Experis Finance & Accounting
Are you Ready
to Adopt IFRS?
On August 27, 2008, the Securities and Exchange Commission (SEC) proposed a roadmap
outlining milestones that need to be met before the SEC moves toward mandatory adoption
of International Financial Reporting Standards (IFRS) for all U.S. filers.
The proposed SEC roadmap provides an initial timeline, enabling U.S. issuers to begin
assessing the impact IFRS will have on their businesses and planning for an orderly transition.
To allow companies sufficient time to complete this major initiative, the SEC proposed 2014
as a guidepost for the mandatory transition to IFRS. Companies seeking to improve finance
operations or avoid another SOX-like fire drill will take full advantage of this timeline.
Background
The proposed roadmap continues to move the United States toward the goal of greater global
integration of financial markets. Based on comments received, discussion during recent
roundtables and pressure on U.S. market regulators, the SEC continues to move in the direction
of requiring U.S. issuers to file financial statements prepared using IFRS as issued by the
International Accounting Standards Board (IASB). According to the proposed roadmap, the SEC
will evaluate progress against these milestones in 2011. At that time, it will decide whether to
require mandatory use of IFRS as issued by the IASB beginning in 2014 and whether to expand
the group of companies permitted to adopt IFRS early. The proposed roadmap seeks feedback
on whether the SEC should stage mandatory adoption based on market capitalization. Largeaccelerated filers would be required to submit financial statements based on IFRS in 2014,
accelerated filers in 2015 and non-accelerated filers in 2016.
Companies looking to make this transition in a manner that captures opportunities for
business improvement and minimizes risks, will want to consider the lessons learned by
European companies that recently transitioned to IFRS. Research by the Institute of Chartered
Accountants in England and Wales (ICAEW) found that companies with operations in multiple
jurisdictions were able to leverage existing IFRS experience since many of them had worked with
these standards in their subsidiaries. In addition, they were better able to streamline operations
across locations. According to the ICAEW survey, a subset of companies identified procedures
that might have significantly lowered their IFRS implementation costs. These include:
••
Starting sooner
••
Improving staff training
••
Making a better initial assessment of the impact
••
Communicating better with subsidiaries
••
Managing the project better
Companies can begin now to address these issues as they prepare for the transition to IFRS.
Am I ready to adopt IFRS?
A transition to IFRS will have a broad and pervasive impact on companies — requiring resources
with diverse skill sets for implementation. For some companies the need to initiate planning
and preparation for this migration is obvious. For most, however, the decision will be based on
the careful analysis of a series of factors, including strategic priorities, the use of IFRS across
the company’s specific industry, the efficiency of current processes, the maturity of finance
technologies and the capabilities of key resources.
The questions below will help you assess your readiness for a transition to IFRS. Obviously,
they cannot replace what will surely be a nuanced decision-making process supported by
detailed and specific analysis. These questions, however, should spur discussions that will
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IFRS: Opportunity or Nightmare?
help you determine when to start transition efforts, scope those activities and identify potential
improvement opportunities that would strengthen current operations, laying a stronger
foundation for the eventual adoption of IFRS.
Transition to IFRS Spurred by IPO
One privately owned company sought outside expertise to transition from U.S.
GAAP to IFRS to prepare for an initial public offering on a foreign stock exchange.
The company’s private equity owners believed that listing on a foreign exchange
would provide an excellent exit strategy.
This example illustrates how companies can leverage IFRS to enhance
their ability to raise capital.
Strategy
Is senior management committed to building a global finance function
that creates business value?
Is senior management committed to taking advantage of the benefits of a truly global finance
function, or is the implementation of IFRS viewed as just another SEC-driven compliance
activity that will divert resources and attention away from the business? Helping top executives
understand the operational and risk management value of assessing and implementing IFRS will
ensure that appropriate resources are available for the transition effort. Building a global set of
policies and processes, enabled by a rationalized technology infrastructure, could pave the way
for greater comparability and benchmarking across business units and increase the company’s
flexibility to make improvements throughout the organization. This vision should be driven by
senior management.
Have you planned for the impact of IFRS on non-U.S. revenue growth?
Companies anticipating significant non-U.S. revenue growth should evaluate the need to provide
IFRS-based financial data in foreign markets for statutory or other operating purposes. Your
company may be required to provide or evaluate IFRS information shared with local business
partners to meet credit and other operational needs. A real opportunity exists to learn from these
business units and prepare to eliminate duplicative processes, systems and controls as more
jurisdictions adopt IFRS.
Have you built the impact of IFRS into capital allocation models?
Entities that use IFRS have greater access to foreign capital markets and investors — listing
securities on foreign markets becomes easier as does approaching foreign investors. In
addition, European companies that were more equity-based found adoption of IFRS enhanced
communication with investor groups and increased transparency and disclosures, improving
the quality of investor relations. Finally, a transition to IFRS will also affect the amount and
classification of equity on a company’s balance sheet. In the end, a transition to IFRS will provide
greater access to capital markets and change key ratios. Over the next several years, Chief
Financial Officers (CFOs) will want to understand and incorporate the effect of a transition to
IFRS into any major financing transaction or renegotiation of debt covenants or lending facilities.
IFRS: Opportunity or Nightmare?
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Have you incorporated IFRS into tax planning models?
International tax strategies are often based on financial accounts. Adopting IFRS will change
the financial statements and affect the allocation of assets between entities and related transfer
pricing policies. In addition, many non-U.S. jurisdictions derive tax compliance data based on
local accounting standards. As more non-U.S. jurisdictions adopt IFRS, the degree to which a
company’s accounting policies align with IFRS will determine its ability to streamline book-to-tax
reconciliations. The potential implementation of IFRS in the United States could influence these tax
strategies over the next several years. Companies will want to incorporate the impact of IFRS into
tax strategy plans today to avoid implementing approaches that will need to be overhauled
in the future.
Have you incorporated IFRS into strategic transaction models?
Differences in the valuation of financial, fixed and intangible assets may change the economics of
specific acquisition or divestiture transactions. Companies should include IFRS accounting in
financial models to avoid unanticipated surprises later. Given that FASB and the IASB have
recently issued harmonized standards on business combinations and the reporting of minority
interests, these transactions can build awareness of the two standards, encourage individuals
to become more familiar with them, and increase confidence in working with both standards.
In addition, since the United States will be the last major market to adopt IFRS, it is likely that a
company will acquire or sell to an entity with financial statements based on IFRS. Companies
planning a sale or purchase can use this experience to build IFRS capabilities by retaining
individuals experienced in IFRS and leverage accountants performing the related due diligence.
Industry
Are you monitoring whether competitors in your industry are preparing financial
statements based on IFRS?
Since specific industries face unique accounting issues, it can be extremely beneficial to
understand whether using IFRS results in favorable comparisons to other industry players.
For example, revenue recognition rules under IFRS may enable technology companies to
report revenue in earlier periods. Monitoring the financial statements of competitors prepared
under IFRS will assist companies in anticipating potential effects, both positive and negative,
and choosing accounting practices that enhance comparability with competitors.
Are you monitoring industry regulators for IFRS-based rule changes?
Certain industries operate under globally harmonized regulatory regimes that typically rely on
financial results for the calculation of key metrics. As the adoption of IFRS spreads across the
globe, companies in certain jurisdictions will gain specific advantages or become disadvantaged
under these regimes. For example, the global transition to Basel II enables financial institutions
to adopt risk-based capital requirements. If global competitors can leverage the emphasis on
fair market valuation under IFRS, along with Basel II, to reduce their capital requirements, U.S.
companies may suffer competitively. Companies should review the current and any proposed
future regulatory approaches of their industries and assess the impact of IFRS adoption in the
United States and abroad to determine if they need to petition regulators or adjust compliance
efforts to maintain global parity.
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IFRS: Opportunity or Nightmare?
Process
Have you implemented well-documented, global policies?
Are policies and procedures documented, current and able to withstand third-party scrutiny?
Just as with SOX, if companies have sound policies and procedures in place, the amount of
streamlining and consolidation work to implement IFRS will be significantly reduced. Good
policies and procedures are the foundation for assessing the impact of IFRS on the company
and gaining efficiencies from the globalization of the finance function.
Once a baseline set of policies and procedures is established, the migration to IFRS will require
companies to update internal policies and procedures to reflect the judgments required under
IFRS regarding the economic substance of transactions. At a recent IFRS roundtable hosted by
FASB, a global software company representative noted that the company’s impact assessment
identified a clear need to replace revenue recognition approaches that cross-referenced U.S.
rules with a set of practices. The assessment provided advanced warning to the company of
the need to update its current policies to reflect the principles-based IFRS.
Have you implemented consistent, streamlined global processes?
Consistent, global processes are the bridge between common policies and the centralization
of finance operations. Common processes also help companies increase the effectiveness
of internal benchmarking in identifying improvement opportunities and facilitating more rapid
implementation of process, technology and policy changes. Streamlining processes can yield
immediate efficiency and internal control benefits while simplifying the future transition to IFRS.
Have you centralized a significant portion of your financial operations?
Companies with centralized finance and control functions that have begun implementing
common accounting systems and processes will be able to reap the benefits of a more rapid
implementation of IFRS, leveraging the standards to further institutionalize this approach.
Centralization also speeds the selection and application of specific standards.
More complex and decentralized companies should have an increased urgency to assess the
implementation effort and establish the underpinnings for a common accounting platform,
including a standard chart of accounts. Those steps will often provide immediate benefits
in terms of streamlined processes and simplified controls, and better position companies to
migrate to IFRS when mandated. On the other hand, decentralized companies may have hidden
advantages, as IFRS skills are probably available in their foreign subsidiaries. Leveraging those
skills, experiences and existing policies and procedures can bring a global company quickly up
to speed on IFRS.
Have you reduced your time to close?
Monthly, companies will often spend considerable time converting national GAAP financial
statements of foreign subsidiaries to U.S. GAAP. This effort often includes related technology
and other support costs. Done properly, a transition to IFRS should enable companies to
reduce or eliminate these costs. In preparation for that transition, companies can make the
closing process more consistent across entities and consider automating the closing cycle.
By leveraging technologies such as consolidation tools or XBRL (eXtensible Business
Reporting Language) now, companies can streamline the flow of information from subsidiaries.
Taking these steps early will pave the way for greater efficiency once IFRS is implemented and
enable subsidiaries to provide more consistent data.
IFRS: Opportunity or Nightmare?
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IFRS: What’s In It
for Alpha, Inc.?
Let’s consider a large, global,
fictitious manufacturer – Alpha, Inc.,
and review the factors Alpha should
consider to determine whether
it is prepared to adopt IFRS:
••
Alpha competes with numerous
non-U.S. companies that report
using IFRS.
– Alpha should consider whether
it qualifies as an early adopter
under the proposed SEC rules
and determine if it wishes to
take that option.
••
Alpha is actively acquiring companies
in various markets.
– These activities may present an
opportunity to apply IFRS-based
economic models to the transaction, prepare non-financial
managers to use IFRS and
create settings for finance
staff to apply IFRS.
••
Alpha has more than 150
international entities and is likely
completing numerous local GAAP
and U.S. GAAP transitions.
– Alpha has the opportunity to
reduce the cost and effort
associated with those processes
by streamlining polices and
consolidating systems.
••
Approximately two-thirds of
Alpha’s revenue is non-U.S.
–Again, this is a likely indicator of
opportunities to streamline backoffice functions by leveraging a
common IFRS platform.
–If Alpha is planning to change
its tax strategy, implement new
systems or has control or business
performance issues with non-U.S.
entities, those items would build
an even stronger case for earlier
preparation for the adoption
of IFRS.
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IFRS: Opportunity or Nightmare?
Have you strengthened your company’s ability to make significant
accounting judgments efficiently?
Principles-based IFRS requires financial statement preparers to make
more accounting judgments. Companies need to strengthen controls over
areas requiring accounting judgments. If making accounting judgments
is a struggle today, it will only get more challenging under IFRS.
Regardless of the accounting standards, senior management and the
audit committee should establish an appropriate ethical tone across the
company regarding accounting judgments. Next, those responsible for
making these assessments need to implement frameworks for analyzing
decisions and documenting conclusions. Finally, internal controls
professionals should develop methods to review and validate those
approaches. Companies can use the time available before the adoption
of IFRS to solidify their approaches and methodologies for making
such judgments. Preparing to adopt IFRS earlier and running systems
and controls concurrently under U.S. GAAP and IFRS will increase
understanding regarding the effect of these judgments, and identify risk
management and control deficiencies before filing under IFRS becomes
mandatory. Running parallel for some time will increase the confidence of
the Chief Executive Officer and CFO when they are required to certify their
first financial statements filed using IFRS.
Under Sarbanes-Oxley, issuers are limited in the advice they can receive
from their audit firms. They must either hire staff or partner with an
experienced professional services firm that can make and support critical
accounting decisions. Locking in those relationships early will help to
prevent resource shortages, audit issues, material weaknesses and costly
disagreements with external auditors later.
Technology
Are you using the current releases of your accounting systems
with no plans to upgrade or make changes?
IFRS standards require companies to collect and use different information
than under U.S. GAAP. For example, inventory valuation impairment under
IFRS is based on a comparison between cost and net realizable value.
Implementation of new financial reporting software applications in the next
few years will likely require substantial changes again during a transition
to IFRS. As most systems have a seven- to ten-year lifespan, a system
implemented today will still be in production when companies are required
to begin filing under IFRS. Completing a system transition or upgrade now
with an eye toward future IFRS requirements reduces technology risks
associated with the eventual transition to IFRS and allows companies to
leverage IFRS-based features embedded in their major Enterprise Resource
Planning and financial systems. Companies can minimize rework by
building IFRS requirements into current application system projects.
Have you reduced your total number of accounting systems?
Companies can lessen the impact of the migration to IFRS by consolidating current systems.
This reduces maintenance costs and enables gains in operating efficiencies in the short-term
while decreasing the number of necessary data conversions during an IFRS transition.
Skills
Have you assessed the IFRS skills of key line and operational
staff members outside of finance?
Companies may focus on training finance personnel on IFRS, leaving business managers
untrained and unable to understand their internal reporting results. Companies should identify
who receives financial information and articulate a strategy for preparing key stakeholders
to understand and use it. This process can begin early as many managers and line leaders
will need IFRS skills to make competitive assessments, benchmark performance against
competitors and complete strategic transactions in foreign markets.
Have you assessed the availability of skills needed to implement IFRS?
Do you have personnel with the breadth of skills necessary to implement IFRS — technical
accounting, financial analysis, project management, process management, information
technology, tax, internal controls, etc.? It’s wise to pull teams together during the assessment
phase to cover the full range of issues, including regulatory and risk reporting requirements. This
will help you identify and address all potential implementation issues and ensure the company
has the required skills to manage the implementation. Since individuals with these skills may
become scarce as more companies transition to IFRS, recruiting skilled resources before
shortages occur will enable companies to obtain the talent, acclimate them to the corporate
culture and avoid critical project delays later.
Have you assessed the IFRS skills of the finance staff?
Are employees experienced in working with IFRS? Implementing a training plan now will
enable companies to prepare core financial employees for this transition and identify potential
skill-building opportunities by rotating employees from other regions.
Are you prepared to rotate staff members to leverage or build IFRS experience?
Many multinational companies have IFRS skill sets in their entities outside the United States.
That means companies should evaluate their employees to see whether moving work or
individuals can result in efficiencies. Putting programs in place to leverage that experience —
for example, rotating employees to roles inside the United States for a period of time — could
benefit the employee and the company and lower the overall implementation cost by reducing
dependence on outside resources. In addition, companies may be able to create centralized
resource centers on specific, complex accounting issues. Instead of needing hedging or
derivative experts in both New York and London to address local accounting standards, the
adoption of IFRS will enable companies to centralize this work.
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Categories of Readiness
Companies’ readiness to adopt IFRS usually falls into one of three categories.
Category 1: If you can answer yes or are very likely to answer yes in the near future to most
of the previous questions above, you are well positioned to adopt IFRS. Performing a high-level
impact assessment will confirm the overall implementation timeline and highlight additional ways
to optimize your finance function throughout the implementation.
Category 2: If you can answer yes to some of the questions, or the discussions describe your
plans for the future, a thorough impact assessment will enable you to understand the impact
of a transition to IFRS and highlight improvements that can speed the transition to IFRS and
selected strategic efforts that will enhance its benefits.
Category 3: If you answered no to most of these questions, you have considerable work
that needs to be done to prepare for a transition to IFRS when mandated by the SEC.
An impact assessment will help you identify the key projects that need to be completed in
advance of the transition to IFRS and action steps to mitigate the most significant risks.
Regardless of your current strategies and structure, an initial impact assessment can help you
determine when to start your transition and help you organize resources and your approach
so you can successfully and efficiently complete the effort while creating business benefits.
While not a complete list, companies should consider the questions as they devise their
strategies for leveraging the implementation of IFRS to build a global finance function and
preparing to file in the United States under IFRS. A broad-based, multifaceted assessment
covering technical accounting, policy and procedure, financial process, accounting system,
internal controls and staffing issues will allow companies to build a plan for this transition,
addressing critical technical accounting, training, communication and project management
questions.
Conclusion
Starting now to prepare for an orderly and staged approach to IFRS allows companies to take
advantage of the time available and avoid a SOX-like fire drill. Most accelerated filers completed
their initial-year SOX efforts with a “just do it” mentality that left companies cleaning up messes
and streamlining processes in ensuing years. The current IFRS timeline offers companies the
opportunity to begin the journey toward IFRS differently — allowing them to control the timelines,
resources and decision making, and avoiding the “under-the-gun” efforts that made SOX such a
negative experience.
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IFRS: Opportunity or Nightmare?
Companies should begin with a series of assessments to determine the impact to financial
statements, organizational readiness, policy consistency, etc. Based on those assessment
results, they can lay out a plan to train staff, develop and implement global policies, procedures
and processes, and convert the systems of specific entities before making a final transition
to IFRS.
As companies initiate their analysis of the effects of IFRS, it is important to consider not only
what the financial statements will look like, but also how IFRS affects the infrastructure used
to obtain those financial statements. The movement toward IFRS provides visionary finance
leaders with a reason to re-examine and simplify accounting policies, processes and
technologies across the enterprise. Companies can leverage IFRS to build a truly efficient
and flexible accounting infrastructure that streamlines cost, leverages global strengths and
enhances enterprisewide decision making.
How can Experis Finance & Accounting help?
We are a global provider of comprehensive financial reporting and technical accounting services,
including research, documentation, ongoing SEC reporting compliance and knowledge transfer.
Experis Finance & Accounting can provide clients with the skills required to assess and
implement IFRS – including:
•• Continuous controls monitoring
•• Technical accounting
•• Business performance management
•• Project management
•• Shared service center optimization
•• Policy and procedure review and development
•• Financial process improvement
•• Tax strategy and implementation
•• Technology planning
•• Risk management
••
Internal control assessment and implementation
Works Cited:
The Institute of Chartered Accountants in England and Wales. EU Implementation of IFRS
and the Fair Value Directive: A report for the European Commission. October 2007.
IFRS: Opportunity or Nightmare?
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About Experis
ExperisTM is the global leader in professional resourcing and project-based workforce
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Experis Finance & Accounting delivers pragmatic project solutions and professional
talent resourcing in the areas of risk advisory, tax and finance. We serve clients,
including Fortune 500 and Global 1000 companies, through highly-experienced
professionals working from offices worldwide.
experis.com
About ManpowerGroup
ManpowerGroupTM (NYSE: MAN), the world leader in innovative workforce solutions,
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Right Management®.
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IFRS: Opportunity or Nightmare?