PG&E Takes Proactive Approach to IFRS
Work is currently underway at the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on multiple joint convergence projects designed to narrow the differences between U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).
Setting the stage for the U.S. conversion to a single set of high-quality global accounting standards, this transition will drive significant changes to accounting processes and reporting and financial systems at companies reporting under U.S. GAAP. This includes addressing such fundamental areas as fair value measurements, revenue recognition, leases and insurance contracts, consolidations, accounting for financial instruments and financial statement presentation.
At the same time, the U.S. Securities and Exchange Commission (SEC) is considering whether to mandate full adoption of IFRS, a decision it expects to make in 2011. Many people expect that the mandate will be issued, in large part because the SEC has already voiced support of the transition. Further, by the end of 2011, the U.S. will be the only major capital market that has not yet converted to IFRS.
That expectation, coupled with the sweeping changes pending under the joint conversion processes, has prompted many U.S.-based companies to begin working through the processes necessary for IFRS adoption.
One such company is California-based Pacific Gas & Electric Co. (PG&E). As one of the largest combined natural gas and electric utilities in the United States, PG&E understands the depth of changes that will take place in accounting standards and realizes the responsibility it has to remain at the forefront of these changes.
“We realized that these changes are not just limited to the accounting department. Given the pervasive changes that are required, business and IT departments must be involved, and companywide training must be administered,” said Mareijke Weidemann, IFRS project manager at PG&E. “We examined this process from a business standpoint, not just accounting. By making these changes to the way we track our fixed assets to comply with IFRS rules, we are now able to better manage our capital infrastructure and improve our plant maintenance and forecasting processes.
Proper Planning and Assessment
For more than a year, PG&E has been contemplating the conversion to IFRS. Still a few years away from full adoption, the company is currently focusing efforts on areas that will not change from a rule-making standpoint, such as property, plant, equipment and inventory changes, and preparing to run accounting for those areas by Jan. 1, 2013.
“Our plan is to adopt IFRS for those areas come January 2013,” said Weidemann. “We will adopt the remainder of IFRS when the rules are finalized and per the SEC’s required adoption dates, which will be available in 2011.”
For PG&E, beginning IFRS preparations early was an overall business decision.
“One of our goals was to be involved in influencing the rule makers behind these changes, and this cannot happen without being a part of the transition. Further, we wanted to start early so we were able to reach a variety of stakeholders. We also believe that by taking this approach, we will be closer to our overall goal of being a leading Finance organization.”
However, until the final implementation date is announced, PG&E is taking a steady approach to the changes. This began with an initial assessment of the various areas where change will be required.
“We spent approximately four months reviewing our key financial transaction areas and determining what process, people, and systems changes we would need to make to accommodate the new accounting rules,” said Weidemann.
During the assessment, PG&E utilized a big four CPA firm for technical accounting support. A number of internal resources were also involved, including the company’s assistant controller, controller, general ledger accounting group and technical accounting research team.
Completed in March 2009, Weidemann reveals that this diagnostic analysis informed a large part of the company’s detailed multi-year project plan, which included the identification of program risks, major dependencies, technology projects, training, change management, and a series of work streams focusing on people, processes, controls, systems and accounting policy changes.
She adds, “I think it’s important to do an initial assessment before commencing detailed planning so that companies can identify where their biggest pain points will be from an implementation standpoint.”
Over the course of eight months, the company also completed the componentization of their property, plant and equipment, coupled with the implementation of an industry specific asset tracking system. This process was led by the PG&E accounting team and involved breaking down the company’s asset records into component-level detail. The team relied heavily on the field staff, which has an in-depth understanding of the company’s complex capital infrastructure, and line-of-business finance organizations. Plant accounting experts were also brought in on a consulting basis.
Utilizing internal resources whenever possible, PG&E assembled a dedicated team of five staff members, including Weidemann, to oversee the entire transition. The use of internal resources was a key point in the assembly of this team, and Weidemann believes it is imperative to a smooth transition.
“The learning curve is huge and will likely take several years. Instead of fully outsourcing our implementation to consultants, we have staffed up internally so our people can be trained and become competent. This way, they are training as they are executing, and they will be up to speed by the implementation deadline. Human capital readiness is one of the key risk factors we identified during the planning stage, and we believe our approach will effectively mitigate this risk.”
Key Challenges
Central to the changes IFRS will bring to accounting is the principles-based framework not typically seen under current U.S. GAAP.
“In the current U.S. standards, literature is readily available to guide accountants on how to record all types of transactions. However, under IFRS there is much less literature, instead the literature is principles based, which leads to the application of much more judgment, since there isn’t always a specific standard for your type of transaction. This means if you have a unique transaction, under IFRS there is not necessarily explicit guidance. Instead, you must interpret it on your own and develop a principles-based way of thinking about transactions,” Weidemann said.
Other challenges PG&E has encountered specific to their industry, include the time-consuming nature of evaluating several hundred commodity contracts and determining the accounting treatment they will receive under IFRS.
Further complicating things is the lack of an international counterpart to serve as a guide to PG&E’s transition process.
“Right now, our industry is facing a challenge because we, in North America, have a regulatory accounting framework different from other countries, and we account for things differently than those companies. Under international accounting standards, there is no standard we can follow,” said Weidemann. “If we have to implement IFRS without an equivalent framework, there is going to be a real problem, especially with our investor community, as our financial statements and earnings measures might look very different than what they do today because of accounting rule differences.”
The Importance of Being Proactive
Until the SEC announces a definite implementation date, many companies are opting to hold off on beginning the transition process. This could result in problems down the road, when they find themselves pressed for time to comply.
The question, says Weidemann, is whether “companies have the bandwidth and resources to accomplish this in such a short time.”
Another concern is the cost involved, which will typically be distributed between training, hiring new staff members, implementing technology and bringing in consultants. However, PG&E believes that utilizing internal resources and implementing early will cut back on some of these costs.
“One reason we started work on this project early was to work through the complexities involved,” she said. “Other companies may miss things and have to redo them, duplicating costs and efforts involved if they don’t start early on. By taking a progressive approach, we will have the opportunity to iron out the details before implementation is required.”
Though taking a proactive approach, the company still expects the transition to take upwards of four years, a projection the SEC has also endorsed. However, companies can begin the transition now by building a campaign for companywide awareness.
“To ensure proper executive level engagement, the project team should make certain they can articulate why these accounting changes are relevant to the lines of business,” said Weidemann. “This team should be at the forefront of companywide education, which should also extend to business partners and stakeholders. IFRS impacts us where our key transactions originate and that happens in business, not finance.”
In terms of IFRS, the benefits PG&E expects to see are understated. These include the significant automation of previously manual processes, and overall process improvements that will be needed given the expected requirement by the SEC for companies to maintain dual accounting records for an extended period of time.
Her advice to companies: “If you haven’t already, start thinking about beginning work on IFRS readiness assessments. Do not underestimate the significance of the people, process and systems changes that you will have to effect, and do not underestimate the time it will take to make these changes. It may appear simple on the surface, but it is much more complicated than one would think.”
Also in this month's issue:
Senate to Vote on Repeal of 1099 Reporting Requirements
Accounting Standards Boards to Propose Improvements to Financial Reporting of Leases