Now that the Securities and Exchange Commission has unveiled its timeline to adopt International Financial Reporting Standards, financial reporting executives are getting an earful on how they can assess the effect of such a change and develop a strategy to get it done.
Already, Webcasts and executive forums are warning companies not to rush into such a dramatic shift. While the SEC has said it may allow a select number of the largest U.S. companies to adopt IFRS as soon as 2010, experts agree most companies will be hard-pressed to do even that, having no definitive deadline to follow. “[W]e believe that it’s actually quite unlikely that a meaningful number of U.S. issuers will elect to early adopt until the SEC revisits the roadmap and sets a mandatory deadline in 2011,” Dave Kaplan, a partner at PricewaterhouseCoopers, said during a Nov. 20 Webcast.
As it stands now, large accelerated U.S. filers would be required to start reporting under IFRS for fiscal years ending on or after Dec. 15, 2014; accelerated filers would follow a year later, and then non-accelerated filers in 2016. Only the largest U.S. companies, competing in global fields where most rivals already use IFRS, would be allowed to start using IFRS accounting next year.
IFRS experts at the Massachusetts Institute of Technology’s recent CFO Summit were also hesitant about swift adoption. Peter Proestakes, a project manager at the Financial Accounting Standards Board, said that while public companies generally support the transition to IFRS, they need a fixed date “to know it is going to happen, and when it’s going to happen, to make judgments about where the differences are and how … to move forward to spend money in an efficient manner to change systems.”
Brad Curley, a partner in KPMG’s IFRS conversion practice, told summit attendees that conversion costs ultimately will depend on how extensive a company’s global operations are, and how many finance staffs the company has in overseas units. Depending on what specific tax jurisdictions a company operates in, it might need to keep separate sets of books for a long time, he said.
Proestakes also noted that not only companies need an established deadline, but regulators also need time to educate those in the field on those changes (how to incorporate IFRS into the certified internal auditor exam, for example). Tax authorities will need to determine what changes will be an issue for them as well, he said.
Strategic Approaches
Kaplan
The SEC has yet to confirm its 2014 deadline and may not do so for months—or may revise its schedule once the Obama Administration appoints new SEC leadership. Even without a definitive schedule, however, companies can take several strategic steps now to avoid headaches later. “Overall, companies should begin to develop a thoughtful, strategic approach to considering the implementation of IFRS,” Kaplan said.
To get started, IFRS experts recommend answering the following three questions:
How much do you want to change your existing accounting?
How quickly do you want to make the change?
How comprehensively do you want to make the change?
McClements
But don’t just focus on the accounting aspect, says Terri McClements, a partner with PwC and leader of the firm’s U.S. IFRS advisory services. “Think of a transition not just as an accounting activity but how the transition will impact an entire organization,” she said during the Nov. 20 Webcast.
She and others recommend embedding IFRS changes into the whole financial reporting process, rather than patch over differences with U.S. Generally Accepted Accounting Principles. “Doing this will allow personnel to make this part of their daily routine rather than add on to their normal workload,” said Nancy Beachman, an advisory partner and IFRS conversion specialist at PwC. To achieve this, she recommended the following three-phased approach:
“[W]e believe that it’s actually quite unlikely that a meaningful number of U.S. issuers will elect to early adopt until the SEC revisits the roadmap and sets a mandatory deadline in 2011.”
— Dave Kaplan,
Partner,
PricewaterhouseCoopers
Step 1. Conduct a preliminary study to identify what effect IFRS will have on your business and how IFRS might shape future strategy. The study should assess how IFRS currently affects the financial reporting, tax, business process, and system of your organization.
Two different surveys should be conducted during this phase. One should be a diagnostic questionnaire, which includes leading practice questions to pinpoint differences between U.S. GAAP and IFRS. The other should be a survey of business units to determine what policy changes and conversion processes each local unit might undergo should IFRS be adopted.
Step 2. Conduct the actual legwork of the conversion process, remembering that each company’s conversion experience will be its own, Beachman said. “We believe companies should approach IFRS policy with an open mind and understand there is not a one-size-fits-all solution,” she said.
For example, IFRS does not allow the use of the completed-contract methods—an accounting rule that recognizes revenues and expenses of a long-term contract in the year it has concluded. So industries that use this particular approach may want to start pondering how to restructure their sales contracts and even the contracting process itself, or how to unravel potential system complexities to satisfy the new revenue recognition model, Beachman said.
Companies must also consider tax implications, she warned: “You need to analyze the impact on cash tax liabilities, your global tax positions, and related tax planning.”
Step 3. Embed those changes into daily operations of the company as seamlessly as possible. “In this phase, IFRS truly becomes the new internal and external language of the business,” Beachman said.
Unanswered Questions
Despite general support of IFRS, underlying concerns about the transition and how uniform those standards will be cannot be ignored.
COMMENT ON IFRS
Comments should be received on or before February 19, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
Use of the Commission’s Internet comment form http://www.sec.gov/rules/proposed.shtml or
Send an e-mail to rule-comments@sec.gov. Please include File Number S7-
27-08 on the subject line; or
Use the Federal Rulemaking ePortal, http://www.regulations.gov. Follow the
instructions for submitting comments.
Paper Comments:
Send paper comments in triplicate to:
Florence E. Harmon
Acting Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Source
SEC IFRS Roadmap (Nov. 15, 2008).
For example, many companies with subsidiaries located in jurisdictions that have converted to IFRS worry that the application of IFRS accounting decisions will be made in these far-flung jurisdictions “that will retroactively become de facto GAAP for the whole corporation,” Proestakes said. (He also stressed that those fears probably won’t come to pass.)
IFRS proponents expect that processes will become a lot simpler and cost-efficient. Frank Edelblut, president of Control Solutions International, cited an example of two Fortune 100 companies that at one point managed 138 different types of GAAP without IFRS, due to all the different jurisdictions they operated in.
Another advantage is the creation of “more higher quality products, by increasing our perspective beyond the boundaries of the U.S. industry and U.S. economics,” Proestakes said. But for a single standard to be effective, he added, “It will have to be strong and independent to withstand political pressures that will come.”
Edelblut agreed. The principles-based nature of IFRS works well in the environment of a nation like Britain, he said, but Britain doesn’t have the same risks that the United States does. Edelblut also noted that IFRS has only been in wide use for three years while U.S. GAAP has evolved from decades of use; in 30 years, he wondered, “are we going to be in the same place again?”
No comments yet