Home > California CPA Magazine > November 2008 Issue > IFRS Convergence Easier Than You Think

IFRS Convergence Easier Than You Think

California CPA magazine: November 2008

Sec. 404 Requirements
Information Technology Modifications are Vital
Common Misconceptions About IFRS
IFRS FAQs

When I talk to my clients about International Financial Reporting Standards, I’m reminded of a story by naturalist Milton Olsen. Olsen says migrating geese fly in a “V” formation because, as each bird flaps its wings, it creates uplift for the bird immediately following. Working together provides the flock a much greater flying range than each bird would have on its own.

The recent upheavals in the global financial markets emphasize our connectivity and our need to work together to successfully navigate the storm. Like geese, people who share a common direction can get where they are going more efficiently traveling on the thrust of one another.

There’s no question that IFRS is the “V” formation that will help us achieve a single, global financial reporting language. And there’s little doubt that a single set of globally accepted accounting standards will benefit the global capital markets by simplifying comparisons among investment opportunities, and will benefit companies by eliminating duplicative and costly reporting requirements.

With IFRS as a unifying force, we’ll travel in a common direction, with benefits for developed economies, emerging markets and the poorest countries. This, in turn, could promote investment, strengthen the economy and improve people’s lives worldwide.

And like the geese, it’s easier when we’re traveling together.

IFRS Adoption: When, Not If
In August, the SEC approved for public comment its long awaited proposed Roadmap related to the eventual use of IFRS by U.S. companies. The proposal foresees mandatory reporting under IFRS beginning in 2014, 2015 or 2016, depending on the size of the issuer. It also provides for early adoption in 2009 by a small number of very large companies that meet certain criteria. And it’s possible that the SEC will decide to permit other companies to adopt prior to the mandatory date of conversion.

The Roadmap also identifies several milestones that the SEC will consider in making its decision in 2011 about whether to proceed with mandatory IFRS adoption. If that seems like a long way off, remember that most companies will need to start preparing financial statements under IFRS three years prior to implementation, which means starting in 2011.

Conversion is Not as Hard as You Think
Companies that have converted to IFRS report that adoption is not an accounting exercise—it’s a fundamental shift in how they operate that affects virtually every function within an organization. Yet, I always stress that it’s not as hard as you think. In fact, through the IFRS conversion experience, you can provide your clients an important opportunity to review, streamline and improve all aspects of accounting, reporting and related compliance and information technology processes.
An effective IFRS conversion process begins with an accounting diagnostic: a high-level analysis of a company’s individual systems that assesses the effect conversion may have on all aspects of the business. Among the areas that will require review are:

Management reporting systems: Management reporting is a complex action that involves other business processes and makes use of a variety of information systems—from general documentation and financial control to internal communications. Changes in the processing and summarization of data in accordance with IFRS must be fully embedded in back offices and general ledger systems. This can require fundamental system changes that can reverberate across the company.
Financial accounting and reporting: For some companies, challenges can surface that are related to the previous accounting for transactions under local GAAP. Unexpected differences can arise  during the conversion from local GAAP to IFRS due to complex technical issues. Management must understand accounting policies to effectively assess and estimate the impact that applying IFRS will have on the business.

Tax planning: Companies will need to review their tax planning strategies to determine whether they are in alignment with any organizational changes created by the IFRS conversion. As companies begin to assess the potential implications of adopting each IFRS standard, the related tax-reporting and compliance implications should be identified. Each financial statement change as a result of IFRS conversion will most likely have some tax impact.

Companies will need to consider the potential impact on current and future tax positions, as well as how those impacts change the balance sheet and accounting income. Also, the company’s information systems that support the direct and indirect tax requirements may require modification to ensure the tax planning, accounting and compliance processes continue to run effectively and efficiently with the new IFRS-based information.

In addition to understanding and interpreting IFRS, companies also need to focus on the significant implementation challenges they will most likely face as they launch an IFRS conversion strategy.

They also must fully understand all accounting changes when reconciling book income to taxable income. Furthermore, companies will need to assess the financial statement tax impact. Those companies that will be applying IFRS in their local statutory financial statements will need to put in place appropriate systems and processes to identify and address possible new book/tax differences.

Employee and executive compensation: Because IFRS may result in significant changes to a company’s financial results, the amount of compensation calculated and paid under performance-based executive and employee bonus plans may be materially different. Therefore, companies will need to assess whether significant changes to the plans are required to appropriately reward activity that contributes to the company’s success.

Key performance indicators (KPIs) and investor relations: Companies will need to understand and quantify the prospective impact on their KPIs that may result from adopting IFRS and determine the appropriate message for investors. Given that, upon adoption, prior year comparatives will be restated (e.g., for public companies the prior two years’ income statements will be presented under IFRS), careful analysis and explanation of the historic and future impacts will be critical. Another factor to consider is that investors and other stakeholders may expect KPIs across sectors to become more comparable. Due to the fact that IFRS can affect organizations within a sector differently, any such differences must be communicated clearly.

Corporate finance and structured financial products: U.S. companies should not be surprised if investment banks and venture capitalists request supplemental IFRS financial information, or a narrative describing the differences between U.S. GAAP and IFRS.

Organization and people: The conversion process requires analysis, time and resources. The company must provide relevant education and training to members of the accounting and finance organization. Investment in employee retraining is critical to meet their new technical knowledge needs, as well as to facilitate the roll-out of accounting policy changes and the associated revised business processes and procedures.

Solution development: U.S. companies have spent years figuring out the right accounting to comply with the rules. A conversion to IFRS and its judgment-based framework will allow companies to identify the best IFRS principle available.

What IFRS Means to You
IFRS represents an exciting new frontier for our profession as businesses are increasingly looking for CPAs who can help with the conversion.

The key for CPAs is continuing education. In a May 2008 report, the U.S. Treasury Department’s Advisory Committee on the Auditing Profession specifically called on private industry, educators, regulators and others to work together to implement market-driven, dynamic curricula and content for accounting students. Professional associations and private industry have responded enthusiastically. We at Ernst & Young announced the formation of the Ernst & Young Academic Resource Center (ARC), a collaboration between the firm’s professionals and university faculty.

The center’s focus is on the development of a flexible, high-quality curriculum that will allow universities to incorporate the material into existing curriculums and accommodate more significant future curriculum needs. In addition, the center will offer a variety of training options for faculty.

The California CPA Education Foundation is taking a tiered approach to providing IFRS education. In addition to the current offerings, a portion of the 2008 International Tax and Business Conference will focus on IFRS.

CalCPA’s Financial Leadership Forum also will focus part of its curriculum on IFRS in its executive education offerings. The forum anticipates gearing its executive education offerings for IFRS around what companies need to know to get ready and, eventually, how to implement the convergence process. Experts will be on hand to guide participants through the initial stages.

Conclusion
It’s clear to me that conversion to IFRS will most likely be the largest single change of accounting policies and procedures ever undertaken by U.S. companies, and is definitely one of the most interesting challenges for the accounting profession.

As the anticipated date for a conversion from U.S. GAAP to IFRS nears, it’s important that neither you nor your clients take a wait-and-see approach to develop an IFRS implementation strategy—on both the corporate and professional levels. In doing so, we will all benefit by traveling in the same direction, and U.S. markets will become more competitive as we begin to speak the accounting language of the other major world markets. 

The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

 

Peter H. Griffith, CPA is vice chair and area managing partner of Ernst & Young’s Pacific Southwest area. You can reach him at peter.griffith@ey.com.