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Worried about the impending US conversion to International Financial Reporting Standards (IFRS)? See some quick hints about things you should know and places you can look for information as the landscape changes.
Key Concept
International Financial Reporting Standards (IFRS) is a reporting standard that is being adopted worldwide, and likely impending for the United States in coming years. It is a conglomeration of many widely used standards, including International Accounting Standards (IAS) and US Generally Accepted Accounting Principles (US GAAP).
Have you recently noticed extra worry lines on the foreheads of CFOs or chief accounting officers (CAOs) of US companies? If you thought that the only contributor was the current economic recession, you were wrong. While the current global economic recession is uppermost in the minds of CFOs and CAOs worldwide, those in charge of US-based companies have another cause for their worries: the impending enactment of International Financial Reporting Standards (IFRS).
I’ll get you up to speed on the basics of IFRS, including an overview, pros and cons, a discussion of the timeline, and the effect the global economic crisis has had on its progression.
Overview of IFRS
IFRS is a collection of financial reporting standards that were inherited from older international accounting standards (such as the International Accounting Standards [IAS]), which was the preeminent international accounting standard prior to 2001. Unlike US GAAP, which is a rule-based accounting standard, IFRS is based on principles. IFRS has the following key features:
- Accounting is done based on the accrual basis. This means that it’s based on the actual consummation of transactions rather than on the receipt or payment of cash.
- The enterprise whose financial statements are being reported is an ongoing concern. In other words, it is a viable financial entity not only as of the time the reporting is being done but also for the conceivable future.
Since 2001, most of the IAS accounting principles have been folded into IFRS to make it the preeminent international standard that it is today. The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) in the US had aimed to bring the two standards together by 2008, but the US is still running on US GAAP as of Q1 2009. Currently more than 100 countries worldwide run on IFRS.
Benefits of IFRS Adoption
US companies can expect that they will accrue several benefits by adopting a common global financial reporting standard. Let’s now take a look at the potential benefits:
- Standardization. With one set of accounting standards worldwide, there will be a standardization of accounting processes and reporting. This makes comparison and analysis not only more convenient, but also less error-prone. As a simple example, consider a US-based multinational company with multiple subsidiaries worldwide. Financial reporting is mostly likely being done using multiple accounting standards, which is far from ideal. Interestingly, quite a few of the other advantages are ancillary benefits of standardization.
- Operational efficiency. Standardization is likely to result in operational efficiencies primarily in the areas of entering, consolidating, and reporting financial information. There will most certainly be economies of scale, and this should translate to cost savings by reducing data entry, reporting, and analysis efforts.
- System and applications efficiency. Instead of having to maintain multiple systems and applications to support multiple accounting systems, enterprises will have a real opportunity to migrate to one set of systems or applications. This economy of scale should eventually translate to significant cost savings.
- Accounting simplification. US GAAP is a rule-based standard and these rules are complex and often arcane. Many believe that these rules played some role in the accounting debacles — most notably at Enron and WorldCom — during the early years of this decade.
- Political benefit. The political benefit is less tangible and more long-term than the others. There is a real possibility that by clinging to US GAAP, the US might not be perceived as a team player and worse, may be isolated in the world of accounting and finance. Adopting IFRS would signal that the US plays by the same set of rules as the rest of the world.
Note
The accounting simplification benefit is a double-edged sword. A principles-based accounting standard that’s considerably more condensed than US GAAP could actually result in multiple interpretations of the same principle. The question that people are asking is that if a detailed rule-based US GAAP could not prevent accounting fraud, wouldn’t a principles-based accounting standard make fraud easier? Ultimately it all boils down to the integrity of human beings, and standards can at best serve as stop signs.
What Are the Implications of Migrating to IFRS?
In numerous discussions I have had on this topic with personnel of US companies, I have found that this migration is most commonly thought to be purely an accounting exercise. I would like to disabuse readers of this notion. This will be much more than an accounting exercise and will have a profound impact on almost all areas of your enterprise, including IT, tax, legal, audit, human resources, sales, marketing, and risk management. Such a migration should be treated as a major project involving multiple departments, personnel, systems, and applications. As such, the price tag for an IFRS migration can be significant. It is going to increase with the size and complexity of an enterprise’s operations.
IFRS Migration Time Frame
In any IFRS-related conversation, migration timeline is the topic that comes up most often. There is confusion surrounding the time frame, but generally the best estimate is 2014-2016. The US Securities and Exchange Commission (SEC) has designated three categories of filers: large accelerated, accelerated, and others (e.g., non-accelerated filers). This means that if you are a very large company, 2014 could be the migration year. This means that in theory, this is the earliest filing date for any US company. The general response to this time frame is that it is a long way off. This notion is erroneous because you have to file comparative financial statements (commonly known as comps) two years before the migration date. So, any enterprise migrating to IFRS would effectively need to be ready two years prior to the actual migration date.
Note
I have seen different interpretations of the terms “large accelerated filers” and “accelerated filers”. Therefore, I recommend you search these phrases on the SEC’s Web site at
www.sec.gov for the official definitions.
The Current Impasse
If you have not been following the most recent developments around IFRS adoption in the US, you might be thinking that at the very least, the accelerated filers have started planning for this endeavor. In fact, ever since the SEC published its roadmap for IFRS adoption in the US in November 2008, there seemed to be little doubt about the direction in which US companies should be heading. Many companies, service providers, and thought leaders had started investing in this multiyear effort.
However, several factors from the end of 2008 through the early part of 2009 converged to cause a perceptible slowdown in IFRS adoption activities. The global economic recession has shifted CFOs’ priorities from IFRS adoption to more critical tasks such as increasing revenues and cutting costs. New SEC chairman Mary Shapiro has testified that she has some concern with the SEC roadmap and said she would exercise caution in coming up with a mandate, while maintaining that she thought a common global accounting standard would be a good thing. Meanwhile, the influential American Institute of Certified Public Accountants (AICPA) has voiced its support for IFRS adoption, albeit with changes to the November 2009 SEC roadmap.
Because of these setbacks, there is considerable speculation around IFRS adoption, thereby causing key decision makers in US companies to play a wait-and-see game or focus on navigating their companies out of the current economic malaise.
IFRS and SAP
A vast majority of US companies, especially the large accelerated and accelerated ones, have some ERP system as their financial system of record. A lot of these companies run SAP and thus a lot of the IFRS adoption, conversion, and migration activities will center on their SAP systems. If and when IFRS adoption in the US is mandated, the highest priority for companies using an SAP system as their financial system of record will be to have their SAP system provide the ability to record and report financial transactions in both US GAAP and IFRS. The good news is that SAP has provided this capability since its earliest releases, with increasing levels of sophistication and options as newer releases have been introduced.
Resources
There are numerous resources in the public domain that will help you get a better understanding of IFRS. Here’s a listing of some of the good ones:
Anurag Barua
Anurag Barua is an independent SAP advisor. He has 23 years of experience in conceiving, designing, managing, and implementing complex software solutions, including more than 17 years of experience with SAP applications. He has been associated with several SAP implementations in various capacities. His core SAP competencies include FI and Controlling FI/CO, logistics, SAP BW, SAP BusinessObjects, Enterprise Performance Management, SAP Solution Manager, Governance, Risk, and Compliance (GRC), and project management. He is a frequent speaker at SAPinsider conferences and contributes to several publications. He holds a BS in computer science and an MBA in finance. He is a PMI-certified PMP, a Certified Scrum Master (CSM), and is ITIL V3F certified.
You may contact the author at Anurag.barua@gmail.com.
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