1. issues&trends
A Kelly finAnciAl resources® report
From GAAP to IFrS:
overcomInG StAFFInG chAllenGeS
Introduction
For years, the Securities and Exchange Commission (SEC) has the International Accounting Standards Board (IASB). The agreement
advocated efforts to develop a single set of high-quality, global essentially stated that the two groups would jointly develop accounting
accounting standards. Thus it came as no surprise when the SEC standards that could be used for domestic as well as international
unanimously voted on August 27, 2008 to issue a schedule of milestones financial reporting.
that would ultimately lead U.S. public companies to the acceptance of
The FASB and the IASB later established a plan to align the U.S.
the International Financial Reporting Standards (IFRS).
Generally Accepted Accounting Principles (GAAP) with the IFRS. The
As a major initial step toward cross-border accounting standards, in convergence would allow U.S. public companies to present financial
2002 the SEC announced its support of the Norwalk agreement, a statements under the same rules as foreign companies and standardize
memorandum of understanding between the U.S.-based accounting accounting standards across international subsidiaries. Aligning the two
standard-setting body, the Financial Accounting Standards Board plans would likely facilitate capital formation in the U.S. and stimulate
(FASB), and the London-based accounting standard-setting body, growth in today’s global economy.
2. What is IFrS? not Just the Financial Department
Adopted and developed by the IASB, IFRS is a set of principle- “To properly prepare for IFRS, U.S. companies must first understand
based accounting standards and interpretations. In contrast to that the shift will not only affect the accounting and financial
the more rules-based set of U.S. GAAP standards, IFRS contains departments, but will have resulting impacts on all aspects of the
substantially less detail and industry-specific instructions, requiring company’s operations,” says Mike Gillan, Regional Manager of
more professional judgment. For example, GAAP dedicates more Kelly Financial Resources®.
than 160 rules to revenue recognition alone. To further illustrate
Companies must educate preparers of financial statements, as
the difference in detail, IFRS fills around 2,000 pages, assuming the
well as preparers of tax returns, in the IFRS reporting method. As
size of a two-inch publication. GAAP runs around 25,000 pages,
internal users of financial accounting information, tax preparers
assuming the size of a nine-inch publication comprised of the FASB
will need to understand the differences between GAAP and IFRS
paperbacks of pronouncements and Emerging Issues Task Force
book methods, and how this difference affects the company. For
consensuses.
example, the tax department will need to determine how the
There are several significant differences between U.S. GAAP and company can continue to use its historical tax method.
IFRS:
“For the IT department, thorough planning is essential in order to
• IFRS does not allow the inventory costing method Last In First minimize conversion costs,” says Gillan. “It’s important to keep the
Out (LIFO). entire business, information systems portfolio, and IT governance
• IFRS features an alternate probability threshold and program in mind.” During implementation, the IT department is
measurement objective for contingencies. responsible not only for technical accounting issues, but also for
implementing, modifying, remapping, or reconfiguring systems
• IFRS requires only one step for asset impairment recognition
and processes to accommodate the changes in data, calculations,
in contrast to the two-step process under GAAP. Thus, IFRS
and reporting that result from conversion. Based on European
increases the likelihood of reporting asset impairment.
conversions, the IT department could incur as much as 50 percent
• IFRS does not allow the curing of debt covenant violations
of the total convergence cost.
after year’s end.
The shift will also greatly affect the HR department. Specifically,
Notably, companies must pay for the rights to republish GAAP text,
IFRS will change earnings, earnings per share, financial position,
as it contains proprietary, copyrighted information. Alternatively, the
and possibly the reported metrics used for income, revenue, and
IASB waives copyright on IFRS bare standards to allow countries to
net asset value. To ensure a smooth transition, Ernst & Young
write the text into their law.
recommends that compensation committees closely collaborate
With the globalization of capital markets, accounting leaders with accounting and management to understand the transition’s
worldwide assert that convergence to one set of international impact on remuneration. The firm also recommends that the HR
financial reporting standards is essential for fostering economic department secure personnel to manage the conversion, integrate
growth. In December 2007, the International Federation of seminars and professional development programs on IFRS into the
Accountants (IFAC) surveyed 143 professional accounting experts finance departments, and effectively communicate changes to the
from 91 countries about the importance of convergence for entire organization.
economic growth. Ninety percent reported that it was “very
U.S. companies can see how IFRS conversion can impact a business
important” or “important.” Merely 9 percent reported that it was
by looking at the experiences of a leading global automotive
only “somewhat important,” and 1 percent said it was not. Today,
manufacturer. Launching its conversion process in 2003, Daimler
more than 100 countries require or accept IFRS reporting, including
AG trained 3,000 employees, in departments from accounting and
the U.S., which now allows foreign private issuers to file U.S.
treasury to controlling, investor relations, and tax—just to craft
financial statements using IFRS without requiring reconciliation to
the internal guidelines for IFRS application, analyze the potential
GAAP.
impact of the new rules on performance measures, and reconfigure
SEC Chairman Christopher Cox recently proposed a timeline for its IT systems.
moving U.S. public companies toward IFRS acceptance. In 2010,
Additionally, the SEC notes in its 2007 Concept Release that IFRS
more than 100 large U.S. multinational public companies will be
adoption may generate an inundation of queries and comments
permitted to use IFRS. In 2011, the SEC will formally announce
from international securities regulators. “U.S. issuers with listings
whether adoption will be mandatory—the same year that Canadian,
in multiple securities markets could find more than one securities
Indian, and Japanese companies plan on adopting the international
regulator commenting upon their IFRS financial statements,”
standards. If the SEC opts to mandate IFRS—it plans on formally
the SEC says. “Because it is likely that not everyone will apply
announcing this decision in 2013—large public companies will be
accounting standards consistently or appropriately, securities
required to use IFRS in 2014, with all public companies following
regulators are developing infrastructure to identify and address
suit by 2016.
3. the application of IFRS globally.” In essence, U.S. companies need cash management activities, technology and financial reporting
to be prepared with personnel that can competently handle these systems, internal controls and processes, human resources and
international securities regulators. compensation, and asset valuation.
learning from the Past Why experienced Staffing is Key
With the introduction of the Sarbanes-Oxley Act (Sarbox) in Most company resources currently focus on maintaining and
2002—which basically rewrote the rules for corporate governance, strengthening their knowledge of U.S. GAAP requirements, which
disclosure, and reporting—a majority of U.S. companies learned will clearly need to change for the transition to IFRS. However,
that compliance is no small endeavor. To comply with Section reallocating current resources to address the conversion will leave
404 alone, the Financial Executives International (FEI) found that behind gaps in the personnel that continue to use GAAP. And the
companies expected to dedicate an average of 12,265 hours cost just to replace a mid- to high-level finance employee can be
internally, based on a survey it conducted in January 2004. Also for more than $50,000, according to FEI and Watson Wyatt. Moreover,
Section 404 compliance, these companies expected to contract organizations will need to reengineer the reallocated staff’s function
3,059 hours. For many companies, the implementation was an structure and ensure that they are highly trained in IFRS—at any
extremely costly experience, especially for those opting to hire a cost.
large-scale assurance, tax, and financial advisory consultant.
The reality of adopting IFRS while avoiding costly downtime can
Like Sarbox, it is essential that U.S. companies understand the be daunting for companies, regardless of geographical location.
efforts and resources required to ensure IFRS compliance. For In its survey of worldwide leaders in the accounting profession, the
instance, auditors estimate that it takes 18 to 24 months to install IFAC determined “application of new accounting standards” as the
an IFRS-based accounting system. Gillan notes that after evaluating number one issue facing accountants in business. However, there
their entire financial infrastructure, companies will also need time are professional staffing providers with a track record for successful
to figure out how to adapt it to the new system. Based on the implementations that U.S. companies can use. In effect, companies
experiences of European companies, the entire implementation eliminate prospective risks and costs during the transition. “A
could take about three years. smooth transition is crucial,” cautions Gillan. “An unsuccessful
implementation could lead to federal financial sanctions resulting
To minimize costs while maximizing efficiencies during IFRS
from accounting errors and—even more damaging—lack of
implementation, companies may want to consider a contract
consumer confidence and community investment.”
staffing provider. “Tapping into the specialized skill sets of outside
resources for assistance is a quick, cost-effective solution that Success Stories in IFrS Adoption
provides more extensive experience in IFRS accounting and Despite the challenges companies may face in making the
reporting than permanent staff,” says Gillan. transition, IFRS has been successfully implemented by numerous
organizations around the world.
readying for IFrS
Prior to the SEC’s 2010 decision on whether to mandate IFRS, implementation A: A global finance company with more than
it would be prudent for U.S. companies of all sizes to evaluate 100 subsidiaries in 70 countries wanted to consolidate, streamline,
convergence as early as possible. One of the priorities should be to and strengthen its statutory reporting processes to increase
provide staff with proper training on IFRS accounting and reporting. transparency into the organization. However, limited visibility into
the reporting processes and requirements clouded the ability to
Deloitte conducted a survey on IFRS in 2008, “Where Are We
determine the company’s existing risk exposure at the subsidiary
Today,” and found a considerable need for more IFRS-focused
level and opportunities to optimize reporting. With the help of
preparation and training. More than 60 percent of companies
a staffing provider experienced in IFRS, the company looked at
reported a lack of personnel with IFRS knowledge to handle
the “IFRS landscape” across the entire organization and assessed
conversion. In parallel, the SEC noted in its 2007 Concept Release
its readiness for conversion. Following implementation, the large
that a potential issue with convergence is limited experience in
company has seen improvements in its financial and tax reporting
preparing IFRS financial statements. Industry experts note that it
processes, treasury processes, and internal controls, as well as
is important for organizations to have professionals in place and
generated cost savings.
equipped with the right education and training to support this
initiative. Implementation B: To issue consolidated financial statements
under the IFRS framework as required by the EU, a major insurance
Gillan suggests that companies also need to develop an
company in Luxembourg wanted to implement a financial reporting
implementation roadmap to properly assess IFRS adoption. The
process according to IFRS rules. Initially, outsourced experts in IFRS
plan should establish a timeline of events up until the expected
performed a review to determine the potential impact of the new
adoption date while considering the effects on areas other
standards on the company’s financial statements. After seeing the
than technical accounting, such as tax structure, treasury and
chief differences between using the existing accounting principles
