As the U.S. continues to transition toward International Financial Reporting Standards (IFRS), many business leaders are unaware of how the changes will impact their accounting and the fact that it could cost them millions.
“I don’t think most people are aware, but even the ones that are aware of it don’t believe it’s a reality. But it’s inevitable,” says Mark Leverette, manager in the assurance department at Burr Pilger Mayer.
Although the changes may not have a significant impact on day-to-day operations as businesses move away from U.S. Generally Accepted Accounting Principles (GAAP) and toward IFRS, the new standards will impact the way you report financial statements and how your contracts with vendors and customers may be structured.
“One of the main items to look at is the tax ramifications of this different accounting reporting standard,” Leverette says. “Now, taxes can be reported on a GAAP accrual basis and moving to IFRS would change your tax calculations.”
Smart Business spoke with Leverette about how to deal with the coming changes to accounting practices and how to minimize the disruption to your business by getting started now on the transition.
What does the transition to IFRS mean for U.S.-based businesses?
U.S. businesses are becoming worldlier, and they want to be able to have a seamless transition between being a U.S.-only company and being an international company. The way to account for different transactions guides your hand on how those transactions are formed and structured. For example, you might structure a contract so that you have revenue recognition in the U.S. one way, but your counterpart transacting with you may have different expense recognitions in another country. Under IFRS, all parties will be recognizing these transactions at the same period.
The major differences will be around revenue recognition, timing of expense recognition and equity transactions. The way you report under U.S. GAAP can be significantly different than the way you will report under IFRS. As we move into a period of increased mergers and acquisitions on a global scale, you’ll see that both accounting standards — GAAP and IFRS — will continue to change and develop.
IFRS is going to remove cross-border differences in financial statements and make it easier for investors to understand and compare the workings of U.S. companies versus foreign companies. Also, the current U.S. GAAP is a rules-based system that has more than 25,000 pages, while IFRS is principles-based and is currently at 2,500 pages of regulations.
The new reporting standards don’t go into effect for public companies until at least 2014, later for others, so why do business owners need to start preparing now?
Starting now gives you the opportunity to do this over a long period of time, especially since there is a road map to implementing IFRS some time in the future that is ever-changing. At this point, as the SEC and the Financial Accounting Standards Board continue their convergence from GAAP toward IFRS, it’s recommended that companies begin to get educated on why those transactions are happening and keep their fingers on the pulse of where IFRS will ultimately end up so that the changes don’t come as a surprise.
In the near term, businesses are starting to get concerned, but so far, most have been putting it out of their minds, thinking it’s too far away and too unlikely for the U.S. to move to a principles-based system. But the wait-and-see mentality is the wrong one to have. You have to realize that this is going to happen.
You don’t need to jump in headfirst and start making changes right now, but you should start reading articles and get a better understanding of when these changes are scheduled to take effect. To minimize disruptions later, start by training one or two people on your staff on this and allow them to report back about the proposed timeline and the major changes. Then, only as you get closer to the required transition date would you need to really ramp up and get everybody trained.
One thing to keep in mind is that comparative financial statements and footnote disclosures will be required for years prior to the implementation date. Therefore, companies should plan on aggregating the required information ahead of time, rather than having to perform a tedious look-back approach.
How much will it cost a business to make the transition to the new standards?
The cost of the transition can be significant, including educating your internal accounting staff and educating your sales force and operations on how to account for their transactions under IFRS. You also may have to invest in new accounting software and infrastructure in order to handle the new financial reporting standards.
If it’s a large company, you could be talking in the millions of dollars. For smaller companies, it will be a fraction of that, depending on how much education you’re required to give your staff, and the sophistication of the systems required in your industry.
Will companies be able to make the transition using only their own staff?
They could, but bringing in an expert will certainly make it easier. Even if you’re planning to go it alone, at the point that you’re going to do the full-fledged transition, you should bring in a consultant to verify that you’ve done it properly.
A consultant can also help you with the transition in implementing the new software and internal controls supporting your transactions.
Mark Leverette is a manager in the assurance department at Burr Pilger Mayer. Reach him at firstname.lastname@example.org or (415) 288-6206.