By Dmitri D. Shiry, CPA
Call it the next British Invasion. The clamor over the International Financial Reporting Standards (IFRS) published by the London-based International Accounting Standards Board could create a sea change in the way U.S. companies conduct financial reporting and other business operations.
This new wave in accounting will affect both large multinationals as well as mid-market companies with cross-border activities. In fact, virtually all organizations involved in financial reporting could be affected to some degree if IFRS becomes universal.
IFRS rules are already used by more than 100 countries, including the influential economies of the United Kingdom and Australia. Others coming on board include Israel this year, Chile and Korea in 2009, Brazil in 2010, and Canada in 2011. Among the Fortune Global 500, approximately 40 percent follow IFRS, while another 40 percent use U.S. GAAP. The remaining 20 percent use local GAAP. Many of the companies using local GAAP, though, are in countries moving to IFRS, including Canada and Brazil. Momentum is on the side of IFRS.
The trend has not gone unnoticed at home. Last August, the Securities and Exchange Commission put forth a concept release seeking opinion on whether U.S. issuers should be able to choose between IFRS or U.S. GAAP. Most comments supported the IFRS choice, which means SEC could take action this year to formalize the option. U.S. companies, therefore, could be using IFRS by 2010 or 2011.
American financial executives have IFRS on their radar. A Deloitte study of about 300 companies showed that 20 percent would consider adopting IFRS if given a choice. Almost two-thirds of those would consider adopting the international standard within the next three years.
Fueling this movement are the easy-to-understand benefits that a single standard will reduce complexity, improve efficiency, and increase transparency and comparability, in addition to enhancing tax planning. But there are also less obvious benefits. One is an opportunity to further reduce costs by changing silo-type accounting functions over to a shared-services model, one that features standardized training programs and the ability to develop accounting personnel throughout the globe.
Organizations may also enjoy a better controls environment because they can put one team in charge of all statutory reporting within the enterprise. This is a difficult proposition when organizations use multiple accounting standards that have to be manually converted from U.S. GAAP. Cash flow planning, too, can be improved for those companies paying dividends from subsidiaries located in different countries.
In addition to company-level benefits, larger positives will flow to the global economy. The investment community is demanding better quality financial information, and IFRS is perceived as an opportunity to compare companies across global industries. Similarly, a more global set of accounting rules will make it easier for companies and individuals to access foreign markets, thus stimulating investment and cross-border capital flow. Given current fears of a global economic downturn, such measures may gain even greater support by the markets.
What Should U.S. Companies Do?
Global acceptance of IFRS may be inevitable. If U.S. companies want to get ahead of the curve, management, most notably CFOs, CEOs, audit committees, and boards of directors, should consider the following actions.
Assess how the organization is exposed to IFRS - Does the organization have a parent company outside the U.S. reporting under IFRS? Does the company have investors outside the U.S., including those involved in joint ventures, using IFRS? Does the company have complex cross-border structures? Does the company operate in an industry in which the major players use IFRS?
Analyze the cost/benefits of adoption - Will adoption increase efficiencies in financial reporting? How long would it take the organization to assimilate IFRS in a controlled manner? Will the organization be ready if IFRS becomes optional or mandatory at a certain date?
Develop an implementation plan embracing different time scenarios - Plans should explore both a deliberate, phased implementation, and quick-strike approach in case of an IFRS mandate.
Transitioning to IFRS is more than a narrow accounting issue. The shift will look more like an enterprisewide effort, touching financial reporting systems, internal controls, taxes, treasury, cash management, legal, among others. Managed correctly, the conversion can bear fruit throughout the organization.
But take action sooner rather than later. Given the forces pushing IFRS acceptance, this British Invasion won’t exactly be a long and winding road.
Dmitri D. Shiry, CPA, is a partner with Deloitte in Pittsburgh, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at dshiry@deloitte.com.
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