International Financial Reporting Standards For U.S. Companies
Audit and Enterprise Risk ServicesInternational Financial Reporting Standardsfor U.S. Companies:Planning for IFRS AdoptionMore U.S. executives—within finance and beyond—arebeginning to look closely at the movement towardInternational Financial Reporting Standards (IFRS) as a basis forfinancial reporting. This global trend is not easily dismissed:IFRS is here.Today, the Securities and Exchange Commission (SEC) allowsforeign companies in the United States the ability to use IFRSfor SEC reporting purposes. In November 2007, the SECeliminated the longstanding requirement to reconcile financialstatements to U.S. Generally Accepted Accounting Principles(U.S. GAAP) for those foreign private issuers that use IFRS, aspublished by the International Accounting Standards Board(IASB). Now, the SEC is focusing on IFRS for domestic U.S.companies—with further announcements expected soon.A shift to IFRS here in the U.S is expected to occur throughthe full adoption of IFRS rather than through a gradualconvergence of IFRS and U.S. GAAP—perhaps with theexception of certain long-standing convergence projects.Historically, convergence has involved incremental changes toaccounting standards. Given the increased activity around IFRSin the United States, it is likely that the ultimate conversion toIFRS within the next several years will overtake the need forfurther convergence.Charged with leading the finance organization, CFOs mustkeep current on important accounting trends that raise bothopportunity and risk for the organization. Developing aresponse and plan around IFRS implementation is becomingincreasingly important to help the organization navigatethrough considerable change. Having weighed the challengesand benefits associated with IFRS, some companies—especiallythose with global operations—have taken steps towarddeveloping and implementing an IFRS strategy that positionsthem for the future.So, how can company leaders—especially in finance—begin toplan properly for tomorrow’s IFRS world?Planning for IFRS Implementation: Pre-workCompany leaders need to get familiar with “big picture” issuesto fully understand the impact a move to IFRS will have on theirorganizations. Gaining this perspective will help determinean approach that coordinates key constituents, considers theorganization’s current state of readiness, and identifies prioritiesto inform the development of an eventual IFRS implementationstrategy. This pre-work is the initial stage for leaders to get abetter sense of the type of change the organization can expectwhen it’s time to implement IFRS.Whether a company ultimately decides to address IFRS from aperspective of minimizing differences with U.S. GAAP or resolvesto take a “fresh start” route (preparing to apply IFRS as if it hadalways used the standards), companies will need to go throughinitial planning.Understanding the impact of IFRS on various aspectsof a company is important to preparing a successfulimplementation. The planning process typically includesassessing technical accounting, tax, internal processesand statutory reporting, technology infrastructure andorganizational issues. This publication presents an overviewfor each of these areas followed by practical steps to helpexecutives engage in the planning process today.Table of Contents - Find it fastPlanning for IFRS Implementation: Pre-work.1Technical Accounting.2Tax.2Internal Processes and Statutory Reporting:.3Technology Infrastructure.4Organizational Issues.4Strategy and Timeline for IFRS Implementation.5
Technical AccountingCFOs, controllers, and chief accounting officers should expecttechnical accounting challenges when moving from U.S. GAAPto IFRS. Companies will need to take into account more thanmeasurable differences between the two sets of standards—itwill also be necessary to develop a framework and approachthat can be used to determine appropriate accounting. Keyconsiderations include: Principles versus rules. A move to principles-based accountingwill require a change in mindset and approach. In U.S.GAAP, the volume of rules is large—perhaps larger than anyother GAAP in the world. However, once the correct rule isidentified, there should be a sound accounting outcome.IFRS has fewer detailed rules and more judgment is generallyrequired to determine how to account for a transaction.Under IFRS, there is increased focus on the substance oftransactions. Evaluating whether the accounting presentationreflects the economic reality and ensuring that similartransactions are accounted for consistently are importantsteps to determining the appropriate treatment under IFRS.Public company CEOs and CFOs will be required to makecertifications on IFRS financial statements in filings with theSEC. Companies will need to ensure that when judgmentsare challenged they can sufficiently support them. Application considerations. Accounting differences betweenIFRS and U.S. GAAP will vary. Some differences will besignificant; others will be seen in the details, or depend onthe company’s industry. Accounting alternatives should beevaluated from a global perspective – not only for prospectivepolicy-setting, but also in making elections and applyingexemptions related to retrospective IFRS application uponinitial adoption. Those companies that approach IFRS from aperspective of minimizing differences with U.S. GAAP mayrecord adjustments only where required.Others that take the “fresh start” will consider adopting newaccounting policies in additional areas where the outcome is morerepresentative of the underlying economics. Overall, the technicalaccounting aspects of IFRS adoption will be challenging. First time adoption considerations. IFRS 1, First-time Adoptionof International Financial Reporting Standards, grants limitedexemptions from the need to comply with certain aspectsof IFRS upon initial adoption, where the cost of compliancecould potentially exceed the benefits to users of financialstatements. Exemptions exist in many areas, such as businesscombinations, share-based payments, and certain aspects ofaccounting for financial instruments. Companies will need todecide which exemptions are the appropriate ones to use.Technical accounting action steps for financialexecutives: Understand key areas of IFRS and U.S. GAAP differences.There will be many differences between U.S. GAAP and IFRSto assess. Some will require minor modifications and otherswill have a significant impact on the organization. Identifyingthese differences and determining the level of effort requiredby the organization to address these changes is an importantstep in developing an IFRS conversion strategy. Determine the accounting policy impact of differences. Thedifferences between IFRS and U.S. GAAP may also impactmany current accounting policies. Some areas of accountingwill require different policies under IFRS as compared withU.S. GAAP due to a clear difference in standards. In otherareas, there will be no differences and in others still, theremay or may not be differences, depending on a company’schoices under IFRS. Understanding and addressing thenecessary policy changes will also be an important steptowards conversion.TaxUnderstanding tax consequences of IFRS will be important forfinance and tax executives to consider – if they’d like to helpsupport appropriate tax results for the organization down theroad. As with any tax accounting issue, the effort for an IFRSconversion will require close collaboration between finance andtax departments. Key considerations include: Conversion timing. Consider developments around FinancialAccounting Standard No. 109, Accounting for Income Taxes(FAS 109). Should the FASB revise FAS 109, changes to thefinancial reporting of income taxes may occur in two stages:first the adoption of a revised FAS 109 standard for reportingunder U.S. GAAP resulting from the convergence projectunderway by the IASB and FASB; and second the conversion toIAS 12, Income Taxes, in place of FAS 109 as a result of a fullconversion to IFRS. In the absence of such a revision, adoptionof IAS 12 would occur as part of a full conversion. Differences in Accounting for Income Taxes. Although IAS 12and FAS 109 have much in common, differences currentlyexist between the two standards. Many of these differencesare expected to be eliminated as a result of the joint IASB/FASB convergence effort. However, some areas of divergencewill remain, including, for example, uncertain tax positions,leveraged leases, and deferred taxes related to share-basedpayments. Tax accounting methods. Companies that make the most ofa conversion to IFRS will approach the undertaking as morethan a mere “IAS 12 vs. FAS 109” exercise. It is importantto address the tax consequences of the pre-tax differencesbetween IFRS and local GAAP because a conversion to IFRSrequires changes to several financial accounting methods.Since the starting point in most jurisdictions for thecalculation of taxable income is book income as reportedin accordance with local GAAP, companies may need to reevaluate their existing tax accounting methods.2
Global tax planning. Global tax planning may need to berevisited to address the potential changes associated withconversion timetables in all jurisdictions and ultimately a full IFRSglobal conversion. For example, tax planning in connection withIFRS should consider changes in the global effective tax rate thatmay arise as a result of the following: The requirement under IAS 12 rather than FAS109 to recognize both current and deferred taxes onthe intercompany sale of inventory and other assets. The requirement under IAS 12 to recognize deferredtaxes on exchange rate fluctuations for temporarydifferences of foreign subsidiaries that use the U.S. dollaras their functional currency.Conversion and convergence. These two words sound alike, buthave very different meanings. Conversion is the overall transitionto a new set of accounting standards; convergence is the rewriteof one accounting standard at a time. What some people may notrealize is that conversion and convergence may come at different points of time. The timeline for U.S. companies to voluntarilyconvert to IFRS may occur as early as 2011 and as early as 2013 formandatory conversion. The timeline for convergence or changesto standards for Accounting for Income Taxes under IFRS or U.S.GAAP, however, could apply sooner. Thus, companies will need toplan for not only the timing of conversion and convergence, butalso the interplay of other standards with their income tax planning.A conversion to IFRS may also impact the calculation of theparent’s basis in its foreign subsidiaries and thereby influencecash repatriation plans.Proper planning should involve an analysis of the tax resultsboth before and after an IFRS conversion. Also, to the extentthe realization of a tax benefit depends on the pre-tax statutorybooks, consideration should be given to the desirability andtiming of conversion for individual legal entities and jurisdictions.Finally, IFRS conversion is a global phenomenon. As IFRS standardsconverge with U.S. GAAP, the change impacts all entities injurisdictions filing under IFRS. To the extent that local tax rules arebased on accounting standards, there may be a correspondingimpact on the tax attributes of a subsidiary in that jurisdiction. Andthe U.S. is not the only jurisdiction contemplating convergencewith, or conversion to, IFRS standards. Japan is undertaking severalprojects to converge its standards with IFRS. Any time a local orglobal accounting standard changes, there is a potential for animpact on tax attributes of the entities in those jurisdictions.Tax action steps for finance and tax leaders to address: Determine changes to key tax positions, provisions,processes, and technology. An IFRS tax assessmentis likely to identify tax positions and tax accountingmethods that may be impacted by changes to financialreporting standards. Tax professionals should considerperforming a high level impact analysis that highlightspotential changes to the tax provision in the followingareas: Deferred income tax Current income tax on a country-by-county basis Indirect tax (VAT, GST, etc.) Based on the results of this analysis, companies can beginto assess the impact of conversion on tax processes andtechnology. Identify and inventory tax issues and opportunities. Anotherimportant step in a conversion to IFRS involves identificationof first-time adoption issues, such as conversion electionsavailable under transitional tax rules and other IFRSaccounting standards that may have an impact. Taking aninventory of tax issues and planning opportunities, as well asdeveloping a roadmap to address overall IFRS tax conversionissues, will be important to capture the tax related costsand benefits associated with a conversion. Additionally, awell thought out plan will help prioritize and incorporatesignificant tax issues into the overall conversion timeline.Internal Processes and Statutory Reporting:A move towards a single set of global accounting standardsis expected to lead to greater efficiency and internal controlimprovements for multinational companies. To make this move andto realize benefits, a number of financial reporting processes willlikely have to be evaluated and/or fine-tuned. Key considerationsinclude: Close and Consolidation. A move to IFRS may require changesin charts of accounts to ensure relevant information is capturedappropriately. It could involve changing current corporateconsolidation processes, or adjusting the existing close calendar. Management Reporting. It is likely that metrics used as thebasis for measuring performance in management reportingwill be impacted by a change to IFRS. There may be a need todevelop new performance metrics to measure performanceand benchmark against competitors. Internal Controls. A move to a new basis of accounting,including a shift from rules to principles and changes tofinancial systems, will affect the internal control environment.Documentation will need to be updated and processes put inplace to mitigate new risks. Statutory Reporting. For many U.S.-based multinational companies, IFRS statutory reporting is already a reality at somesubsidiaries. Historically, statutory reporting has primarily beenaccomplished at international locations and has received lessattention at a corporate level. However, in an IFRS environment,the potential for adoption of a consistent set of accounting standards at many locations, causes a need for consistent applicationthroughout the organization — it also creates an opportunity forstandardizing and centralizing statutory reporting activities.Internal processes and statutory reporting action steps: Take an IFRS inventory. Inventory your current IFRS reportingrequirements and locations to understand the extent towhich you may already be reporting under IFRS, or whereit is now permissible, and identify the resources you havewithin your organization to assist in the IFRS effort. Review IFRS application. It is also important to assess howconsistently IFRS accounting policies are applied at all IFRSreporting locations.3
Technology Infrastructure:Changes in accounting policies and financial reporting processescan also have a significant impact on a company’s financial systemsand reporting infrastructure. These changes may require someadjustments to financial reporting systems, existing interfaces andunderlying databases to incorporate specific data to support IFRSreporting. CFOs will need to collaborate with their IT counterpartsto review systems implications of IFRS. Key considerations include: Upstream Systems. The transition from local GAAPs to IFRScan often result in additional reporting requirements incomplex areas such as taxes, financial instruments, sharebased payments and fixed assets, to name a few. Not only maysystem adjustments be necessary to address these complexareas, but also modifications to the interfaces between thesesource systems and the general ledger may also be required.In instances where this information is currently being gatheredthrough the use of complex spreadsheets, the adoption of IFRSmay serve as a catalyst that some companies may need to bringabout long overdue updates to these processes and make criticaladjustments for supporting source systems. General Ledger. IFRS conversions may require changes to thechart of accounts and modifications to capture IFRS-specificdata requirements. In addition, during the transition to IFRS,general ledger reporting will likely need to accommodatemultiple ledgers (under U.S. GAAP and IFRS) and themaintenance of multiple ledger structures during transitionwill require planning. In the long term however, conversionscan also provide the opportunity to streamline your financialreporting systems by reducing the number of general ledgerspreviously required under a local GAAP reporting structure. Reporting Data Warehouse. Current systems may not have thefunctionality to handle IFRS requirements, so changes in financialinformation requirements due to IFRS should be identified – andthe impact of these requirements on the existing data modelsshould be assessed. Valuation systems and actuarial models willalso need to be evaluated to accommodate IFRS changes. Downstream Reporting. The conversion to IFRS can also resultin changes to the number of consolidated entities, mappingstructures and financial statement reporting formats, all of whichwill require adjustments to the consolidation system. Externalreporting templates will need to be evaluated to identify changesnecessary to support increased or different disclosures under IFRS.Technology infrastructure action steps for CFOs andIT leaders to discuss: Determine IFRS impact on technical infrastructure. Once thescope and extent of technical accounting differences havebeen identified, an important next step is determining theimpact on information systems and system interfaces. IFRScan have broad implications on front end systems, generalledgers, sub-ledgers and reporting applications that may allneed to be evaluated as part of an impact analysis. Identify the impact on existing system projects. As newsystems projects are scoped and planned, it is important toalign these project requirements with the likely impact ofIFRS reporting.Organizational Issues:Organizational changes that are this pervasive require planning,communication, and training throughout the organization.Another important aspect of the planning process is consideringorganizational issues that, when identified up front, can helppave the way and support the eventual IFRS implementation.Key considerations for human resources and finance leaders toreview include: Organizational Readiness. An important step to assessing theimpact of IFRS is to understand the company’s current awarenessof IFRS and determine what type of education program willbe needed. In addition to having an internal communicationstrategy, other awareness-building activities, such as executivebriefing sessions and workshops, should also be considered tohelp develop consensus regarding IFRS initiatives. Training and Learning. IFRS training should extend beyondthe technical accounting personnel and may pose asignificant challenge for organizations. A conversion to IFRSwill require stakeholders throughout the company to betrained appropriately. This will require training or workshopsto address ongoing learning needs. Stakeholder Communication. Converting to IFRS alsomeans anticipating the information and communicationneeds of external stakeholder groups, including the board,shareholders, lenders, and analysts, among others. Forexample, financial knowledge for board members related toIFRS will need to be supported.Organizational action steps: Conduct a key stakeholder analysis. IFRS can have manyimpacts on an organization. Identifying target audiencesand stakeholder groups impacted by IFRS and assessingtheir current level of understanding and communicationneeds is an important step in planning for the impacts ofIFRS. Develop IFRS communication and training plans.Communication and training will be an essential elementin effectively planning for and managing the necessarychanges resulting from an IFRS conversion. Establishing aproactive plan to address the near and long-term trainingand communication requirements for each stakeholdergroup can further support the overall IFRS plan.4
Strategy and Timeline for IFRSImplementationThe conversion to IFRS will require an approach and timelinethat can accomplish a measured transition to IFRS and ultimatelyachieve a sustainable IFRS reporting structure. The timelinefor IFRS implementation is likely to take longer than manycompanies initially anticipate, as was seen in the EU experience.Reasons for this include: the comparative financial statementsthat will be required upon adoption; the retrospective nature ofimplementation; and the pervasiveness of many of the impactsof IFRS. Ultimately, companies will have to set up a structure toimplement IFRS. Developing a holistic plan now can help properlyequip the company for upcoming changes.While conversion to IFRS on a consolidated basis may not bemandated for another few years, companies can start takingadvantage of opportunities to convert to IFRS for statutoryreporting purposes now by developing a multi-year strategy forconversion and sustainability (see Figure 1 for an overview ofwhat companies will need to focus on in the next several years,starting with planning efforts today). Many countries alreadypermit the use of IFRS. These provide an opportunity to developa multi-year strategy and a detailed roadmap for conversion toIFRS. By leveraging the training and experience gained on thesestatutory conversions, companies will be better positioned toexecute a consolidated IFRS conversion in the near future.Before a company can get to the implementation stage, theCFO, along with leaders from key areas of the organization, willneed to proactively confer to: increase awareness of IFRS, assessthe company’s current capabilities to address IFRS smoothly,and plan the best approach and training needs. Understandingthe impact to these areas will help inform the developmentof the roadmap. Smart planning can provide companies withadvantages that global competitors may already have.Figure 1. An illustrative timeline for IFRS conversion activities, starting in 20085
ContactsFor more information, please contact:D.J. GannonLeader, IFRS Centre of Excellence – AmericasPartner, Deloitte & Touche LLP202-220-2110dgannon@deloitte.comNick DifazioNational Leadership Partner - IFRSDeloitte & Touche LLP212-436-7747ndifazio@deloitte.comJoel OsnossGlobal Leader, Global IFRS & Offerings ServicesPartner, Deloitte & Touche LLP212-436-3352josnoss@deloitte.comNathan AndrewsPartnerDeloitte Tax LLP919-546-8055nandrews@deloitte.comAlfred PopkenU.S. Leader, Global IFRS & Offerings ServicesPrincipal, Deloitte & Touche LLP212-436-3693apopken@deloitte.comGlen FeinbergPrincipalDeloitte Consulting LLP412-338-7214gfeinberg@deloitte.comAbout this publicationThis publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial,investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, norshould it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that mayaffect your business, you should consult a qualified professional advisor.Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separateand independent entity. Please see www.deloitte.com/about for a detailed description of the letgal structure of Deloitte Touche Tohmatsu and itsmember firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.Copyright 2008 Deloitte Development LLC. All rights reserved.Member ofDeloitte Touche Tohmatsu
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