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Saturday, October 16, 2010

IFRS conversion: The early bird catches the most benefits

What to know about the conversion to IFRS and benefits of converting early

The question today is no longer if  IFRS will replace U.S. GAAP, but when it will happen — and an answer to that question is expected soon.

Any day now the SEC may issue its timetable for requiring U.S. companies to use IFRS, and some companies could be required to follow IFRS as soon as 2013.

The SEC also is expected to allow companies to adopt IFRS earlier than the deadline, likely in 2011. For many companies, early conversion will be a smart move, so CFOs should start thinking now about whether their companies will benefit.

Why Convert Early

There are several potential benefits of early conversion.

For many companies with global operations, one advantage is obvious: They’ll no longer have to maintain dual accounting systems. Many countries are already following IFRS, including members of the European Union. Economic powerhouses Canada, India and Japan are planning to start following IFRS in 2011.

Early conversion can also provide strategic benefits. Transparency is a key focus of IFRS, so it should provide a more realistic financial picture of the company, which can help not only investors, but also executives, make smarter decisions.

For many companies, the biggest benefit of starting to convert to IFRS early will be that it allows time to plan so that the transition can be as smooth as possible. The switch to IFRS presents many challenges. By starting early, the CFO can help the company overcome these challenges, control risk and take advantage of the opportunities associated with IFRS.

Conversion Challenges

The overall challenge is simply that IFRS is very different from U.S. GAAP. Because IFRS is new and principles-based, there are few clear-cut answers, making it harder to apply, at least initially. Companies will have to look more at the big picture to determine how to account for many items, and accounting staff will need to learn a new accounting system.

Specific differences between IFRS and U.S. GAAP create additional challenges. For example, under U.S. GAAP, companies must expense research and development costs, but under IFRS, they’re prohibited from expensing development costs and must instead capitalize them. This change will artificially boost profits short-term.

Similarly, IFRS prohibits the last in, first (LIFO) inventory accounting method, which is commonly used under U.S. GAAP. This prohibition will force many companies to use the first in, first out (FIFO) method instead. In a volatile market, FIFO creates a mismatch on the income statement between selling price and cost of sales.

So in addition to making the accounting changes necessary to comply with IFRS, companies also must prepare for how these changes will affect the financial results they’re reporting.

Ensuring a Smooth Transition

To convert to IFRS, companies will have to:

  • Redo all of their policies to be in conformance
  • Make changes to technology infrastructure
  • Train accounting staff to understand how to account for transactions differently
  • Redo covenants with banks and other contracts because changes to the financial statements due to IFRS could negatively affect them
  • Make changes to business processes where necessary to address other issues created by the changes to financial statements
  • Communicate with stakeholders

There are several steps you, as CFO, can take to help ensure a smooth transition:

  • Familiarize yourself with the key differences between U.S. GAAP and IFRS
  • Assess how the differences affect your accounting policies and whether there are any IFRS requirements you’re already following
  • Assess how the differences affect your tax accounting methods and tax positions
  • Address first-time adoption issues and available exemptions
  • Look at what changes to technology infrastructure you’ll have to make
  • Develop a training plan for your accounting staff
  • Review covenants with banks and other contracts to determine how they’ll be affected
  • Assess whether you’ll need to make any changes to your business processes
  • Determine how stakeholders will be affected and create a stakeholder communication plan

An outside expert can also be invaluable in the conversion process. For example, an external accounting firm can assess the impact of IFRS on your company, develop new accounting policies, provide training or even serve as a back office, handling the IFRS reporting.

Outside tax experts can help assess the tax impact of the conversion. Online resources are also available for training. A marketing or PR firm can assist with stakeholder communication. No single approach will be right for all companies, but a wide variety of options are available.

Don’t Wait

The SEC, as of this writing, has yet to permit U.S. companies to report under IFRS. But that doesn’t mean you should wait to start planning for the conversion. By starting to plan now, you’ll be better prepared when the time comes, which may provide your company with a host of benefits.

If you have questions about how IFRS will affect your company or would like assistance with the conversion process, please contact us. We can help you create as smooth a transition as possible and make the most of the opportunities IFRS offers.


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