U.S. GAAP and IFRS share many similarities, but they are also different in many areas.
Staff responsible for internal control over financial reporting (ICFR) under Sarbanes-Oxley (SOX) section 404 and operational audits will need to understand how your company plans to apply IFRS so they can take appropriate actions based on both operational risks and the risk of material weakness in ICFR. (See author Steve Arnold, CPA, outline how to leverage your SOX investment for conversion to IFRS in this Steps to Success video.) While your company may be familiar with the general principles of IFRS, such as a potential need to depreciate components of fixed assets on a detailed level, a thorough review will make clear that there are many rules and requirements in these principles-based standards. Once they have analyzed the standards, companies may realize they do not have much flexibility under IFRS, but ICFR staff can assist with that analysis.
Companies will also need to evaluate the impact these differences may have on their accounting policies, as well as the underlying information technology systems that support the company’s financial reporting structure. Changes to policies and systems on this scale will invariably give rise to additional risks that your organization may need to monitor and control.
PARALLEL REPORTING RISKS
Under the SEC’s proposed road map, companies would need to maintain a parallel reporting environment for approximately three years. In creating a parallel reporting environment, your ICFR and operational audit staff will need to consider the ramifications of modifying your company’s systems and processes. These staff members will need to review the company’s enterprise resource planning (ERP) and consolidation systems’ ability to manage parallel accounting. This can be complicated and expose the organization to additional risk.
ERP and consolidation systems will need to be assessed to determine if they can handle the requirements of dual ledgers and reporting. Although the system may be structured to handle the requirement, consider the volume of data that will pass through the ERP system. Is bandwidth sufficient to process transactions in a timely manner? For example, your parallel accounting environment may be structured to process a single transaction into two separate accounting streams, which may cause processing lags due to volume. Systems will need to be configured and controls created to avoid cross-pollination of IFRS transactions with U.S. GAAP transactions (and vice versa). Also, for most companies a plan will be needed to maintain statutory reporting ledgers.
Beyond systems, your organization may also need to modify its accounting processes for simultaneous IFRS and U.S. GAAP accounting. The financial statement consolidation of this information, even with systems modifications, will be time-consuming and will more than likely lead to additional resource requirements for the controller. Staff training for the new processes will also need to be developed and implemented.
CONTINUAL MONITORING AND TESTING
As these changes are implemented, your ICFR/operational audit staff will need to continually monitor risks and test controls. These activities are necessary, not optional. The responsibility for determining accounting standards may be shifting to or converging with the International Accounting Standards Board (IASB). However, U.S. regulatory oversight of financial reporting will likely stay with the SEC. As such, the first set of financial statements published under IFRS may be subject to SOX section 302 and section 906 certification rules. Controls through the conversion process such as new policy approvals and reviews of conversion calculations will be equally important.
Just as it is impractical to assume the conversion to IFRS can happen in a short time, the same is true for internal control testing. This means documentation and testing will need to move in parallel with the accounting changes and processing your company performs. With the same rigor you apply today, your company will need to prove its internal control over financial reporting is effective and maintain supporting documentation.
Your company’s external auditors will presumably be taking similar actions, as audit opinions will need to cover multiple years of IFRS-based financial statements. Throughout the IFRS conversion phases, it will be critical to get feedback from your external auditor on your project plans and execution.
HOW INTERNALCONTROL/AUDIT STAFF CAN ASSIST IN IDENTIFYING CHANGE
ICFR and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.
ICFR personnel will be able to assist your company by:
Inventorying the areas where the company has applied the principles of Accounting Principles Board Opinion 28 (FASB Accounting Standards Codification Topic 270) in estimating costs and expenses during interim periods—IFRS requires each interim period to be discrete and does not recognize the smoothing of costs and expenses between interim periods. For example, your company’s process for expensing marketing and advertising on an interim basis may be different under IFRS.
Operational audit staff will be able to assist by:
Documenting the current process for valuing inventory and identifying the system interfaces that may need to be modified under IFRS.
Interviewing production personnel to determine how the manufacturing of trials/samples is planned and performed and then discussing the results with accounting personnel—U.S. companies often value these items in inventory, but IFRS normally requires these to be expensed as produced. Your ICFR staff will want to work with operational audit/risk management staff to plan your company control structure not only to avoid the development of material weaknesses in ICFR but also to provide for operational risk coverage.
The IFRS conversion will be a multiyear effort impacting your entire organization, and it is likely not too far away. If you have not started to plan for IFRS, you need to take some initial steps in the near future, especially if your company is subject to the potential 2014 implementation date. (See author Steve Arnold, CPA, outline how to form your IFRS team in this Steps to Success video.)
Risk mitigation and controls play a huge role in the overall conversion plan. It is critical for ICFR and operational audit staff to get involved early to help guide the company in the planning, and to ensure that their portion of the cost estimate is included.
With an increase in risk and testing documentation, the ICFR and operational audit functions will need to assess their employee competencies. More resources may be necessary to cover the parallel risk remediation and control period.
As the SEC continues deliberating the future of IFRS in the U.S., your company will need to maintain the momentum and continue along the path toward conversion. Your ICFR and operational audit staff will need to ensure that they have a seat at the table at the outset to avoid any unwanted surprises.
Strategic IFRS Planning Questions for ICFR (SOX) Management
- How many resources should be assigned to the IFRS conversion project team?
- Do the personnel have adequate accounting training to understand the differences between U.S. GAAP and IFRS?
- Can the current SOX 404 process and systems documentation assist the company in estimating change impacts?
- Does the company have sufficient resources/flexibility to handle the increased controls testing?
- What can ICFR staff do to assist with mitigating the risks of change management in this significant conversion process?
- Is there IT knowledge within the department to assist in identifying risks that may arise for system modifications for the parallel accounting period?
Based on the current SEC road map, your company will need to evaluate how to perform U.S. GAAP/IFRS parallel accounting over a multiyear period.
In creating a parallel accounting environment, your internal control and operational audit staff may need to consider the ramifications of modifying your company’s systems and processes.
Internal control and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.
It is critical for internal control and operational audit staff to get involved early to help guide the company in the planning and to ensure that their portion of the overall conversion cost estimate is included.
Steve Arnold (firstname.lastname@example.org) is a senior manager in Ernst & Young’s Advisory Services practice. Disclaimer: The opinions expressed in this article are those of the author and not necessarily those of Ernst & Young LLP.
To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at email@example.com or 919-402-4435.
“IFRS: A Preparer’s Point of View,” April 09, page 46
“IFRS: Beyond the Standards,” Feb. 09, page 34
“Interest Capitalization: One Small Step Toward Convergence,” May 08, page 80
“Simplifying Global Accounting,” July 07, page 36
“IFRS: Coming to America,” June 07, page 70
“Found in Translation,” Feb. 07, page 38
Use journalofaccountancy.com to find past articles. In the search box, click “Open Advanced Search” and then search by title.
International Versus U.S. Accounting: What in the World is the Difference? , a CPE selfstudy course (#731667)
AICPA/IASC Foundation Conference on International Financial Reporting Standards (IFRS) in North America 2009: The U.S. Perspective, Oct. 29–30, New York
For more information or to make a purchase or register, go to cpa2biz.com or call the Institute at 888-777-7077.
IFRS resources, ifrs.com
SEC road mapProposed rule: Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, sec.gov/spotlight/ifrsroadmap.htm