Whether US companies are compelled to move to IFRS (International Reporting Standards) is still in the balance. The SEC shows signs of wavering (see last week’s news) but if it the move proceeds as planned there will be no shortage of people looking to gain economically from the change. Consultancies are positioning themselves to offer services but if the European experience is anything to go by then the transition is not quite as foreboding as some would have us believe. Gary Simon, FSN’s managing editor explains.
If the proposed changes to US reporting happen and listed companies are required to report in IFRS rather than US GAAP then there is undoubtedly a considerable change to take on board. But if the European experience is anything to go by the biggest impacts will not necessarily be around systems and processes although these will of course be affected.
In many ways, the US coming into line with IFRS at a relatively late stage confers a number of advantages. Controllers in the thick of the change in 2005 will remember that IFRS was very much a moveable feast and many solutions had to be developed ‘on the fly’ as initial standards were worked and re-worked as practical problems and unforeseen issues with interpretation emerged. Several years later, IFRS is a much more settled and the implications on public disclosure are more certain. Nevertheless, there will be the need to assess the precise consequences for earnings releases and balance sheet presentation of a new set of rules.
History shows that regulators are not too interested in the presentational problems leaving most companies and their auditors to work it out for themselves. Understandably, the issues varied from industry to industry with Financial Services being particularly badly affected by the uncertainty of some key standards at the time, such as IAS 39.
This time around most large US companies will have familiarity with IFRS reporting through overseas subsidiaries that report in IFRS as well as local GAAP. The overall impact is therefore less of an ordeal. Nevertheless, one of the biggest and earliest challenges for Group Finance departments will be getting to grips with the rules and what they mean for their own organisations.
This has implications not only for external disclosures but also for performance reporting internally. Favoured KPI’s (Key Performance Indicators) and other measures may be affected by a different basis of measurement. An early requirement is to understand the implications of IFRS on management reporting that previously relied on US-GAAP. Inevitably this leads to a reconciliation burden as finance managers seek to uncover where the differences lay and how to manage the communications, because the impacts also have an external dimension that needs to be explained away.
Once the finance function has a grip on the technical accounting impact and propagated that knowledge throughout the finance organisation across the globe there is then the challenge of determining the impact on systems and processes. What we learn from Europe is that the impact, though important, is relatively small and manageable. Most of the prominent consolidation and reporting tools of the day stood up well to the changes and generally proved to be sufficiently adaptable in reporting and configuration to cope with reconciliations, multi GAAP reporting and extra data elements.
The issue was not necessarily one of data complexity but more one of having the resources to maintain the systems in place which may not have changed very much since they were implemented. The changes related principally to the group reporting chart of accounts and the mappings from local reporting systems into the group pack.
