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Friday, November 13, 2009

The Impact of IFRS for EPM Reporting – Part 1

The question isn’t if the US will adopt new IFRS accounting standards, it is when.

Brief Summary of IFRS

The SEC is reviewing a combination of IFRS and U.S. GAAP to produce a common global standard for reporting financial data. Across the globe many companies in hundreds of countries have successfully adopted IFRS, and by 2012 every major capital market is scheduled to have adopted IFRS, except the United States. The challenge for many companies is that global investors are interested in a single set of financial statements and measures that are consistent across borders and languages. The current expectation for the United States is to adopt IFRS by 2014 two years behind the rest of the world.


Here are some of the challenges of transitioning to IFRS for U.S. GAAP companies:

  • Sourcing the right information
  • New data required by IFRS
  • New accounting definitions
  • New valuations for balance sheet and income statement lines
  • More detailed overseas operations’ reporting
  • More detailed segment reporting
  • Increased disclosure obligations
  • Standardized data definitions across the organization
  • Preventive and detective controls
  • Reduced reliance on spreadsheets to support the collection, consolidation, and reporting of information
  • Conversion of historical data for comparability and trending

In addition, during the process of converting to IFRS there will be an interim phase in which IFRS and local GAAP requirements will be required. Therefore, public companies would be required to maintain multiple reporting methodologies until IFRS becomes fully adopted.

Potential changes for Employees and Operations

Corporate culture has long conformed to the necessities of US GAAP, with more than just financial reporting being impacted. The first example is sales strategies, although companies might not have explicitly designed their sales processes around US GAAP requirements, many compensate their sales staff based on revenue recorded or product shipped, essentially designing their sales commission program around financial reporting considerations. The new IFRS reporting requirements could change all that. Second, businesses may also decide to restructure their compensation structures, especially if compensation is equity-based or driven by performance. These are just a couple of the changes for employees to consider when transitioning to IFRS.

In addition to employees, the operations of an organization may need to change as companies begin to adopt the new reporting standard throughout the business; some examples are the data sources and data repositories. There may be a need for new processes control, new treasury strategies and additional IT infrastructure changes to facilitate new systems or upgrades. All these items will drive companies to enhance resources by hiring new personnel or begin retraining in- house staff. So, planning for these changes becomes a crucial part of the operation of a company during the transition to IFRS

Major differences between IFRS and US GAAP:

  • Financial Statement Presentation
  • Consolidations, Joint Venture Accounting, and Equity Method Investees
  • Business Combinations
  • Inventory
  • Intangible assets
  • Long-lived assets
  • Impairment of assets
  • Leases
  • Financial Instruments
  • Foreign Currency Matters
  • Income Taxes
  • Provisions and contingencies
  • Revenue Recognition
  • Share-based payments
  • Research & Development
  • Employee benefits other than share-based payments
  • Segment reporting
  • Earnings per Share
  • Interim Financial Reporting
  • Subsequent Events
  • Related Parties

In the future I’ll provide additional detail regarding each difference to help us understand the changes and how they relate to the EPM environment.


Anonymous said...

Excellent post. It would be ideal to also provide the data sources for this information.
Jorge Anicama