Companies Should be Proactive About IFRS
The Securities and Exchange Commission (SEC) has proposed making reporting under International Financial Reporting Standards (IFRS) mandatory for U.S. companies between 2014 and 2016, including a requirement for three years of audited financial statements in the first year of IFRS reporting.
For companies subject to the first wave of IFRS reporting in particular, those dates leave little time for procrastination.
“We’re suggesting that this is not a long timeframe to achieve everything that will need to be done. At the very least, in 2009, some serious planning for conversion needs to take place,” said Ken Marshall, a partner with Ernst & Young and the firm’s Americas markets leader for IFRS. “How long is the runway you really have between now and then to get your [IFRS] airplane off the ground? Some companies have a very condensed timeframe [while] others will need every bit of the three years to get the opening balance sheet prepared and underway… It’s not a trivial job. [IFRS] is a wedge into the overall organization, not just accounting. All aspects of the company, even though these are accounting standards, will be affected by the move to IFRS.”
The SEC in August approved for public comment the “Roadmap” for IFRS, in which it anticipates mandatory reporting under IFRS beginning in 2014 for large accelerated filers, 2015 for accelerated filers and 2016 for non-accelerated filers. It also provides for early adoption in 2009 by a small number of very large companies that meet certain criteria. The possibility also exists that the SEC will at some point allow other companies to voluntarily adopt IFRS prior to the mandatory conversion date.
Under those adoption dates, calendar-year large accelerated filers would need to include in their 2014 filings:
- Balance sheets as of December 31, 2013 and 2014
- Income and cash flow statements and statements of changes in equity for the years ended 2012, 2013 and 2014
- Opening balance sheet as of the date of transition to IFRS, in this case January 2012
Pre-planning for a Smooth Conversion
Even though final details of the proposed Roadmap have yet to be released, U.S. companies need to be thinking now about how to approach the transition to IFRS. A smart first step is conducting an impact assessment designed to identify where key changes must be made to accommodate IFRS.
“What are the differences [between IFRS and US GAAP] at a fairly granular level? For a lot of these things, the devil is in the details so companies should do a fairly robust analysis of any differences at the accounting level,” said Marshall. “Then companies need to take the results of that analysis and cross-socialize them within the rest of the organization… Explore what the changes in accounting might mean and what are the potential policy changes for the rest of the organization. This will help identify some systems and data collection issues you might have.”
For example, footnote disclosures are more onerous under IFRS than under US GAAP, which will necessitate revising data collection processes. Changes in recording certain tangible and intangible assets will also alter the types of information companies need to collect and report under IFRS, such as milestone payments for research and development which are currently expensed.
Companies should also pay close attention to how IFRS will impact their ERP systems, particularly if an upgrade is planned prior to the conversion. Key will be determining whether the lead general ledger will be based on IFRS or US GAAP.
“If you decide wrong, it could be very costly,” cautions Marshall. “Anyone going through any major financial project needs to think long and hard about how IFRS may affect them. You don’t want to waste money now, only to have to redo [the systems] in three years.”
It is also important, as part of the analysis, to determine which areas will be impacted by standards that are still in a state of flux, such as revenue recognition. As such, “part of the planning process is to set aside those areas that will have a big impact, but that are changing,” said Marshall. “…Your accounting policy function should also be monitoring the progress of the conversion process, soliciting input and making affected areas of the organization aware of the debate and how they can influence it.”
Focus on Big Picture Issues
In “International Financial Reporting Standards for U.S. Companies: Planning for IFRS Adoption,” Deloitte also recommends that companies take a very proactive, strategic approach to IFRS pre-planning and adoption. It is critical for companies to get familiar with the “big picture” issues in order to fully understand the impact conversion will have on their organization.
“Gaining this perspective will help determine an approach that coordinates key constituents, considers the organization’s current state of readiness, and identifies priorities to inform the development of an eventual IFRS implementation strategy. This pre-work is the initial stage for leaders to get a better sense of the type of change the organization can expect when it’s time to implement IFRS,” wrote the paper’s authors.
Deloitte recommends the following steps:
- Take an inventory of current IFRS reporting requirements and opportunities. Inventory current IFRS reporting requirements and locations to understand the extent of IFRS reporting already occurring at the company and to identify the resources within the organization to assist in the IFRS effort.
- Identify and inventory first-time adoption issues. Another important step in adopting IFRS involves identification of first-time adoption issues, such as conversion elections available and other IFRS accounting standards that may have an impact.
- Determine changes to key tax positions, provisions, processes, and technology. An IFRS tax assessment is likely to identify tax positions and tax accounting methods that may be impacted by changes to financial reporting standards. Tax professionals should consider performing a high-level impact analysis that highlights potential changes to the tax provision.
- Determine key changes to technology infrastructure. IFRS can have broad implications on front-end systems, general ledgers, sub-ledgers and reporting applications that may need to be evaluated as part of an impact analysis.
- Identify the impact on existing system projects. As new systems projects are scoped and planned, it is important to align these project requirements with the likely impact of IFRS reporting.
- Conduct a key stakeholder analysis. Identifying target audiences and stakeholder groups impacted by IFRS and assessing their current level of understanding and communication needs is an important step in planning for the impacts of IFRS.
- Develop IFRS communication and training plans. Communication and training will be an essential element in effectively planning for and managing the necessary changes resulting from an IFRS conversion. Establishing a proactive plan to address the near and long-term training and communication requirements for each stakeholder group can further support the overall IFRS plan.
Financial, SOX Compliance Impact
According to Ernst & Young’s Marshall, it is difficult to anticipate the costs a company will bear in making the transition from US GAAP to IFRS other than to accept that it will not be cheap. While organizations in Europe have done studies on the costs of conversions, they are not a good gauge for U.S. companies.
“Their transition and conversion was a lot different than ours will be. Ours will be a bottom up and top down approach… Many European entities covered under IFRS did [conversion] at a high level. They didn’t drive it through the organization. It was a compliance exercise rather than a change management exercise… In the U.S., we will be driving into source data and ledger systems, so the effect will be magnified,” said Marshall.
U.S. companies will also have to take into consideration the impact IFRS will have on compliance with Sarbanes-Oxley, which may also add to the overall cost of conversion.
Marshall notes that there are two key issues related to SOX. First, conversion must be done in a way that allows the company to express to auditors that it was handled in a SOX-compliant manner and that when the switch is made, the quality of the data will be appropriate. Second, any changes to accounting procedures, processes and systems will need to be re-documented under SOX.
Given the complexity of the conversion and the impact it will have on organizations that go much deeper than accounting functions, taking advantage of the time the SEC has provided to prepare for conversion is a must-do for companies.
“The SEC has done us a favor by giving us this time to get started, because they understand the nature of the change. We need to get moving with regard to planning,” said Marshall. “There’s not a [high cost] for planning but the cost of not planning may very well be [steep]… The more you can plan to use your own internal resources, the cheaper it will be for a company going forward and the more effective the controls.”
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