IFRS: 'Buckle your seatbelts'

The "date certain" for conversion to International Reporting Standards (IFRS) may be as soon as 2014, according to Kenneth Marshall, a partner in E&Y's Assurance & Advisory Business Services practice, which, with three-year comparative reporting, will mean that U.S. companies should begin the process of adapting their accounting and other business systems within the next eighteen months. "Companies need to have their eye on the ball right now, or risk scrambling for resources," Marshall said at an E&Y Thought Center Web cast held on June 6, "Are You Ready for IFRS?" that was devoted to practical conversion issues.

On Monday, Financial Accounting Standards Board (FASB) chairman Robert Herz told his audience at the Investor Relations Institute's 2008 annual conference in San Diego, to "buckle their seatbelts" for his headline address on the next chapter in the world of financial reporting, The Cross Border Group reports. Herz said IFRS are coming for U.S. companies, probably within three to five years. He added that standard-setters are not in favor of a lengthy adjustment period. "It will be a swift change to IFRS," he said. "[Having a choice between U.S. GAAP and IFRS] might be an interim step, but it creates a two-language reporting regime."

The pace of change in sentiment in the U.S. since the Securities and Exchange Commission (SEC) roundtables in December has been astonishing, said Danita Ostling, a partner in E&Y's Assurance & Advisory Business Services practice, and a participant in the Thought Center Web cast. The SEC, along with accounting and business leaders, are coming to the conclusion that, "If IFRS are good enough for U.S. registrants, they are good enough for everybody." Although smaller companies may not see the same benefit, there seems to be a developing consensus that a "single set of high quality standards benefits all."

Addressing some of the broad practical challenges that that conversion will bring for accounting professionals and financial executives of U.S. companies, Ostling first raised the question of what will happen to generally accepted accounting principles, GAAP. Ostling voiced her own opinion that private companies were likely to follow [public companies] in time.

Another enormous challenge for companies and the accounting profession is preparing professionals and staff for the change. The AICPA has formed a committee to see what will happen with the CPA exam, Ostling said, and FASB will host a forum on IFRS later this month which includes accounting education and professional certification among the issues to be discussed. Ostling said that changes in accounting interpretations were a constant feature of the profession, noting how many changes had occurred in U.S. GAAP since she and her audience had passed their CPA exams.

On a practical level, the conversion to IFRS will affect the whole organization, not just accounting departments, Marshall and Robert Owens, the Deputy Chief Accountant for Alcatel-Lucent said. Accounting departments must adjust to differences in revenue recognition and the way companies capitalize development costs among other issues, but the standards change can potentially impact every aspect of the company affected by financial information; e.g., key performance indicators, employee and executive compensation plans, management's internal reporting, and all systems that are tied to financial information.

Owens, who presented Lucent's conversion story in the Web cast, completed a conversion from GAAP to IFRS that resulted from the merger of Lucent and Alcatel. The project, which took two years, was an accelerated process designed to make the Lucent reporting system fit into Alcatel's existing framework. Owens emphasized that the process was specific to the company, but that in the case of Alcatel-Lucent, the conversion project team identified potential issues in the legal department, relating to contracts, among M&A teams, in tax and investor relations, as well as in IT, auditors and Treasury.

A company will need a fully dedicated project team with the support of the entire organization in order to manage the change, Owens said. The auditor will assist in an advisory capacity, Marshall said. Lessons learned from the Lucent IFRS conversion were that the project team:

  • Cannot start too early.

  • Start with a clean sheet of paper. The Lucent team took the approach of identifying and minimizing differences with GAAP. Had he had the time, Owens said, a better approach would have been to start with a clean sheet and evaluate all business processes that were potentially involved.

  • Fully understand issues, be decisive.

  • Allow enough time to implement and flush out issues.

    Overall costs were nowhere near the cost of SOX 404 implementation, Owens said, although again, this would depend on the company.

    Other broad issues that remain to be resolved include coordination with the Internal Revenue Service (IRS) and issues of governance, Ostling said. The IRS is involved in ongoing discussions on interpretation of adjustments to income.

    And while IFRS considered on a broad scale represent principles-based rather than rules-based accounting and rely on professional judgment, Sarbanes-Oxley is not going to go away, Ostling said. Companies must be prepared to develop detailed policies and rules that will provide documentation for SOX 404 purposes and well as support professional judgment.

    The archived Web cast is available online.

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