By Mike Arnoldy
September 14th, 2011
Imagine that it is December 2011 and the SEC has just announced their decision that the US will be adopting IFRS.
When I first started hearing about IFRS, many of the discussions with my colleagues centered on just completing the financial consolidations as we do today and then layering on a series of IFRS adjustments. As I have learned more about IFRS, I do not think this is an adequate approach—the changes required to do it correctly without adding time and resources to the monthly are much greater.
Without boring you with the minute details of the differences between US GAAP and IFRS, I’d say IFRS adoption will need to start with the transaction systems. IFRS has different approaches for things such as revenue recognition, valuation of assets, depreciation. Depending upon the results of the convergence efforts, these differences could remain or be resolved. My money is that some of the differences will remain. These items involve hundreds or thousands of transactions each month for a company. It may be acceptable for the very short term to book an IFRS adjustment on top, but the long term solution needs to have these transactions recorded in the source systems correctly using the new accounting principles.
Think about all of the processes that feed data from the sub systems like order entry or fixed assets. An IFRS project should include reviewing and possibly modifying these to conform to the new accounting principles. Think about all of the people in your company responsible for recording transactions in these sub systems or booking journal entries in the ledger systems. They all need to be educated and trained about the new accounting principles and how they impact the entries they are responsible for. The scope of this is not just the relatively small group of people in the corporate consolidation team, it includes hundreds of people across the company and around the world.
Because there are so many source systems involved and they are used by some many people, this will probably be the largest part of the IFRS adoption effort. There will be a lot of resources used to determine what to change, how to change it, when to change it and to actually implement the changes.
The bottom line is I would not want to record all of my transactions using one set of accounting standards, then do my reporting using another, relying on top side adjustments to handle the differences. I can think of no better to way to slow down my monthly close process then to have to add time and resources to do the analysis and make these adjustments.
At some point in the IFRS adoption process, the source systems need to be addressed. The best time to do that will vary from company to company and will be influenced about the method and timing the SEC chooses for IFRS adoption.