IFRS are standards that are used internationally. In December 2007, the US Securities and Exchange (SEC) made the decision to have all companies make the shift to IFRS to unify businesses under one list of standards in order to reduce the differences of financial statements. The SEC, under control of former chairman Christopher Cox, set preliminary dates stating that all publicly traded companies will need to start converting as early as 2014 and the process should be completed no later than 2016. The switch will require a lot of work, and will not be simple for businesses to accomplish. It is expected that each company will take approximately two years to complete the transformation.
The SEC stated that foreign companies are allowed to apply IFRS immediately without making a settlement to US GAAP. There are, however, many companies that already use IFRS, meaning many businesses need to change sooner, such as US firms with offices overseas and foreign owned US businesses. Making the switch quickly is a key step to avoid companies using two different standards for a long period of time.
Dwayne Cook, partner and practice leader for the Mid Atlantic area at Tatum LLC, points out the ways companies will be affected by stating “companies will have to change the way they record and report financial data because IFRS and US GAAP rules differ regarding revenue recognition, compensation, fixed assets and inventory for example” (Pratt 2). The most significant difference between IFRS and GAAP is that IFRS provides much less detail. In comparison IFRS consists of 2,500 pages, while GAAP has 17,000. Currently across the globe, over one hundred companies are already using IFRS and one hundred and fifty are expected to be by 2011.
There are many benefits that come along with the switch to IFRS. The transformation will make the process of financial reporting more comprehensive. Companies who have global operations or use foreign reporting will be able to use streamline reporting and can reduce related costs by creating a common reporting system that will generate consistency in statutory reporting. “Mr. Jamil Khatri, Executive Director and Head, Accounting Advisory Services, KPMG (one of the largest professional services firms in the world), said that the new guidelines would clear the air over issues like what should be on the timeline for calculating eligibility criteria for converging to the new standard, applicability of the norm” (Fresh guidelines 2). These companies could also build up regional financial centers, reposition finance resources in regard to where they would be needed and integrate training and development efforts.
Other companies that take part in the conversion will be able to compare financial reporting with international competitors. IFRS will enable many businesses to access foreign capital markets and investments. The standards for IFRS are much more flexible because they are principle-based, and will help rid the system of inconsistencies between businesses, meaning there will be less confusion in comparing financial results. It will aid in making it easier to perform cross-border acquisitions, ventures, and spin-offs. Those countries that have not been able to keep up with the evolution of financial reporting, such as Canada, will be able to make this transition to level out the playing field. Marion Kirsh, a chief accountant, reports “the use of IFRS is also expected to result in more volatility of companies’ reported financial results, as the new standards will enable companies to use more estimates an fair value reporting” (Harman 1). Those businesses that adopt IFRS early, before the SEC makes it a requirement, will be cutting edge in comparison to the others. These businesses will gain experience before their competitors do.
Along with the benefits that follow the conversion of IFRS comes many challenges as well. Companies are going to have to apply the financial knowledge they already have with completely new policies. This will be a large change for the ways that many accounting personnel think. They have been trained to operate in a completely different way and now are put in an environment where not only more application exists, but industry guidance as well. Each organization will most likely need to add financial personnel to their teams who are more familiar with reporting IFRS.
Another concern is that companies will have to upgrade their information technology (IT) to adhere with the changing systems. There are many things that they will have to renegotiate due to the switch to IFRS, such as current business contracts, and debt agreements. These organizations will also have to be sure to budget one-time costs that are associated with the conversion, such as auditing and external adviser costs. Finally, throughout all the changes, they should be aware to seek to manage stakeholder expectations, such as budgeting and planning. “As companies and investors adapt to the new standards over time, however, Kirsh expects the challenges to subside” (Harman 1).
The steps needed to make the switch to IFRS will affect many branches of companies. Specifically, it will have large effects on internal system and controls, financing and contractual agreements, operations and internal and external communications. The larger the company, the longer the process of switching from GAAP to IFRS will take, meaning strong management will be needed in order to have success during the transition. Nevertheless, the most important step during this process is to perform an in-depth assessment of the impact the conversion could potentially have on the finance and people in the business. According to KPMG, “the goal to create a detailed plan for completing the conversion; such an assessment would encompass the following:
Gap Analysis – accounting and disclosure
Initial adoption alternatives – IFRS 1
Financial statement assessment -quantifying differences and directional impact
Availability of information
Process and controls requirements
IT systems changes
Existing resource capabilities
External audit impact
Training requirement
Competitor assessment
Foreign subsidiaries and planned acquisitions
Evaluation of contractual agreements
Investor and analyst communications
Summary of conversion benefits
Project team and work plan (IFRS in the US 3)
If all the important steps above are taken, the company is on its way to a successful conversion process. The average projected time for each company to complete the transformation is about two years. It is important that each business comes up with a conversion plan in advance before they begin any of the process. During the conversion, all other changes should be synchronized together. In the first phases, the global approach and policies should be laid out. During the second phase, the international business should begin to be converted by sending local teams to global basis of the company. Participation by the personnel is an important key to the success of the business while making the large change. After the financial reporting and IT have been converted, a team should get together and develop a way to communicate and explain the changes that were made. The effort will require highly experienced personnel who are well educated on the issues and hold strong problem-solving qualities.
In order for companies to operate globally in conjunction with other companies easily, there must be a universal method of accounting procedures. The switch that the SEC has made necessary from GAAP to IFRS will benefit businesses worldwide. It may seem to be more of a burden to many companies, rather than an important shift in the operations at first. However, most will find that once the switch has been made, the universal methods make a lot of conversion that was necessary in the past unnecessary. Although it may take a while to come up with the right IFRS system, once it has all been said and done, accountants will no longer have to worry about discrepancies between various accounting methods. The shift that will be occurring in the next few years, although business related, is just another way in which our world is coming closer to a unified society.
Works Cited
“Generally Accepted Accounting Principles.” Federal Accounting Standards Advisory Board. 16 Mar. 2010. fasab.gov/accepted.html.
Harman, Megan. “Switch to IFRS will present challenges for investors, analysis.” Investment Executive. 23 Feb. 2010. 18 Mar. 2010. investmentexecutive.com/client/en/News.
“IFRS in the US: Benefits and Challenges of the Coming Change.” KPMG (2008): PDF file.
Kelly, Susan. “Switch to IFRS Back on Course.” Treasury & Risk: The of Finance Today 1 Mar. 2010. 18 Mar. 2010. treasuryandrisk.com/News/Pages/Switch-to-IFRS-Back-on-Course.
Pratt, Mary K. “New global accounting standard will require IT conversion.” Computer World. 8 Feb. 2010. Web. 17 Feb. 2010. computerwolrd.com/s/article/346405/Get_Ready_for_Gloabl_Accounting.
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