IFRS Emerging Again on Corporate Agendas As Companies Look Beyond The Economic Crisis

(The following article was contributed to Corporate Compliance Insights by Ms. Janice Patrisso, an Advisory partner with KPMG LLP. Ms. Patrisso can be contacted via telephone at 212.872.5603.)

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Projects that were placed on hold as companies weathered the economic downturn are slowly – and cautiously – coming back online. Others are being put in the queue to be reactivated on a number of fronts, including assessing their organization’s readiness for potential U.S. adoption of International Financial Reporting Standards (IFRS).

Securities and Exchange Commission (SEC) staff has been studying comment letters and responses to the SEC’s proposed roadmap on whether and, if so, how to move U.S. issuers to IFRS. The proposed roadmap calls for an SEC decision in 2011 that could lead the largest U.S. companies to begin using IFRS for 2014 calendar-year financial reporting periods.

Eyes are turning to the SEC’s anticipated re-deliberations. SEC Chairwoman Mary Schapiro has indicated support for a single set of global standards and has said that the SEC would take up the matter again this fall.

Transition Prep Work

Ideally, companies should prepare for a transition period of anywhere from one to four years, and possibly as much as five years. A recent KPMG survey of investors/analysts and financial statement preparers indicated that:

• Companies that have converted to IFRS in Europe and elsewhere have found that a comprehensive and detailed gap analysis, for example, is helpful to the conversion process. Almost half (48 percent) of preparers said their organizations have assessment plans in place to gauge the impact of IFRS.

• The majority of investor/analyst respondents felt that IFRS would result in a positive impact in both the attractiveness of U.S. capital markets to foreign investors (65 percent) as well as companies’ ability to raise cash (including from debt offerings) more easily from non-U.S. markets (55 percent).

The potential transition to IFRS by U.S. companies would present challenges, but it also would provide opportunities for companies that approach the transition as a process to strengthen their business as well as their information processes and financial-reporting systems.

A single set of high-quality global standards would also make it easier for investors to compare the financial statements of companies from different countries—which is increasingly important as investors can more readily invest in organizations listed on capital markets around the world.

Executives can get a better handle on their companies’ readiness to convert by making a few decisions in the short-term that can help them navigate the process of adoption of the global reporting standards. Many corporate leaders are soliciting information from throughout their organizations and from their external stakeholders on the following:

Challenges and Costs

IFRS conversion challenges will depend on a company’s size and scope. Most organizations will need to institute a company-wide assessment of the implications of a conversion.

It is clear, however, that the conversion to IFRS is not just an accounting exercise. Changes to a company’s accounting policies can affect its internal controls, cash management, IT services, contractual and compensation arrangements, tax compliance—almost everything that is part of its business operations.

CFOs will need to assemble a capable project-management team to take a holistic view of adopting IFRS. The team will need to be skilled in technical accounting, systems integration, process management, tax issues, and operations, such as procurement, as well as human resource skills that may range from compensation to training and investor communications.

A key question for CFOs is whether they want to wholly manage the process internally or bring in outside help.

Companies converting to IFRS will incur a one-time cost, which includes changing information systems and training of financial reporting and other personnel. However, the ongoing cost of compliance with IFRS would not be greater than the ongoing cost of compliance with U.S. GAAP. In fact, the ongoing cost may be lower, particularly for entities that have key stakeholders (e.g., venture partners, equity-method investees, subsidiaries) that already report using IFRS.

Will Financial Results Change?

While it is difficult to generalize whether companies’ net income would be higher or lower under IFRS, experience has shown that for many organizations the difference can be more than inconsequential. How much of a difference depends on a company’s specific transactions and events, its business practices, and the accounting policy elections it makes when adopting IFRS—both in first-time adoption and on an ongoing basis.

One key decision in this regard involves which of the two ends of the spectrum a company chooses when adopting IFRS:

• The “minimize the differences” approach: Using U.S. GAAP when it is acceptable under IFRS or

• The “clean sheet” view: taking the viewpoint that IFRS is an entirely new body of literature and that the company will not necessarily be anchored to U.S. GAAP.

CFOs may seek counsel from the CEO, COO, the audit committee of the board, and possibly outside organizations with IFRS experience to obtain perspectives on leading marketplace practices, approaches, experience with timelines and investor communication, etc.

Key Differences and Training

Generally speaking, IFRS standards themselves are no longer than the comparable U.S. standard. Some key differences, however, are that U.S. GAAP generally has more extensive implementation guidance and includes much more industry-specific guidance. IFRS generally offers less prescriptive implementation guidance, leaving more to the judgment of the preparer and auditor.

According to a survey of accounting faculty conducted this past summer by the American Accounting Association and KPMG, the first class of graduating seniors likely to have a substantial amount of IFRS education will be the class of 2014.

This means that accounting firms and companies may need to provide significant training for accounting professionals—at least in the short term. Once a national commitment is made to move to IFRS, university curricula can be modified so that the “next generation” of accountants will be IFRS trained. Additionally, once the short-term “learning curve” is dealt with, ongoing training (CPE) for accountants likewise would focus on IFRS.

As a practical matter, companies planning an IFRS conversion should ensure that they have professionals in-house with sufficient knowledge of the standards to help with early gap analyses and readiness assessments to address the initial questions of timing and philosophy.

Conclusion

We believe that a single set of global financial reporting standards is the right objective and an important one in today’s global economy with global capital markets. A carefully planned and managed IFRS implementation process with a clear understanding of what management and the board should expect can provide for a smoother transition to IFRS.

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Janice Patrisso, an Advisory partner with KPMG LLP, the audit, tax and advisory firm, is the firm’s IFRS National Leader. She can be reached at 212-872-5603.

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International’s member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

Tags: Accounting, financial reporting, GAAP, IFRS, International FInancial Reporting Standards, KPMG, sec