearly entries to make.  The first entry will be for the purchase and then each year you would do an entry to show the detriment to your financial statements:

January 1st Year 1

Debit     Fixed Asset (Pencil)                      $5.00

Credit    Cash                              $5.00

To record the purchase of the Pencil

Notice that no expense accounts are affected by this transaction.  We just removed cash and added an asset. So our Income Statement is not affected.  Only our balance sheet has changed a liquid asset (cash) into a fixed asset (pencil).

December 31 year 1

Debit     Depreciation Expense (Pencil)        `           $1.00

Credit    Accumulated Depreciation (Pencil)           $1.00

To record 1 year of depreciation expense for the pencil.

Notice that now we have an expense account being affected (Depreciation Expense).  Therefore only $1 of the $5 dollar purchase is reducing our income for the year.  If we stop at this point and look at our balance sheet we would see the following:

Fixed Asset (Pencil)                                      $5.00

Accumulated Depreciation (Pencil)               -$1.00

Here we see that the net value of the pencil on our balance sheet is $4.00.  This is also referred to as Net Book Value.

The depreciation expense method we are using here is a simple even number divided over the life of the asset. But in reality most companies do not use this method (straight line).  Most companies will use at least 2 different methods.  One method will be for reporting of taxes and another method will be for internal reporting.  This may be referred to as different “books.”  The tax book we usually use an accelerated depreciation method.  This means that more depreciation will be taken in early years and less in later years. This has been a recent benefit that the United States government has provided for companies.

If a company can increase their depreciation expense earlier, then they can decrease their income and thus reduce their taxes.  This may seem undesirable to an investor but remember that there is another method of depreciation used for reporting outside of taxes.  So for example we could have $100 of depreciation expense for tax purposes and cause that we pay less taxes but then only have $50 of depreciation expense for our book reporting and show a higher income for that period.

This was just a quick beginner’s guide to basic information about depreciation. Further detail and research will be required to understand more complicated depreciation methods.  But software is normally used to control a company that has many assets and many books to record them in.

Because I am an Accountant does that mean I am a Tax expert?

Accountants are always good at taxes… false!

Most accountants do not deal with taxes.  Accounting is a broad field and includes many different types of jobs.  Mostly auditing and business decision support.  This may come as a shock to many people.  I am often asked questions about personal income taxes.  It’s true in my case I actually do some studying about personal income taxes for my sake but I do not claim to know how to help anyone else.  But as an accountant I have learned some common personal tax questions just because so many people ask.  So I think it’s important to review the basics.


  1. The 1040EZ.  Most people fall under the category of the 1040EZ.  Anyone can fill out this form.  These people do not need an expert or an accountant or anyone to help them.  It’s very simple to read the instructions and fill in the information.  All they need is the W2 that their employers will send then and sign their name at the bottom.
  2. Tax software.  I like to use tax software to help me do my taxes.  I think it’s very useful.  Taxes are kind like the news. You have to continually be keeping up with changes otherwise you will not know how to proceed.  Tax software can solve that issue for you and help you keep up with the current events.  Generally the software will tell you what information to keep and how to fill out the forms.  Sometimes the software will fill out the form for you and even file it for you.
  3. Self Employed.  If someone is self-employed and asking you for tax advice then just refer them to a specialist.  Self-employment income taxes are quite a bit complicated and most importantly you can really do some tax savings and tax planning when you have a company.  So it is important that you refer these people to a tax specialist that can hopefully save them a lot more money than they charge them.
  4. Deductions and Credits.  A deduction will reduce the amount of income that you pay taxes on and a credit will reduce your tax liability directly.  Sometimes a credit can reduce your tax liability to the point that you can receive money.  There are 2 main types of deductions.  The page 1 deductions and the itemized deductions.  Page 1 deductions will reduce your adjusted gross income.  This number is used to calculate several factors and other benefits.  These are a bit better than the itemized deductions.  The itemized deductions will generally be subject to a limit.  That limit is often calculated based on the adjusted gross income.
  5. April 15.  I just recently found out that the April 15th deadline is really only for people that owe taxes to the government.  I guess it makes sense that if the government owes you money then they don’t care when you request it from them.  But if you owe them money, then they Do care when you pay them.  So just keep in mind that if you believe that the government will owe you money for last year’s taxes then really you can send that in anytime.
  6. Errors.  I have done my own taxes for a while and almost always make a mistake.  Usually my mistakes are not that big and do not carry a penalty.  But the IRS usually will let me know when I have made a mistake and send me the correcting paperwork.  So don’t sweat it too much if you are not 100 percent sure about what you’re doing.

So that’s just a few points to keep in mind when helping others with their taxes.  It can be a profitable side business if you are up for doing some paperwork.  Just be sure to keep good records so that you can answer questions in the future.

About Accounting Professors

I have often wondered about the life of an accounting professor.  My professors in school seemed to enjoy their job and their lifestyle. I always envied them but assumed they didn’t receive much pay as their big 4 partner counterparts.  After some research I found that I was right but at the same time I was wrong.

Accounting professors make good money

I was shocked to find out that accounting professors can start out making over 100k.  And that is just for 9 months.  Many professors will work during the summer months and add another 30% or more to their salary.  Also there are opportunities to get grants from companies to do special projects or research which can add even more on top of that.

Accounting professor’s salaries are available online.  For public schools in the United States you can find all employees’ salaries available.  It may be a little difficult to dig through and get it but with some good Google skills or the right links you should be able to find a lot of information.

The best part is the time.  Accounting professors are usually in the classroom teaching for 3 to 5 hours per week.  Then they may have another 5 or 6 hours per week with the students or preparing lessons.  But the bulk of their time is spent on doing their own research and publishing.  Al together an accounting professor will work about 40 hours per week.  But it’s very flexible so they can work for 3 hours one day and 10 hours the next.  The freedom to research what they love is also very rewarding.

It’s not all all good

There are two main points that may be seen as negative for an accounting professor:

  1.  The PhD program.  This is a 5 to 6 year stretch of studying, working, reading, and many late nights.  Also you receive very little to no pay.  Many PhD students will teach classes to earn a decent income while they are in the program.  This is really where you find out if research is the life for you.  If you make it through the program then you are definitely set.  With so few programs and the difficulty of getting accepted, graduates will definitely have a job available to them.
  2. Publishing.  Accounting professors must publish.  Their job is mostly to research and publish.  If they cannot publish but they want to teach, they can expect about 50% less income than their publishing counterparts.  So if you really want to teach then its advisable to just get a masters degree and become a lecturer not a professor.

The main thing that is exciting about accounting professors is the lifestyle.  I have spoken with several accounting professors and generally they love their job.  I haven’t done so, but I imagine if I took a random pool of accounting professors and a random pool of accounting professionals in Big 4 or industry jobs with about the same amount of experience, I would find the job satisfaction rate of the professors to be much higher.  So think about it and if you can get through the PhD program then the professorship might be your dream job.

International Tax Exemption

A friend of mine moved to Korea recently.  His company provided him with some tax support to help with the year that he would have income from two different countries.  I thought it might be beneficial (and educational) to tell you his story.

He worked from January to March in the United States and then from March 5th through the remainder of the year he worked in Korea.  Now, I am not a tax expert but I have heard that the double taxation for a U.S. citizen living and working in other countries is burdensome and complicated.  So I asked my friend what kind of advice he got from the tax support his company gave him.

The Foreign Tax Credit or Deduction

US citizens under certain circumstances have the ability to elect either the foreign tax credit or foreign tax deduction.  You can choose either one or the other and you can change each year if you would like.  The best way to proceed is to figure your taxes both ways and then decide which is more beneficial.  You cannot choose both, so that means that the taxes you pay to a foreign country must be either deducted or claimed as a credit.

The Credit

Claiming the credit is usually more beneficial.  Generally, if you pay more taxes to the foreign country than you would have if you were in the US then you would not need to pay any US taxes.  However, if the opposite is true and your taxes are lower in the foreign country than it would be in the US you would owe the difference to the US.  This is the case in Korea for the most part.  Also keep in mind that in my friend’s situation he could only claim this credit for the money he earned in Korea and not the money he got while working in the US.

The IRS gives us 3 good reasons to use the Credit rather than taking the deduction:

  1. The credit will reduce your US taxes on a 1 to 1 ratio (dollar for dollar).  But if you take the deduction then you will only be reducing your taxable income which is more like reducing your taxes by 20 to 30 percent or 20 to 30 cents on the dollar (depending on your tax rate)
  2. The deduction would require you to itemize.  Generally you only chose to itemize your deductions if you have lots of charitable deductions, student interest, mortgage interest, or business expenses. Most people choose the standard deduction because their itemized deductions are less than the standard.  But with the credit you can take the standard deduction and still see the benefits.
  3. The credit can be carried forward.  If you don’t end up using all the current tax credit then you can use the rest of it the next year.  This is not true with the deduction as that only reduces your taxable income.

My friend was advised to take the credit.  It was clearly the best option.

Accountant or Auditor

The stereotypical accountant is oftentimes pictured as an IRS tax auditor.  The bad guy that comes around and makes you dig out tons of old pages of financial information and then makes you pay more taxes.  This was what I was afraid of when I first decided to become an accountant.  I thought for sure that everyone would hate me.  A few classes later I was a bit wiser.  I found out that actually very few accountants become IRS tax auditors.

There are however, lots of business auditors that may have the same “bad guy” image.  Many recent college graduates will take a job with one of the big accounting firms.  These firms have become more of an on the job training type locations more than a long term career.  Generally the first year employee will chose to specialize in auditing, tax, or other.  The other field includes analysis and business services provided to help companies save money or improve returns.

The Auditing Path

If you decide to become an auditor then you can expect to be out of the office most of the time.  First year auditors will be doing most of the grunt work of the audit (which is really what the customers actually see.) So the audit group generally works with the partner as the main boss and then several senior auditors and managers.  These guys will be supervising and reviewing the audit.  They have the most to lose because their names will be on the audit.  Well at least the partner’s name will be on the audit, the other managers will probably not have their names on the audit.

So you will be given a set of tasks to complete that will likely involve talking to several employees at the customer company.  It is important to remember that there is a bit of a mixed relationship with the customer.  The board of directors at the company is the group that stands in need of actually having an audit done. Generally they are not close to the day to day actions and they get an audit to verify that things are going well.  So you would say that the board of directors is your “customer” but the people that you are actually auditing will generally not receive you well.  If you think about it, usually the auditor will be a young recent college grad with high expectations.  And the person being audited may have been on the job for several years or decades.  If the young auditor comes in and asks questions about the job it may be a natural reaction for the employee to say “what do you know about this? I’ve been doing this for much longer than you.”

Anyway, you can see the relationship may be sensitive.  But it is a great way for the auditor to learn how to interact with other employees and communicate.

The Other Paths

So in general if you want to know what an accountant does it could be auditing or it could be something very different.  My first job was actually working for a small manufacturing company.  There I would download data from an old computer system and format it neatly and send it to my supervisor who would make charts and present the data to the plant manager.  I was essentially a data extractor.

So Auditors may be bad guys in some people’s eyes but that is not to be confused with all accountants.  Accountants may just be the people who give you the information you need to make good decisions and that’s not all that bad.

Forensic Accounting Jobs

magnifying glassMany people now days are curious about forensic accounting.  This seems to be a new trend that sounds interesting.  A forensic accountant is essentially a financial detective. They usually must have an in-depth knowledge of accounting process in order to detect fraud.  Usually this comes with many years of experience.  But sometimes it is possible for a recent grad to find themselves in this field.