US GAAP to IFRS

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US GAAP to IFRS

  1. 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. 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. 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
  4. 4. and using IFRS, the company could identify the accounts that “Through providers such as Kelly Financial Resources, U.S. needed to be adjusted for compliance, evaluate the conversion’s companies can gain access to an international talent pool of impact on its existing financial, reporting and IT processes, and professionals who have worked comprehensively with the IFRS- develop action plans to implement the new reporting system. based accounting system,” says Gillan. These professionals have successfully helped other organizations make the transition cost- implementation c: Most European countries have adopted some effectively. version of IFRS. During Israel’s implementation of the standards, the country was required to report on their preparation activities conclusion as well as on the expected financial implications. The editor of The conversion to IFRS from U.S. GAAP will greatly impact U.S. The Accountant, a publication of the Institute of Certified Public companies’ existing accounting policies for financial instruments, Accountants in Israel, says that companies, auditors, analysts and deferred tax, pensions, provisions, special-purpose entities, banks will no doubt experience trying times as they adjust to the employee-share options, and more. To alleviate the many potential new language, but he also assures that it is worth it. Specifically, complexities and risks associated with the conversion, companies he estimates that the conversion will encourage more Israeli need to dedicate staff to the project. With an outsourced staffing companies to list on U.S. exchanges, as they will be able to carry provider, U.S. companies gain access to personnel who have out flotations more easily and at a higher value, making it easier for already successfully implemented IFRS while educating permanent them to raise capital. staff on the new standard’s requirements. With Kelly Financial To properly approach the migration to IFRS based on these global Resources, these companies even have the option of permanently experiences, U.S. organizations should first evaluate how the hiring this staff, ensuring that the company remains IFRS compliant implementation will potentially impact financial statements. By and successfully attracts finance in today’s increasingly global then reviewing the key differences between GAAP and IFRS, the marketplace. company can develop a strategic plan with the help of experts Kelly Financial Resources has experienced and knowledgeable in IFRS for compliance. In effect, the implementation optimizes recruiters who find talent in a number of disciplines in accounting reporting processes and increases business transparency to attract and finance fields, including public accounting, general accounting, investors. At the same time, the company benefits from economic payroll/billing, internal audit, tax, budgeting and cost accounting, growth as foreign companies increasingly list securities in the U.S. financial analysis, treasury, cash management, investor relations, mergers and acquisitions, and credit management. For more how companies Benefit from contract information about Kelly Financial Resources, visit Staffing www.kellyfinance.com. Professionals versed in IFRS not only help companies circumvent prospective risks and costly disruptions to operations during conversion, but also provide expert management throughout the resources process. With contract staffing, companies temporarily acquire a http://www.ifrs.com/updates/aicpa/ifrs_faq.html#q1 http://www.ifrs.com/updates/aicpa/Backgrounder_pdf.html supplemental team of financial professionals with independent http://www.cfo.com/article.cfm/10919122/c_3395216 expertise in areas such as valuation of contingencies, derivatives, http://www.cfo.com/article.cfm/10910052?f=related and defined benefit plans—on a flexible cost structure, as opposed http://www.cfo.com/article.cfm/12323586?f=search to hiring costly permanent staff. http://www.cfo.com/article.cfm/11288569?f=related http://www.kpmgifrsinstitute.com/documents/IFRS/10920081258328272008175029Th These knowledgeable professionals can start as soon as necessary, e_Effects_of_IFRS_on_Information_Systems082708.pdf avoiding downtime caused by transitioning existing staff to IFRS- http://www.tmcnet.com/usubmit/2008/09/11/3645404.htm dedicated efforts, and thereby facilitate the transition without http://www.reuters.com/article/pressRelease/idUS226850+22-May-2008+PRN20080522 disrupting normal operations. Of further benefit to the company, http://www.ifrs.com/overview/Financial_Management/IFRS_Tunnel.html reputable contract personnel can provide extensive on-the-job CFO Research Services, January 2004: Finance under Pressure: How CFOs do more with less http://www.deloitte.com/dtt/case_study/0,1005,cid%253D199929,00.html training on IFRS procedures for various departments, on critical http://www.pwc.com/lu/eng/about/ind/insurance_case.html subjects such as the momentum-gaining eXtensible Business http://www.ifrs.com/overview/General/Adopting_IFRS.html Reporting Language (XBRL), a technical language used to exchange business information, submit financial reports, and analyze corporate financial performance. The IASB’s XBRL Advisory Council (XAC) and Quality Review Team (XQRT) are currently driving the implementation of XBRL and IFRS through the use of XBRL. All trademarks are property of their respective owners. Kelly Financial Resources, A Business Unit of Kelly Services An Equal Opportunity Employer © 2008 Kelly Services, Inc. T2517 supply #1160 11/08

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