If you think IFRS is difficult for CPAs to comprehend, talk to non-CPAs. Historically, accounting professionals have insulated their colleagues from understanding the effort involved in implementing newly issued accounting standards. As a result, you cannot expect them to understand the challenge associated with adopting an entirely new framework.
To successfully implement IFRS, CPAs will need the assistance and insight of their colleagues. IFRS provides preparers many options to elect policies that best reflect the underlying business. Input from key stakeholders in the company is crucial for anticipating potential changes in company practices and ensuring the proper elections are made.
Presentations and proposals by audit firms and consultants feature robust IFRS implementation methodologies that typically start with an assessment phase called Phase 1. What many audit firms and consultants do not realize is how many companies are not ready for Phase 1.
PHASE 0: INTERNAL EDUCATION
Because IFRS knowledge is limited in the United States, each project should start with Phase 0: Internal Education. Unlike the situation experienced by European companies in 2004, today a wealth of free information is available on the Internet. Start with the AICPA’s Web site, www.ifrs.com. In addition, each Big Four firm has published IFRS overviews and checklists highlighting the differences between IFRS and U.S. GAAP.
As a preparer it is important to understand your auditor’s interpretation of IFRS. You should also read the other large firm IFRS publications to see where there is diversity of opinion before making policy elections. This review should provide a solid foundation enabling you to identify areas for your company that may require significant policy, process or system changes.
This analysis will be critical to your internal message. Publication of the SEC’s proposed road map to IFRS adoption may have unintentionally created a false sense of security in your organization. For example, it may be difficult for the senior management team of a large, accelerated filer to understand why IFRS should be a priority today over another project when its first annual filing is not expected until the first quarter of 2015 under the SEC proposal. However, the SEC’s proposal would require comparative financial statements for 2012, 2013 and 2014. (In February the SEC extended the comment period for its proposed road map.)
In Phase 0, you should develop and conduct a training session for senior management on the basics of IFRS. This training should include a summary of the potential top differences you have identified from a technical accounting perspective (see Exhibit 1). Make the presentation interactive so you can get their input as to how they believe adoption affects their departments.
Key Activities in Phase 0
Identifying technical accounting differences
Determining resource requirements
The first important consideration the implementation team will face is whether to adopt or to convert. These terms are often used interchangeably to describe a company’s movement to IFRS, though each approach implies taking a separate path. Adoption suggests that the preparer will view IFRS as a new starting point and evaluate all accounting options before selecting a company policy. Conversion suggests that the preparer will limit the focus to only identified differences between IFRS and U.S. GAAP.
In 2005, many European companies chose the conversion approach. This approach was popular for companies that started the implementation process late or wanted to minimize the number of reconciling items included in their footnote disclosure. In 2007, the SEC removed the requirement for foreign private issuers to include the footnote reconciliation to U.S. GAAP.
Moving to a new framework means preparers should challenge themselves not to view issues only through a U.S. GAAP point of view. The preparer should understand the substance of the transaction to leverage the principles-based framework of IFRS and then select the accounting conclusion that is most representative. Like U.S. GAAP, once a company has established its accounting policies under IFRS, it must demonstrate preferability when changing an accounting policy in future years.
If you are trying to decide which approach is best for your company, consider that FASB refers to its approach as “improve and adopt.” Without adoption, the goal of a single set of accounting standards will never be achieved. The “improve” initiative can be seen in FASB’s updated memorandum of understanding (MOU) with the International Accounting Standards Board that prioritizes certain joint projects for completion in 2011.
The second important consideration is the extent to which IFRS adoption will affect the business. The European IFRS implementation was widely criticized as being merely a top-side implementation. In this “change the scorecard” type of implementation, no underlying business practices are changed. The accountants simply recalculate the financial statement results using IFRS principles. To truly embrace the opportunity, companies should review business process, contracts and transaction structure. Involved upfront, CPAs can partner with operations management to assess the impact on transactions of accounting options available under IFRS.
When developing your company’s implementation approach, the internal and external factors shown in Exhibit 2 will influence the project’s depth and scope.
IMPACT ON THE AUDIT
In your initial year of adoption, you may be audited under three or more GAAPs. These “GAAP triangles” occur when neither IFRS nor U.S. GAAP can be used as the basis of accounting to meet statutory filing requirements (see Exhibit 3).
For example, if an entity with statutory reporting obligations in the Netherlands had disclosed a difference in its reconciliation between Dutch GAAP and U.S. GAAP and there were no changes in policy between Dutch GAAP and IFRS, the expectation would be that the entity would report a difference between IFRS and U.S. GAAP. The preparer must explain the impact of adoption not only on the company’s former primary reporting GAAP but also on its statutory GAAP. This adds an extra dimension to the audit that can be time-consuming and complicated. Unlike the infamous Bermuda Triangle where material objects disappeared, material objects may appear thanks to the “GAAP triangle.”
Parallel reporting will likely be a reality for most companies beginning in 2012. This raises several questions:
How many GAAPs will you track?
At what level will you track the GAAPs (consolidation system, local ERP or both)?
How long will you run in parallel?
This initiative will require working closely with your information systems team to build the architecture and reporting to complete the consolidation of financial statements under the desired number of GAAPs. In 2005, best practice was to track two GAAPs, but the bar has now been raised to track three. Because statutory GAAP is often used as a basis for tax reporting, you will need to work closely with your tax department to determine the ramifications of any changes to the basis of statutory reporting. Deloitte’s IAS Plus Web site (www.iasplus.com/country/useias.htm) lists jurisdictions where IFRS is acceptable for statutory reporting purposes. The specificity of U.S. GAAP guidance allowed audit firms to create detailed audit programs. With IFRS, there will be a fundamental shift. Auditors will need to evaluate the reasonableness of their client’s interpretation of IFRS guidance, as well as the consistency of application within the client.
Although auditors cannot be involved in policy election, they can provide valuable insight regarding available accounting options, industry and firm perspectives, as well as SEC interpretations based on previous staff reviews. IFRS has fewer rules than U.S. GAAP, so more judgment will be back in the hands of preparers and auditors. Judgment allows the preparer the flexibility to improve the transparency of the financial statements but comes with the risk of inconsistency of application. To mitigate this risk, companies should create a robust corporate accounting manual that drives consistency across business units and geographies. Audits should be based on compliance with the manual to reduce local auditor interpretations.
IFRS adoption is a multiyear project that requires not only strong governance, but leaders who will sustain momentum over the life of the project. Creation of a steering committee under the oversight of the audit committee can help sustain this momentum and can provide high-level organizational support for the project (see Exhibit 4). The steering committee should comprise senior management representatives from accounting, tax, communications, human resources, investor relations, legal, information systems, manufacturing and sales.
For the day-to-day implementation activities, you need a core project team, headed by a talented project manager. This team must be 100% dedicated to the project. The core team will be responsible for identifying technical accounting differences, drafting the corporate accounting manual, interacting with the auditors, working with information systems to design the system reporting requirements and conducting global training programs. The core team should be supplemented with subject matter experts, who are allocated to assist with specific topic areas. These experts, who are not working full time on the project, will be responsible for validating the accounting differences, identifying process/system changes and quantifying differences. External auditors should be involved throughout the implementation process.
IFRS is the future of accounting in the United States and whether you are a member of the core project team or a subject expert, you should begin work on Phase 0 today.
Start your IFRS implementation project with internal education rather than assessment. Consider the IFRS publications provided by the AICPA and all of the Big Four firms, not just those provided by your external auditors. Develop and conduct a training session for senior management on the basics of IFRS that includes a summary of the potential top technical accounting differences.
Develop a strategy. First decide whether to adopt or to convert. Adoption views IFRS as a new starting point and evaluates all accounting options before selecting a company policy. Conversion limits the focus to only identified differences between IFRS and U.S. GAAP.
Assess impact on business. The second important consideration is the extent to which IFRS will affect the business. IFRS provides companies the opportunity to restructure not only their accounting, but the underlying transactions as well.
Be prepared to be audited in a “GAAP triangle.” In your initial year of adoption, you may be audited under as many as three GAAPs: U.S. GAAP, IFRS and statutory GAAP (for tax purposes). This extra dimension to the audit can be timeconsuming and complicated.
Create a steering committee and core project team. The steering committee should be comprised of senior management from accounting, tax, communications, human resources, investor relations, legal, information systems, manufacturing and sales. The dedicated core team will identify technical accounting differences, draft the corporate accounting manual, interact with external auditors, work with information systems to design the system reporting requirements and conduct global training programs.
Lewis Dulitz, CPA, is vice president of accounting policies and research for Covidien, a global health care company. His e-mail address is email@example.com.
“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
International Versus U.S. Accounting: What in the World is the Difference?, a CPE self-study course (#731665)
For more information or to make a purchase, go to www.cpa2biz.com or call the Institute at 888-777-7077.
IFRS Resources, www.ifrs.com
SEC road map
Proposed rule: Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, www.sec.gov/spotlight/ifrsroadmap.htm