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Sec. 404 Requirements

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No discussion of potential changes in accounting policies and procedures can take place without acknowledging the importance of Sec. 404. Existing systems of internal controls related to financial reporting will need to be assessed and it is highly likely that changes will have to be made when considering the switch to IFRS. From the initial strategy development, internal controls will need to be put in place to cover the conversion process, reducing the likelihood that a material error in the financial statements will arise as a result of the process.

Every aspect of a company’s existing Sec. 404 evaluation process should be examined to determine if modifications are needed. For example:

•    Scoping. Converting to IFRS will most likely result in changing the basis on which companies determine which locations, accounts and controls are in scope for testing (e.g., pre-tax income).

•    Audit committee oversight. Audit committee members may need additional education and insight on IFRS to become familiar with the new accounting and reporting standards, and can continue to function properly in their oversight role.

•    Sec. 404 testing resources. New or modified internal controls implemented post-conversion—especially internal controls in IFRS’s more subjective areas such as impairment or financial instruments—may require education and training of those charged with evaluating the controls’ effectiveness.
•    Accounting policies and procedures. A company’s accounting policies and procedures are important to entity-level internal control and help ensure consistent application of accounting standards throughout an organization. Therefore, new or modified policies and procedures will need to be developed to comply with IFRS. In addition, training will be needed for company accounting personnel expected to use new accounting policies and procedures.
•    Financial statement close processes. Multinational companies with numerous subsidiaries will need to examine the process used to report period-end financial results. For example, the process and related internal controls necessary to produce subsidiary reporting packages most likely will need to be modified to timely and accurately capture data for preparing IFRS financial statements at a consolidated level.