There is a famous headline here in the United Kingdom: “House fire in Cumberland; nobody hurt.”

At first glance, that same ho-hum sentiment could equally apply to Europe’s shift in 2003 from nation-based generally accepted accounting principles to a single system of International Financial Reporting Standards across the European Union. The headline: “7,500 listed companies change their accounting; nothing happens.” But that calm appearance belies significant activity companies must undertake to secure a smooth and uneventful transition from your local GAAP to IFRS.

What follows are some observations from my own experience at Astra Zeneca, where we made the transition to IFRS several years ago—and they might prove useful to American companies if your Securities and Exchange Commission allows you to start filing financial statements in IFRS, which apparently it wants to do. In no particular order …

Set Up a Project Team and a Plan

No, really. I realize large corporations have a habit of setting up a project team for everything, including changing the weekly menu at the canteen. In this case, however, a project team with a leader dedicated full time to the transition, backed by a steering committee comprising senior and influential figures from the business, provides the appropriate backdrop. And the full time commitment of resources need not be high; as one of the top 10 listed companies in Britain, we used just three full-time staff members, with support from these three engaged in day-to-day work. A plan with clear, achievable, and realistic objectives and timings is essential.

Start Early

Well, obviously. With our first “live” IFRS financial reports due for first-quarter 2005, we started work in mid-2002. We had the advantage in Europe that, at the time, the International Accounting Standards Board’s entire focus was on the European transition to IFRS and preparing standards for it. That meant an improvements project for a number of existing standards, as well as new guidance for key areas such as first-time adoption of IFRS and share-based payments. We took the opportunity to comment on the response drafts, allowing us both to help shape the eventual guidance and to learn about the requirements. While those specific opportunities have now passed, the current standard-setting environment is no less dynamic. Reading and critiquing exposure drafts and discussion papers offers an invaluable insight into the style and direction of the IFRS system.

Engage Widely

And do so inside and outside. One of the early tasks we undertook at AZ was an assessment of each international standard on the business. We pushed this work out from the center to as wide a team of finance professionals across the world as possible. We also spent time with non-finance professionals exploring and explaining the effects on their areas, including legal and secretarial, human resources, and acquisition teams. It’s worth bearing in mind Donald Rumsfeld’s much-mocked maxim: “There are some things we don’t know we don’t know.”

Talk to your peers as well. We sit on a working group comprised of teams from the major pharmaceuticals companies that met (and continues to meet) regularly to examine various issues common to our industry. For example, before the transition, each of the major players had different approaches to accounting for acquired products; all were in accordance with established local GAAP, yet more complied with IFRS. The working group was able to develop a common approach to the issue, exploring the many nuances in the area. And the answers are far from exhaustive. Three years ago, we were in the first stages of developing GAAP; while we have travelled some considerable way, we are still at an early stage. GAAP will evolve further and more businesses will be brought into the IFRS net.

Engage With Your Auditors

Go on, grit your teeth. We decided not only to announce our restated results and financial position early (in October 2002 and January 2005) but to ensure that the auditors had endorsed the information. This had two advantages: First, it locked down the figures and allowed us to move on; second, it highlighted any problems and issues that would otherwise have only emerged at a less leisurely time (such as the day before the first live IFRS results announcement). And the auditors were able to provide valuable insights using breadth of experience from working with clients and professionals.

And Brace for Tax

Grit your teeth again. It’s commonly accepted that International Accounting Standard No. 12, Income Taxes, is not the IASB’s (or, at least, its predecessor's) finest moment. For example, you may be surprised to know that intra-group transfers of inventories can result in consolidated profits or losses from deferred tax. And calculating the taxation effects of pensions and share-based payments requires resolve, steely nerves, and a great deal of commitment.

Opportunity and Challenge

That’s not a cliché, honestly. We took the opportunity to train all finance staff around the world on IFRS. This had two advantages at least. Firstly, we established a known baseline of knowledge. Secondly, we were able to use the training program to provide a check on our new numbers. By doing a “top-down” estimation of the effect of transition, completing the training, and then asking the finance teams around the world to submit their figures on a “bottom-up” basis, we were able to secure negative assurance both on the quality of the training and the integrity of the new financial information. And we extended the training to non-finance teams, reinforcing the links from finance to other parts of the business.

We also carefully considered the options available under IFRS to determine and use those that were most appropriate to the business. Financial reporting is, to a significant extent, an exercise in communication—and the transition to IFRS provides an unparallel opportunity to re-assess your accounting policies to enable you to reflect the business as clearly and transparently as possible.

And Take Heart …

We are not alone. There is a lot of life out there in space, or at least cyberspace. The Internet resources are huge, from the IASB itself to the Big Four sites, from regulatory information to blogs. And, if you’re looking for a starting point, try IasPlus.com, a Deloitte & Touche Web site that has been at the forefront of resources since the beginning and is still, in my opinion, the benchmark.

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