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Transitioning to IFRS?

Here's how to do it correctly.

March 4, 2010
by Sukanya Mitra

Time and again finance execs ask, “Why should we change to IFRS (International Financial Reporting Standards)?” or “What’s wrong with U.S. GAAP (Generally Accepted Accounting Principles)?”

With the shrinking global workplace, many countries worldwide have adopted IFRS and if your firm has subsidiaries or business entities overseas or you do any business with firms outside the U.S., being on the same page as them will make life easier.

Cecil Nazareth, CPA, ACA, partner at IFRS Partners, put it in perspective when he quoted Jim Turley, CEO of : Ernst & Young, who once said, “Imagine the Soccer World Cup being played in South Africa this year and teams played by different rules.” That, in essence, is what it would be if U.S. remained using GAAP, when everyone else has already adopted or is close to adopting IFRS.

Nazareth was the key panelist at a recent IFRS Webcast that was sponsored by Prophix Software Inc.

“IFRS is part of the mainstream in Europe,” pointed out Geoffrey Ng, vice president of product planning at Canada-based Prophix Software, Inc., and co-panelist at the Webcast. Ng shared the world status of those countries worldwide that are either already using IFRS, some form of IFRS or are in the process of converging to IFRS (see map).

“Overall, IFRS is either required or permitted in over 100 countries around the world,” said Ng, “Interestingly the majority of these countries are outside of North America,” he added. He said public companies have been affected by this the most, though so have the SMEs.

Are there any real benefits? For companies, Ng said they would benefit in lowered cost of capital, integrated IT systems, easier consolidation and reduced overall costs. For capital markets, there is greater

Are There Any Benefits?

Nazareth expanded on Ng’s benefits. He noted that “IFRS makes sense to investors, the public and those who use financial statements.” He also said that IFRS provides:

  • comparability across countries (most companies are doing cross-border transactions and they find it easier to find a consolidated effort,” explained Nazareth. He further likened it to the euro, where there is one currency and there is no stress or headache of converting to several different currencies when dealing with different countries.);
  • consistency in application;
  • cost-saving in compiling financial statements by eliminating time and effort in conversion/consolidating; and
  • ease of compiling consolidated financial statements.

Why IFRS Now?

Nazareth said it was time to take each word of International Accounting Standard Board’s (IASB) goal seriously:

“Single set of high quality understandable and enforceable, transparent and comparable global financial reporting standards developed in the public interest.”

IFRS Pure, as opposed to country-specific promotes the use of these standards. Both the Financial Accounting Standards Board (FASB) and the IASB have been meeting every month to make sure that several of their joint convergence projects are completed. “There will be more conversions in the next two years,” said Nazareth, “costs of conversion will be much less, the quicker you do so.”

IFRS Full vs. IFRS SMEs

These are two different standards said Nazareth. “They are standalone,” explained Nazareth. Clarifying it further, Nazareth said that IFRS for SMEs is a “scaled down version of the full IFRS with 230 pages, contains simplified measurements and fewer disclosures, for example there is omission of EPS, segment reporting and all the complicated measurement computations.” The IFRS for SMEs has been effective as of July 2009.

All entities that have no public accountability are eligible to use IFRS for SMEs. This includes companies whose securities are not publicly traded and those that are not financial institutions. Nazareth pointed out that a large number of private entities in the world can use this standard right now. He also pointed out that “subsidiaries of listed companies can use it right now, provided the subsidiary itself is not listed.”

Can the U.S. adopt this? The answer is a resounding “yes!” IASB is the second designated standard setter (along with the FASB) in the AICPA Code of Ethics. Nazareth also noted that “IFRS-SMEs can be adopted even when the country governing the entity does not follow IFRS.”

It’s Not an Easy Process …

“One suggestion is start today,” emphasized Nazareth. “You need a two-year timeline. [It is] better to get involved, get your feet wet and you’ll be far ahead of the game.” Nazareth also urged companies to:

  • Revisit accounting policies and make appropriate changes;
  • Be pro-active because conversion takes a long time;
  • Map out the differences between U.S. GAAP and IFRS; For example, Nazareth pointed out that “while LIFO is acceptable in U.S. GAAP, but it is not acceptable in IFRS;”
  • Engage the CEO and your firm regularly and obtain sponsorship on this project; and
  • Engage outside auditors to bless the proposed changes in areas that IFRS may impact, such as inventory and R&D.

And a few more suggestions …

In order to truly prepare and plan for IFRS, both Nazareth and Ng emphasized:

  • Educating all stakeholders;
  • Embedding IFRS in your entire organization (Ng pointed out that this includes your IT systems as well);
  • Managing change in your people (staff), processes and technology;
  • Allocating enough resources to the conversion effort;
  • Mapping out entities to be consolidated;
  • Considering the impact IFRS will have on both financial and nonfinancial measures, such as compensation, stock options, bonuses and more;
  • Using fair market value for assets, which would result in higher state (franchise) taxes (that is usually based on property).

Last Thoughts

As your firm prepares for transition, Nazareth emphasized that it is a “critical time” to assess your current accounting policies and reporting systems because it is a “one-time deal!” It is necessary for your firm to conduct an impact analysis on the bottom line, highlight the major differences between local GAAP and IFRS through mapping and develop a transition time line.

Nazareth closed by reminding attendees of four major conversion steps:

  1. Recognize all assets and liabilities that IFRS requires;
  2. De-recognize assets and liabilities that don’t meet IFRS
  3. Reclassify assets, liabilities and equity;
  4. Apply IFRS measurements — IAS 12, Deferred Income Tax

Still unsure about IFRS vs. U.S. GAAP and whether it’s the right time for your company? Have more questions? You can contact Nazareth directly here.

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Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group.