Converting from US GAAP to IFRS

From the IFRS Institute - February 2017

There are three main reasons a US company may want to consider adopting IFRS – as a substitute for, or to complement, its US GAAP financial statements.

• To access international capital markets that require financial statements prepared in accordance with IFRS. This has been an increasing trend recently, both for mid-sized firms unable to generate sufficient investor interest/capital in the United States, and for larger firms seeking access to previously untapped markets.¹
• The fact that a US-based company has foreign investors, intends to attract foreign capital providers, or has significant foreign operations.
• As a result of being acquired by a foreign company that prepares IFRS financial statements.

Converting to IFRS is a significant finance transformational event for a company and may be prompted by any of the reasons stated above. The long-term effects on a company go beyond accounting and if planned right can improve various aspects of the organization. We have accumulated the following lessons learned from prior IFRS conversion projects.

Ten factors for success

1. A well-developed and ‘living’ plan, including realistic timelines and clear accountability.
2. Buy-in from senior management and members of the audit committee from the outset.
3. Sufficiently focused and appropriately engaged company resources, including a designated Project Management Office.
4. A comprehensive and detailed accounting gap analysis, leading to an impact assessment of process, data and systems, people and change, and other potentially impacted business areas.
5. Timely involvement of the external auditor.
6. Tailored training delivered throughout all phases of the IFRS implementation project – designed to meet the various needs of specific company personnel.
7. Early assessment of regulatory requirements, such as pro forma financial information, prospectuses, specific disclosures, number of comparative years, etc.
8. Careful management of internal controls: An IFRS implementation opens many opportunities to reengineer/transform key processes and systems; such integrated efforts create very significant risks and challenges that need to be carefully managed.
9. An effective protocol for resolving, cataloging and sharing technical accounting and key process issues.
10. Proactive and early development of sufficiently comprehensive messaging to support the organization’s level of engagement, consistency in execution, and clarity and consistency of external communication.

Five key things to consider

1. The first step in any plan should be to perform an accounting gap assessment. This can take anywhere from 4-8 weeks depending on the size and complexity of your business – but it is vital to identify areas where differences will arise and help to focus any future implementation.
2. Any IFRS adopter for the purpose of external financial reporting needs to apply IFRS 1,First-time Adoption of IFRS. This requires retrospective application of IFRS with some required exceptions and elective exemptions, and specific disclosures.
3. Like US GAAP, IFRS has significant new standards for revenue recognition, leases and financial instruments. These standards aren’t fully aligned with their US GAAP counterparts. For example, if you have already begun your lease assessment in anticipation of ASC 842, Leases, you will need to rethink the process under IFRS due to the differences between the two standards, although the information gathered to inventory all leases will still be useful.
   In contrast, the new revenue recognition standards are largely converged, so any work done to date to prepare for US GAAP adoption should largely carry over. However, there remain some challenging differences in the detail (read our Top 10 differences between IFRS 15 and ASC 606).
   However, US companies may directly adopt the new IFRS leases and revenue standards as part of the first-time adoption of IFRS – to bypass the additional efforts of changing to the new standards after IFRS adoption.
4. Each applicable regulatory framework may bring additional complexities in areas such as pro forma financial information, separate acquiree’s financial reporting, and accounting reconciliations.
5. Finally, converting to IFRS is more than an accounting exercise. It will impact systems, processes, people and other business areas – and all of these areas need to be considered when moving forward with a potential conversion.

Footnotes

1. Statistics from the Committee on Capital Markets Regulation – Continuing Competitive Weakness in U.S. Public Capital Markets; October 28, 2016.