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Friday, July 24, 2009
Inside Compliance
Why you need to be thinking about IFRS today
By Jim Cashin & Marianne Bach
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If you have not given thought to the potential impacts of International Financial Reporting Standards to your organization, now is the time to take action. A mandatory adoption of IFRS for public companies is predicted for U.S. registrants by 2014, which would require comparative reporting as early as 2012.
Whether your organization is large or small, there are potential benefits and impacts of IFRS adoption that should be considered from an operational, IT and financial perspective. For technology and life science organizations, which have tendencies towards joint ventures, profit-sharing agreements and other collaborative arrangements, there are likely to be accounting impacts resulting in changes in the treatment of R&D expenditures, share-based payments and component depreciation. Companies can use this opportunity to evaluate their revenue recognition policies, which IFRS rules allow for an approach that may better reflect the economic reality of revenue-producing transactions. With IFRS, revenue may be recognized in a different reporting period than under U.S. Generally Accepted Accounting Principles.
If you work for an international public company, you have likely given thought to these issues. However, these impacts are not limited to global organizations. Sources of financing for non-public domestic organizations are increasingly coming from international sources. Future plans involving joint ventures or international investors will require a single view of financial statements for which U.S. GAAP statements alone may be insufficient. International suppliers and customers also prefer references and credit reports created based upon IFRS statements. In addition, private companies with no public equity or debt now have the option of adopting a slimmed-down version of IFRS as released earlier this month.
The impacts of IFRS go beyond strict accounting-focused policies. The conversion to IFRS will have wide-ranging impacts on various aspects of an organization, including the company’s IT systems, underlying processes and associated controls. Without changes in the current tax law, IFRS will impact income tax reporting and cash taxes payable for many companies. For instance, IFRS does not allow the LIFO (Last-In-First-Out) method of accounting for inventory as U.S. GAAP does, which absent tax law changes could increase cash taxes after changing over to IFRS. Additionally, IFRS may lead to changes in the treatment of off-balance sheet transactions, which among other things, can impact key agreements and contracts.
So, what steps should an organization take to prepare for the potential benefit or impact that IFRS adoption may have?
• Preliminary assessment: Perform a high-level assessment of the impact of IFRS to your organization, including impact to detailed financial records, reporting, tax, compliance, controls and business processes.
• Strategy and plan: Build a strategy based upon the anticipated impacts — including a framework, timeline and resource allocation plan. Does your IT system need to be re-configured or replaced? Identify an appropriate project leader to manage the conversion and provide status updates. Consider consulting with IFRS experts and comparing IFRS strategies to industry peers.
• Conversion: Set your conversion plan in motion. Complete full evaluations of the IFRS differences, options and impacts; select policies and develop disclosures; and create IFRS financial statements for the comparative period(s). Be sure to continually gather feedback from key stakeholders.
• Change and process management: The conversion to IFRS requires a strong change management component. During the conversion, continually review the impact on regular business processes and make changes as needed. The new IFRS policies should be effectively embedded into the regular business processes of the organization to create a smooth transition.
IFRS should be a focus for most U.S. companies due to the wide-reaching strategic and business implications, as well as the time and investment required for any accounting transition. While you may not necessarily want to adopt all the changes related to IFRS, understanding the benefits of each option and determining an effective conversion approach allows for the early identification of issues. It is easy to underestimate the size and impact of an IFRS conversion. By getting started now, organizations can reduce and control costs, get ahead of the competition and facilitate a smooth transition plan.
Jim Cashin is a vice president and partner and Marianne Bach is a manager in the management consulting practice for Boston accounting firm Caturano and Company.
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