The change to IFRS (International Financial Reporting Standards) from U.S. GAAP (Generally Accepted Accounting Principles) has been looming on the horizon for years, leaving businesses unsure about whether they should make the switch sooner or later. But it’s finally time for audit committees and management teams to begin discussions to prepare for the far-reaching implications of the IFRS conversion.
The SEC has recommended a staged transition to implement IFRS reporting with a start in fiscal years ending on or after Dec. 15, 2015, for large, accelerated filers and subsequent years for accelerated filers and nonaccelerated filers, including smaller and mid-size reporting companies. This could result in an opening IFRS balance sheet of Jan. 1, 2013, for calendar-year reporting entities.
“It is important for audit committees to recognize not only that accounting differences between U.S. GAAP and IFRS could materially change a company’s operating results and shareholders’ equity, but also that IFRS requires much greater reliance on management’s judgment,” says Wayne Williams, a partner at Crowe Horwath LLP, specializing in audit and financial advisory.
Smart Business spoke to Williams about preparing for the transition to IFRS.
What should businesses first consider to make the transition?
Because IFRS includes fewer rules and less detailed guidance, it is critical that the audit committee and board members oversee and lead the transition through the conversion process. This will allow the audit committee to manage properly both stakeholder expectations and implementation costs.
When more than 7,000 European public companies converted from their local accounting principles to IFRS in 2005, they discovered that the conversion process requires anywhere from two to four years to execute well, from planning to full implementation.
Considering this time frame and the far-reaching aspects — and potential opportunities — of an IFRS conversion, now is the time for U.S. companies to 1) assess the potential impact of a requirement to report under IFRS, and 2) identify and, where possible, capitalize on the benefits of an eventual IFRS reporting mandate. Ideally, this process will include external auditors, as they will ultimately need to weigh in on the company’s IFRS financial statements, including the opening IFRS balance sheet.
What are the potential opportunities of an IFRS conversion?
IFRS is described as ‘principles-based’ as opposed to the more ‘rules-based’ U.S. GAAP and is more difficult to apply initially, since it offers few clear-cut answers to the accounting questions that inevitably arise. But this conceptual difference requires an increased focus on the proper definition of an organization’s accounting policies, which, in turn, will result in improved consistency and increased transparency of financial reporting. Businesses can tailor these policies to the unique circumstances of their business activities.
In addition, the use of a consistently applied global financial standard facilitates an apples-to-apples comparison when using financial data to make decisions. Such comparability benefits several parties, including:
• Banks that make loans across borders and operate internationally
• Vendors that sell on credit to buyers in other countries
• Credit rating agencies that operate internationally
• Entities considering long-term relationships with suppliers in other countries
• Private equity and VC firms that provide capital to businesses across borders
• Investors in businesses who are not involved in their day-to-day management
What additional responsibilities do executives and management teams face?
Now is the time for executives and audit committees to take a hard look at their company’s auditors to be sure they have the necessary knowledge and experience to guide the company through the process.
Management teams will need to make many critical assumptions and decisions during the conversion based on several factors: missing information and data needed to properly identify accounting differences, a lack of detailed guidance under the new basis of accounting, and potential errors in reporting under the old basis of accounting.
It’s also important to consider the accounting impact under both U.S. GAAP and IFRS of business transactions intended to take place between now and the anticipated date of the opening IFRS balance sheet to avoid any negative impact of those transactions when the financial statements are initially prepared and presented to the public under IFRS. Such transactions include major acquisitions and dispositions, new debt and lease agreements, and implementation of or revisions to employee stock ownership programs.
How should small and medium-size entities (SMEs) prepare?
The International Accounting Standards Board released ‘IFRS for SMEs,’ recognizing that users of private company financial statements have different needs than users of public company financial data. The standard comprises of about 230 pages (full IFRS runs about 2,800 pages) and is self-contained, meaning that it is not directly affected by any new or revised standards for full IFRS.
SMEs could enjoy some advantages from adopting the new standard, including simplified financial reporting. They should, however, take advantage of the training materials provided by the International Accounting Standards Board (IASB) before beginning the transition, and anticipate some hurdles, including cost of implementation.
Before making the decision to convert to IFRS for SMEs, companies should consult with their lenders and accounting advisers to determine how adoption of the standard would affect both their loan agreements and financial statements.
Wayne Williams is a partner at Crowe Horwath LLP who specializes in audit and financial advisory. Reach him at (214) 574-1017 or [email protected]