CIOs have a new acronym to learn — and fast: IFRS.
U.S. companies are facing big changes in how they handle financial reporting, with the expected adoption of new accounting rules known as the International Financial Reporting Standards, or IFRS. And while fiscal concerns generally fall into the chief financial officer's domain, the expected accounting changes will affect IT, too.
“It's a CFO problem on Day 1. On Day 2, if the CIO or IT folks aren't involved in the project, then it will be one of the things that will end up on their plate for certain,” says Dwayne Cook, partner and practice leader for the Mid-Atlantic area at Tatum LLC, an executive services and consulting firm in Atlanta.
The accounting overhaul stems from the expected switch from the long-standing U.S. Generally Accepted Accounting Principles (GAAP) to the global IFRS model. Make no mistake: The switch to IFRS is complex. It will require more than just some tinkering to your company's financial software package. The adoption of IFRS will affect systems and processes throughout your organization, and preparing for it could take several years.
“You have to be doing the planning right now and find out where there's going to be an impact,” says Jane Fedorowicz, a professor of accounting and information systems at Bentley University in Waltham, Mass.
The U.S. Securities and Exchange Commission has set preliminary dates for the conversion, saying that U.S. publicly traded companies will need to use IFRS starting as early as 2014.
Because many countries have already adopted IFRS or plan to do so in the next few years, businesses with global operations will need to comply sooner. This includes U.S. firms with overseas offices, as well as U.S. businesses owned by foreign companies or traded on foreign stock exchanges. Indeed, some U.S. companies in those categories have already adopted the new standards.
IFRS at a Glance
Goal: The goal of the movement toward International Financial Reporting Standards is to have a single set of global accounting rules. Convergence: U.S. and international accounting boards have numerous “convergence” efforts under way to reduce the differences between U.S. Generally Accepted Accounting Principles and IFRS, such as their differing treatment of revenue recognition.
The gap: The greatest difference between IFRS and U.S. GAAP is that IFRS provides much less detail. The IFRS, which sets out principles, is about 2,500 pages long, whereas the more rules-based U.S. GAAP is about 17,000 pages.
Timeline: The SEC is expected to decide in 2011 whether to mandate the adoption of IFRS rules by U.S. companies, which would have several years to convert. According to the SEC's current timeline, the largest companies would start IFRS reporting in 2014, and all public companies would switch by 2016.
Status: Over 100 countries have already adopted IFRS, and that number will increase to more than 150 in 2011. Brazil, Canada and South Korea are expected to adopt IFRS in 2011, with Mexico on board in 2012.
Sources: American Institute of Certified Public Accountants; PricewaterhouseCoopers LLP; CFO.com; WebCPA.com
However, the SEC might not adopt IFRS as it stands today. Rather, it could adjust the standards to move them closer to the U.S. GAAP model, Cook says. This has left everyone guessing about what the standards might look like when they're adopted in the U.S.
Moreover, public companies aren't the only ones that need to focus on IFRS. Private companies that are thinking about going public someday or that get sold to a public company might opt to use IFRS too, Cook says. Private companies might also find that banks and private investors will push for statements based on IFRS so they only have to deal with one format for financial statements rather than different ones for public and private companies.
“IFRS looms in the horizon for most folks,” says Cook, who has worked with companies around the world as they've converted to IFRS.
As the U.S. moves forward with the expected IFRS adoption, companies are beginning to assess what it means for them and their systems. Cook says companies will have to change the way they record and report financial data because IFRS and U.S. GAAP rules differ regarding revenue recognition, compensation, fixed assets and inventory, for example.
Ken Gabriel, a Chicago-based partner in the performance and technology division of KPMG LLP, says he performed an accounting assessment with one company and found 103 differences between U.S. GAAP and IFRS in how data was recorded. Each of those differences represents a change that will be needed in the IT systems.