Conversion for financial reporting on the horizon

The Securities and Exchange Commission is hard at work this winter preparing guidelines for potential use of new International Financial Reporting Standards for all U.S. financial statements. They are considering mandatory use of the standards as soon as 2014. In fact, there will be some limited early use beginning in December. However, the date on the horizon is 2011; that’s when the SEC will make its decision whether to proceed. If they do proceed, you can smooth the way now with advance understanding of what’s involved, planning thoughtfully and establishing execution tactics in advance.

As background, IFRS is an outgrowth of the GAAP Convergence 2002 project. (GAAP stands for Generally Accepted Accounting Principles.) The largest global accounting firms administered surveys to 59 different countries to get feedback about standards and protocol. Results said nearly all planned to revise their accounting reporting standards and protocol to converge with new International Financial Reporting Standards, and almost three-quarters of them set formal policies in place as early as five years ago for a smooth transition. Universal convergence to the IFRS standard will bring all accountancy firms closer to talking in a single, worldwide language of financial reporting. And that will surely raise standards of integrity and clear communications.

Companies making improvements and preparing for this change in financial reporting and communication do face some challenges. While IFRS training demand is expected to rise dramatically, only a few universities offer even limited IFRS training at this time. Several of the new standard aspects are intricate and could hinder implementation, especially regarding financial instruments and fair value accounting. Another hurdle is the tax-driven environment of national accounting administration. Because of these roadblocks, IFRS convergence may be limited initially to the six largest global firms: BDO, Deloitte Touche Tohmatsu, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers. 

Nevertheless, across the board there is a general desire to receive more prompt, accurate language translations of the new IFRS standards and interpretations and for everyone to get IFRS training. These translations are in process but have yet to be approved by the International Accounting Standards Board (IASB).

So where do we go from here? Certainly we’ll need greater commitment from all parties to adhere to the standards and unified capital market participants to eliminate national differences. Here are a few action items for anyone involved in making IFRS convergence work, with thanks to The Journal of Accountancy:

• Structure your methodology to include best practices of project management, vision and direction, overall planning, execution tactics, business acceptance across the enterprise and ways to measure and monitor.

• Understand your own timeline to convert to IFRS. For example, if you have a first report under IFRS of Dec. 31, 2014, as large accelerated filers might have, financial statements would have an IFRS “date of adoption” of Jan. 1, 2012. You’ll have to finalize planning activities to determine timelines and figure out what will be needed and make a budget. Consider a diagnostic to understand the differences between a company’s accounting policies and the requirements of IFRS.

• Know that there will be ancillary effects on other business processes, like internal reporting, key performance indicator use, compensation plans for employees and executives, and your investor relations structure and efforts.

• Go beyond IFRS when thinking about IT. Consider modifications necessary for systems used to collect and report financial data vis a vis treasury, financial instrument and payroll systems, general ledger and asset management.

• You’ll need to train all departments and boards.  Be candid in assessing  knowledge levels in relation to IFRS. Board and audit committee members might want additional education and insight on IFRS so they can continue to function properly in their oversight roles.

• Learn from European conversion experiences. European companies had about 24 months to convert to IFRS. By looking at it as a basic accounting and reporting exercise, they’ve since spent several post-conversion years dealing with resulting business and operational issues. Results have ranged from failure to effectively communicate the results of the conversion to stakeholders to struggling to maintain consistency in the manner in which various IFRS principles are applied throughout organizations. It can be critical to retain key employees and anticipate costs that can be incurred by ineffective planning and project management.

• Communicate clearly and frequently. Both during and after the transition, you’ll need to manage investor expectations well and respond to issues quickly. Your communications plan should have frequent contact with investors, analysts and regulators about the possible effects of IFRS on financial reporting.

Certified Public Accountant Allyson Baumeister is an officer and

partner at Sanford, Baumeister, & Frazier, PLLC.