As convergence toward a global set of accounting standards gains steam, U.S. companies inevitably will encounter financial reporting challenges as they develop an effective readiness plan. Several recent Webcasts gave some suggestions on how to overcome them.
Whenever U.S. regulators eventually decide to let public companies here file financial statements according to International Financial Reporting Standards (and signs suggest they may revisit that question soon) the largest challenge for users of U.S. Generally Accepted Accounting Principles will be “the move away from a rules-based framework to a framework that needs professional judgment,” Ken Owens, a partner at PricewaterhouseCoopers, said during an Oct. 21 Webcast. “That should not be underestimated.”
And corporations should start planning for an IFRS transition as early as possible, according to Deloitte Partner Sherif Sakr, who also spoke during the Webcast. He warned that conversion to IFRS can take 18 to 36 months, depending on the complexity of a company’s accounting. “Start as early as possible,” he said.
The U.S. Securities and Exchange Commission currently has a proposed roadmap to adopt IFRS in the United States by 2016, with some large companies allowed to start filing in IFRS as soon as 2011. Since the Obama Administration has come to power, however, current SEC leadership has been much cooler to the idea of using IFRS—although recent statements by SEC officials suggest they’ll give more thought to the question in coming months.
Any IFRS adoption here also hinges on the Financial Accounting Standards Board and the International Accounting Standards Board converging GAAP and IFRS into essentially equivalent rules. Just this month the two boards promised to redouble their efforts and finish convergence by June 2011, when the SEC ostensibly will make a final decision on when to adopt IFRS. Skeptics in the United States, however, wonder whether the boards can meet that deadline.
In a separate IFRS Webinar on Oct. 29, experts from the consulting firm Protiviti recommended a list of questions that executives should ask themselves as they prepare for the conversion to IFRS:
Have we obtained the proper education to understand the principal differences between GAAP and IFRS?
Do we understand the implications of a change of IFRS on our internal and external financial reports?
Have we developed a point of view around the perceived benefits and costs implementing IFRS, if given the choice to adopt it?
Have we gauged the extent of the company’s readiness for whatever transpires over the next 18 to 36 months during the IFRS transition?
Have we evaluated the effect a change to IFRS would have on people, processes, and technology?
“U.S. companies should take advantage of the lessons learned from previous transitions to IFRS in Europe and other parts of the world,” Steve Hobbs, a managing director with Protiviti, tells Compliance Week.
Hobbs
Hobbs contends that wiser companies will use a transition to IFRS as an opportunity to develop sustainable reporting processes across their entire global organization based on IFRS, rather than as a discreet finance project. “Thorough scoping, planning, and project management need to be a significant portion of the transition effort, and management teams should have sufficient time under any transition roadmap to strategically think through the impacts of their organizations,” he says.
Experts also say executives should spend sufficient time monitoring any developments in standards-setting activity and pass along details as necessary to your staff so they understand the contours of how a transition might affect the company’s financial reporting processes.
“U.S. companies should take advantage of the lessons learned from previous transitions to IFRS in Europe and other parts of the world.”
—Steve Hobbs,
Managing Director,
Protiviti
Scott Powell, an analyst with the financial software vendor Confluence, advised companies to create a mock set of financial statements. “While the numbers may not be there or may not be accurate, you’re really using this as a guide to test your other systems,” he said in the Oct. 29 Webcast. Use that same mock set of financials to confirm that you can prepare all statements, schedules, and other information required under IFRS.
For example, under U.S. GAAP, equity positions are held in aggregate; under IFRS they are held to maturity—which means a company wants an accounting system that tracks each position separately, even if they are in the same investment. Likewise, any financial reporting system should be able to break that information out, Powell said.
Protiviti further recommended that financial executives review the following checklist:
The readiness and resiliency of your financial staff;
The effect of using IFRS on internal controls;
The leadership structure of whatever project management office that would plan, organize, and manage the transition process;
The implications for accounting policies and procedure; and
The system changes that may be needed to provide the required information and to make the calculations necessary to prepare for IFRS financial reports.
“A change from U.S. GAAP to IFRS is much more than an exercise in changing accounting policies,” says Christopher Wright, a managing director with Protiviti who participated in the Webinar with Hobbs. “The implications to an organization’s people, processes, and technology could be substantial, depending on the key choices made by management in setting the scope.”
Wright
Companies will take different approaches to adoption depending on their specific industries and operating models, “as they consider changing either everything that they can change, or only what they have to change, in adopting IFRS,” Wright adds.
Current IFRS filers should also be keeping current with regulatory changes as they occur. Sakr recommended that financial executives attend as many conferences, events, and Webcasts as possible to keep up-to-date with the latest changes in the industry. Most large accounting firms, for example, have some sort of IFRS resource center on their Websites.
“We will have to wait and see where things end up in 2011 between IASB and FASB, given that’s their scheduled completion of the convergence process,” Sakr said.
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