The US Securities and Exchange Commission (SEC) recently announced a plan to push back US adoption of International Financial Reporting Standards (IFRS) by at least one year (to 2015) as it studies ways to bridge the gap between IFRS and US Generally Accepted Accounting Principles (US GAAP).

While the announcement means companies have more time to plan their IFRS projects, at least one expert warns that convergence between IFRS and US GAAP may not be much different from an outright IFRS adoption project.

“I’ve heard this called ‘IFRS by stealth,’” says Gary Fullmer of Ernst & Young. “You need to be very aware of what’s going on, because now they’re pulling the two standards together.”

At a panel discussion at the recent Financials 2010 conference in Orlando, FL, Fullmer and other consultants said companies should remain vigilant about their IFRS preparations, even as the SEC works out a final roadmap. Even if the eventual plan is to adopt a convergence of IFRS and US GAAP standards, companies will still have a multi-year project on their hands similar in scope to an IFRS conversion. In other words, complacency is ill-advised.

“Many companies expect SAP to provide a tool in which you push a button and it gives you IFRS, but this is a much bigger project than something like a Euro conversion. You have to understand that SAP is already IFRS-compatible. The issue is parallel accounting. The message is to try to create a roadmap now,” says Thomas Yoder of Mi6 consulting.

How the SEC Got Here

In August 2008, the SEC proposed a roadmap for considering mandating IFRS as the new standard for the 11,000 publicly traded companies in the US that currently report using US GAAP standards. Many expected the SEC to announce in 2010 a firm deadline for IFRS adoption. However, the commission pushed the deadline to 2011 after receiving hundreds of comments on the proposed roadmap.

“Commenters generally expressed widespread support for the ultimate goal of having a single set of high-quality globally accepted accounting standards. However, commenters differed in their views about the approach in the Proposed Roadmap to achieve further use of IFRS in the US capital markets. Several commenters asserted that there are many transition questions and issues arising from the proposed approach that the Commission should consider further,” according to the SEC.

Among the concerns raised by commenters were the following:

• IFRS does not offer enough specific guidance to deal with certain areas of financial reporting
• There are too many local flavors of IFRS to make it a reliable global standard
• A genuine global standard would need to be applied and audited consistently across all countries
• The business case for moving from US GAAP to IFRS is not clear

These concerns were enough to convince the SEC to reconsider its proposed roadmap before forcing companies into a massive overhaul of their reporting systems. The work plan is aimed at alleviating concerns by developing an enforceable, consistent standard that bridges the gaps between IFRS and US GAAP.

“Preparers and users of financial statements, such as investors and analysts, are familiar with U.S. GAAP. Thus, we acknowledge the magnitude of the task that would be involved to incorporate IFRS into our financial reporting environment for U.S. issuers. It is therefore important that, before we mandate any such change, careful consideration and deliberation, as well as a sufficient transition time for users and preparers of financial statements, occur to assure that such a change is in the best interest of U.S. investors and markets,” according to the SEC.

The work plan will focus on six key areas, according to the commission’s statement:

• Sufficient development and application of IFRS for the US domestic reporting system
• The independence of standard setting for the benefit of investors
• Investor understanding and education regarding IFRS
• Examination of the US regulatory environment that would be affected by a change in accounting standards
• The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies
• Human capital readiness

What It Means for Your Company

While the proposed deadline for conversion to IFRS may have been pushed back, panelists at the Financials 2010 event agreed that companies should still act aggressively to assess the impact of new reporting standards.

“One thing we suggest is to get your house in order. Decisions have to be made, and you need to make sure your resources have enough time. One way to do that is to make sure your financial systems are in order. Can you close efficiently? Once you’ve got that you’ll be in better shape for the future,” says James Fisher of SAP.

Fisher describes how the Desjardins Group, a Canadian banking company, was able to improve its financial close process dramatically while laying the technological groundwork necessary for IFRS conversion.

“They looked at their reporting processes and close processes, and made some changes. Then they were able to move forward with IFRS,” he says.

Many global enterprises already have entities that report under IFRS guidelines; however, Yoder cautions against assuming that what works elsewhere will work in the US.

“A common misconception is that if other countries are doing IFRS, you can just use those ledgers when you implement on SAP. But other countries — Brazil, for example — have very different versions of IFRS. Even if one of your companies in Europe is on IFRS, that doesn’t give you a pass,” he says.

Andrew Bray of PricewaterhouseCoopers urged companies to focus on what changes conversion would likely cause in their financial systems. Companies with entities in multiple countries will have to account for different local standards.

“The goal is not to turn everyone into walking Wikipedias. You have to understand how standards around the world affect accounting and business, and then report to senior leadership. Come up with a set of global standards to avoid too much reconciliation,” he says. “Talk to accounting, tax, human resources, operations, and other areas and build a broad base of understanding. Determine how changes will impact and align with your business plans. Start to come up with cohesive plan so when you’re in the elevator with the CEO and he asks what IFRS is all about, you have something to say.”

Several consultants suggested rolling IFRS planning into other future projects, such as an SAP ERP or SAP ERP Financials upgrade, or an implementation of SAP BusinessObjects Planning and Consolidation.

“One of the key stepping stones is going to the new GL [SAP General Ledger]. SAP has responded very well to IFRS, and there is a lot of functionality coming in enhancement package 5 that you can’t use unless you’re on the new GL. I would say you need to get there sooner rather than later. Even if the SEC pushes the deadline out to 2017, you will have to make your decision to go to the new GL soon; otherwise, you might not have time,” says John Steele of Deloitte. 

Yoder says the business case for IFRS conversion can be rolled into an existing SAP implementation project, even as just a hedge against future SEC decisions.

“You can buy yourself a lot of insurance just by adding another ledger during SAP implementation. If you add a parallel ledger, you can go either way as you move forward and understand IFRS better,” he says.

However, not all consultants urged companies to rush into IFRS planning. The poor economy of 2008 and 2009 has naturally forced many SAP initiatives into holding patterns. Bray says companies should consider their needs carefully, and do what makes sense for them.

“The reason companies exist is to innovate. If you’re in wait-and-see mode because you have to focus on keeping your company afloat, it makes sense to push IFRS to the back burner. However, if the economy improves, you should start planning for it as soon as possible,” he says.

Davin Wilfrid

Davin Wilfrid was a writer and editor for SAPinsider and SAP Experts. He contributed case studies and research projects aimed at helping the SAP ecosystem get the most out of their existing technology investments.

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