The Latest on The SEC’s Roadmap for IFRS Adoption
How Will IFRS Affect Your Organization
The SEC’s current roadmap, as of January 2011, contemplates a phased IFRS implementation timeframe of three waves of adoptions as follows:
- Large accelerated filers as early as 2015 with two years of comparatives of U.S. GAAP versus IFRS
- Accelerated filers as early as 2016 with two years of comparatives
- All other filers as early as 2017 with two years of comparatives
The transition from existing accounting standards to a set of new standards is more than just a technical accounting exercise with quantitative/financial impacts. The transition will affect systems and data, financial reporting processes and outputs, financial compliance controls and certification activities, business metrics and performance management systems, extent and depth of financial disclosures, staff education and training programs, as well as financial measurements.
While the exact magnitude of the impacts cannot yet be calculated, because of the ongoing activities to converge elements of IFRS and U.S. GAAP, some highlights of anticipated changes will be in the following areas:
1. Potential Financial impacts – Revenue, Leases, Financial Instruments and more
- Revenue – The IFRS standard for revenue (IAS 18) provides significantly less guidance than its U.S. GAAP counterpart. More judgement is needed leading to a variety of potential revenue outcomes. Thoughtful design will be needed to evaluate contract deliverables and issues such as the transfer of ownership and control triggering revenue recognition. System changes could be significant. Both FASB and the IASB are working at trying to address some of the larger revenue issues. Updates to this work are expected in the second half of 2011.
- Leases – FASB and the IASB are working to converge the accounting standards in the area of leases by mid 2011. At present IFRS uses a principles-based framework to classify lease types. Heavy emphasis is put on substance of the transaction over form. In many cases operating leases under GAAP could become finance leases under IFRS. Impacts could be felt on taxes and balance sheet ratios.
- Provisions – IFRS may trigger provision obligations sooner in many cases than under GAAP due to the “more likely than not” principle. Contracts and disputes will need to be evaluated carefully. As with leases, provision impacts could be in the areas of ratios and income taxes. The IASB has been working on changes to the relevant IFRS standard (IAS 37) for some time. 2011 may bring some clarity.
- Financial Instruments – There is significant effort underway by the IASB to strengthen and simplify critical elements of IAS 39 - Financial Instruments: Recognition and Measurement by the end of 2011. At present a wide variety of differences exist around classification of instruments, more transparency with respect to impairment calculations and disclosures, and simplification of hedge accounting while improving disclosures.
- Share-based Payments – The scope of IFRS is somewhat broader with respect to share-based payments and includes ESOPs. Different provisions could affect fair value calculations of compensation expenses and classification of grants. Potential income tax impacts. May need to consider changes to systems to track award details and calculations in greater detail.
- Inventories – LIFO measurement is not allowed under IFRS. IFRS instead uses the lower of cost or net realizable value (NRV). Inventory tracking systems may need to be updated. The financial impact particularly with respect to income taxes could be significant especially if your organization is currently using LIFO.
- And more – Many other areas are affected including impairment, fixed assets, business combinations, joint ventures, insurance contracts, employee benefits, financial statement presentation requirements, and more.
The lead times required to change Enterprise Resource Planning (ERP) systems can range from months to years. The potential adoption of IFRS, even an IFRS that is heavily converged in areas with U.S. GAAP, is likely to impact not only reporting structures but how individual transactions are captured and processed. Typical areas of IT impact include as fixed asset sub-ledgers, contract management and lease tracking systems, treasury and portfolio management systems, tracking of engineering and developments costs, and corporate and segment reporting. In addition, because of the need to provide comparative reporting between U.S. GAAP and IFRS, accounting and reporting systems will need to provide parallel reporting capabilities during the transition period.
3. Financial Compliance – Impact on Internal Controls over Financial Reporting and more
Whenever there is a change of accounting policies, and a ripple through to supporting processes and systems, there is a need to evaluate the impact on financial compliance and control activities. IFRS will bring significant changes in some sub-system areas, new financial reporting formats, new chart of account considerations, new accounting concepts that will need to be implemented in the field, and so on. In addition, the need to provide comparative reporting with dual IFRS and US GAAP reporting for a two year look-back period will require additional controls to ensure that accuracy of transactions. It should be anticipated that external auditors will take a keen interest in management’s attestation obligations under SOX 404 a) and will likely result in increased external reviews and costs in line with the auditor’s obligations under SOX 404 b).
4. Business Metrics – Need to Review Impacts on Compensation and Contractual Obligations
Changes in accounting policies and resulting financial metrics may have a significant impact on various contractual obligations – both internally and externally. Business and financial metrics may change under IFRS and management and staff compensation plans should be examined for any adverse effects. External obligations, such as banking debt covenants, may also be impacted by IFRS and need to be managed proactively.
5. Disclosures – A New Level of Discussion
The principles-based nature of IFRS can trigger the need for enhanced explanations to provide readers’ with sufficient information to effectively understand your company’s financial statements. This is particularly acute in the years of transition from GAAP to IFRS as the notes will need to be increased to discuss adjustments between the two different accounting standards. The legal implications of greater notes disclosure will also be an important consideration in the move to IFRS.