IFRS – Seeing Nothing New in the SEC Announcement is a Mirage
February 25, 2010

The US Securities and Exchange Commission’s (SEC) long awaited (and long anticipated) announcement delaying adoption of International Financial Reporting Standards (IFRS) until 2015 at the earliest came as no surprise. Nonetheless, I think companies need to start right now working out how they will make the change to IFRS and developing a five-year IT capital plan to support it. There’s a lot more than meets the eye in the Commission’s announcement.

The Commission is delaying implementation of the formal change from US-GAAP (Generally Accepted Accounting Principles) because there are still major differences between the basic approach to accounting as practiced in the US and the rest of the world. Over the past three decades, the Financial Accounting Standards Board (FASB), which is chartered by the SEC to administer US-GAAP, has shifted to more of a rules-based approach, whereas IFRS is more of a standards-based approach. The latter gives company accountants and external auditors greater leeway in classification and interpretation but places a heavy burden on companies to demonstrate that the results conform to the accounting principles. Rules-based systems are far more prescriptive, detailing exactly how specific conditions and contingencies are to be handled.

Many think accounting is an exact science but that confuses it with bookkeeping. As the saying goes: bookkeeping is a matter of facts; accounting is a matter of opinion. I’m not a big fan of rules-based systems because I believe different types of businesses need fundamentally different approaches of conveying the meaning of the bookkeeping data into an accurate and useful picture of the state of the company. Attempts to impose different sets of strict rules ultimately creates distortions. Endless tinkering with the rules has left US-GAAP a bit of a mess, in my judgment. The switch to IFRS is as much an attempt to achieve harmonization with international standards as it is to throw in the towel and give up on the increasingly unworkable set of rules FASB has created.

Yet, getting from a rules-based to a principles-based standard is not going to be easy, which is why the delay is taking place. Some – maybe most – finance executives in corporations will conclude they can now forget about IFRS for a couple of years and write-off calls-to-action as attempts by consultants and other self-interested parties to generate fees for themselves. While that last part is undeniable, there’s no reason to believe there’s nothing to be done in the near term. Consequently it’s not too early for finance executives to look into the impact that changes in accounting standards will have on their ERP and consolidation systems.

For one, the transition from US-GAAP to an international standard will not be a big bang. Instead, FASB and its counterpart, the International Accounting Standard Board (IASB), which administers IFRS, will be creating new standards in parallel that will supplant both existing US-GAAP and IFRS treatments. Some may be close to either US-GAAP or IFRS, while others will be something different. When it comes time to flip the switch and turn off US-GAAP most of the work is likely to be done. To be sure, the adoption of many new standards will have its greatest impact on accounting practices and processes but may require significant changes to a company’s ERP systems, especially ones that have been heavily customized over the years.

For another, companies that operate internationally will find themselves under increasing pressure to present the result of their non-US businesses to local authorities using IFRS. This means being able to automate the production of financial statement using two parallel statutory consolidation and reporting methodologies. Some corporations have the ability to do this already. Others will need to make some adjustments to their IT systems and processes to be able to support this, while still others will have to purchase entirely new software.

Another, less appreciated change that could take place sooner, rather than later, is the widespread adoption of IFRS by private companies that have no intention of going public anytime soon. Private corporations are not governed by the SEC and may be able to make the shift sooner. The IASB issued a directive on IFRS for small and medium size entities in 2009 to reduce the administrative burdens and cost, something that would be welcomed by midsize companies in the US. Finance executives in these firms should be looking into making the switch, especially if they can achieve savings in their audit costs over the years and be able to present their financial statements in a way that better reflects the true underlying economic results of the business. These corporations may or may not need to make substantial changes to their underlying ERP and consolidation systems. In any case, the IT dimension needs to be part of the overall assessment of whether and when private companies make the change.

So there is no no-news in the SEC’s delay in shutting down US-GAAP. Finance departments in public and private US corporations need to have a working group that keeps on top of the shifting accounting rules, understands the implications of these changes on their ERP, consolidation and other financial systems and manages a long-term IT capital plan that minimizes Finance operations costs, internal audit burdens and external audit fees.

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Regards,

Robert D. Kugel CFA - SVP Research


 

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