Experis Finance & Accounting. Are you Ready to Adopt IFRS?

Transcription

1 Experis Finance & Accounting Are you Ready to Adopt IFRS?

2 On August 27, 2008, the Securities and Exchange Commission (SEC) proposed a roadmap outlining milestones that need to be met before the SEC moves toward mandatory adoption of International Financial Reporting Standards (IFRS) for all U.S. filers. The proposed SEC roadmap provides an initial timeline, enabling U.S. issuers to begin assessing the impact IFRS will have on their businesses and planning for an orderly transition. To allow companies sufficient time to complete this major initiative, the SEC proposed 2014 as a guidepost for the mandatory transition to IFRS. Companies seeking to improve finance operations or avoid another SOX-like fire drill will take full advantage of this timeline. Background The proposed roadmap continues to move the United States toward the goal of greater global integration of financial markets. Based on comments received, discussion during recent roundtables and pressure on U.S. market regulators, the SEC continues to move in the direction of requiring U.S. issuers to file financial statements prepared using IFRS as issued by the International Accounting Standards Board (IASB). According to the proposed roadmap, the SEC will evaluate progress against these milestones in At that time, it will decide whether to require mandatory use of IFRS as issued by the IASB beginning in 2014 and whether to expand the group of companies permitted to adopt IFRS early. The proposed roadmap seeks feedback on whether the SEC should stage mandatory adoption based on market capitalization. Largeaccelerated filers would be required to submit financial statements based on IFRS in 2014, accelerated filers in 2015 and non-accelerated filers in Companies looking to make this transition in a manner that captures opportunities for business improvement and minimizes risks, will want to consider the lessons learned by European companies that recently transitioned to IFRS. Research by the Institute of Chartered Accountants in England and Wales (ICAEW) found that companies with operations in multiple jurisdictions were able to leverage existing IFRS experience since many of them had worked with these standards in their subsidiaries. In addition, they were better able to streamline operations across locations. According to the ICAEW survey, a subset of companies identified procedures that might have significantly lowered their IFRS implementation costs. These include: Starting sooner Making a better initial assessment of the impact Managing the project better Companies can begin now to address these issues as they prepare for the transition to IFRS. Am I ready to adopt IFRS? Improving staff training Communicating better with subsidiaries A transition to IFRS will have a broad and pervasive impact on companies requiring resources with diverse skill sets for implementation. For some companies the need to initiate planning and preparation for this migration is obvious. For most, however, the decision will be based on the careful analysis of a series of factors, including strategic priorities, the use of IFRS across the company s specific industry, the efficiency of current processes, the maturity of finance technologies and the capabilities of key resources. The questions below will help you assess your readiness for a transition to IFRS. Obviously, they cannot replace what will surely be a nuanced decision-making process supported by detailed and specific analysis. These questions, however, should spur discussions that will 2 IFRS: Opportunity or Nightmare?

3 help you determine when to start transition efforts, scope those activities and identify potential improvement opportunities that would strengthen current operations, laying a stronger foundation for the eventual adoption of IFRS. Transition to IFRS Spurred by IPO One privately owned company sought outside expertise to transition from U.S. GAAP to IFRS to prepare for an initial public offering on a foreign stock exchange. The company s private equity owners believed that listing on a foreign exchange would provide an excellent exit strategy. This example illustrates how companies can leverage IFRS to enhance their ability to raise capital. Strategy Is senior management committed to building a global finance function that creates business value? Is senior management committed to taking advantage of the benefits of a truly global finance function, or is the implementation of IFRS viewed as just another SEC-driven compliance activity that will divert resources and attention away from the business? Helping top executives understand the operational and risk management value of assessing and implementing IFRS will ensure that appropriate resources are available for the transition effort. Building a global set of policies and processes, enabled by a rationalized technology infrastructure, could pave the way for greater comparability and benchmarking across business units and increase the company s flexibility to make improvements throughout the organization. This vision should be driven by senior management. Have you planned for the impact of IFRS on non-u.s. revenue growth? Companies anticipating significant non-u.s. revenue growth should evaluate the need to provide IFRS-based financial data in foreign markets for statutory or other operating purposes. Your company may be required to provide or evaluate IFRS information shared with local business partners to meet credit and other operational needs. A real opportunity exists to learn from these business units and prepare to eliminate duplicative processes, systems and controls as more jurisdictions adopt IFRS. Have you built the impact of IFRS into capital allocation models? Entities that use IFRS have greater access to foreign capital markets and investors listing securities on foreign markets becomes easier as does approaching foreign investors. In addition, European companies that were more equity-based found adoption of IFRS enhanced communication with investor groups and increased transparency and disclosures, improving the quality of investor relations. Finally, a transition to IFRS will also affect the amount and classification of equity on a company s balance sheet. In the end, a transition to IFRS will provide greater access to capital markets and change key ratios. Over the next several years, Chief Financial Officers (CFOs) will want to understand and incorporate the effect of a transition to IFRS into any major financing transaction or renegotiation of debt covenants or lending facilities. IFRS: Opportunity or Nightmare? 3

4 Have you incorporated IFRS into tax planning models? International tax strategies are often based on financial accounts. Adopting IFRS will change the financial statements and affect the allocation of assets between entities and related transfer pricing policies. In addition, many non-u.s. jurisdictions derive tax compliance data based on local accounting standards. As more non-u.s. jurisdictions adopt IFRS, the degree to which a company s accounting policies align with IFRS will determine its ability to streamline book-to-tax reconciliations. The potential implementation of IFRS in the United States could influence these tax strategies over the next several years. Companies will want to incorporate the impact of IFRS into tax strategy plans today to avoid implementing approaches that will need to be overhauled in the future. Have you incorporated IFRS into strategic transaction models? Differences in the valuation of financial, fixed and intangible assets may change the economics of specific acquisition or divestiture transactions. Companies should include IFRS accounting in financial models to avoid unanticipated surprises later. Given that FASB and the IASB have recently issued harmonized standards on business combinations and the reporting of minority interests, these transactions can build awareness of the two standards, encourage individuals to become more familiar with them, and increase confidence in working with both standards. In addition, since the United States will be the last major market to adopt IFRS, it is likely that a company will acquire or sell to an entity with financial statements based on IFRS. Companies planning a sale or purchase can use this experience to build IFRS capabilities by retaining individuals experienced in IFRS and leverage accountants performing the related due diligence. Industry Are you monitoring whether competitors in your industry are preparing financial statements based on IFRS? Since specific industries face unique accounting issues, it can be extremely beneficial to understand whether using IFRS results in favorable comparisons to other industry players. For example, revenue recognition rules under IFRS may enable technology companies to report revenue in earlier periods. Monitoring the financial statements of competitors prepared under IFRS will assist companies in anticipating potential effects, both positive and negative, and choosing accounting practices that enhance comparability with competitors. Are you monitoring industry regulators for IFRS-based rule changes? Certain industries operate under globally harmonized regulatory regimes that typically rely on financial results for the calculation of key metrics. As the adoption of IFRS spreads across the globe, companies in certain jurisdictions will gain specific advantages or become disadvantaged under these regimes. For example, the global transition to Basel II enables financial institutions to adopt risk-based capital requirements. If global competitors can leverage the emphasis on fair market valuation under IFRS, along with Basel II, to reduce their capital requirements, U.S. companies may suffer competitively. Companies should review the current and any proposed future regulatory approaches of their industries and assess the impact of IFRS adoption in the United States and abroad to determine if they need to petition regulators or adjust compliance efforts to maintain global parity. 4 IFRS: Opportunity or Nightmare?

5 Process Have you implemented well-documented, global policies? Are policies and procedures documented, current and able to withstand third-party scrutiny? Just as with SOX, if companies have sound policies and procedures in place, the amount of streamlining and consolidation work to implement IFRS will be significantly reduced. Good policies and procedures are the foundation for assessing the impact of IFRS on the company and gaining efficiencies from the globalization of the finance function. Once a baseline set of policies and procedures is established, the migration to IFRS will require companies to update internal policies and procedures to reflect the judgments required under IFRS regarding the economic substance of transactions. At a recent IFRS roundtable hosted by FASB, a global software company representative noted that the company s impact assessment identified a clear need to replace revenue recognition approaches that cross-referenced U.S. rules with a set of practices. The assessment provided advanced warning to the company of the need to update its current policies to reflect the principles-based IFRS. Have you implemented consistent, streamlined global processes? Consistent, global processes are the bridge between common policies and the centralization of finance operations. Common processes also help companies increase the effectiveness of internal benchmarking in identifying improvement opportunities and facilitating more rapid implementation of process, technology and policy changes. Streamlining processes can yield immediate efficiency and internal control benefits while simplifying the future transition to IFRS. Have you centralized a significant portion of your financial operations? Companies with centralized finance and control functions that have begun implementing common accounting systems and processes will be able to reap the benefits of a more rapid implementation of IFRS, leveraging the standards to further institutionalize this approach. Centralization also speeds the selection and application of specific standards. More complex and decentralized companies should have an increased urgency to assess the implementation effort and establish the underpinnings for a common accounting platform, including a standard chart of accounts. Those steps will often provide immediate benefits in terms of streamlined processes and simplified controls, and better position companies to migrate to IFRS when mandated. On the other hand, decentralized companies may have hidden advantages, as IFRS skills are probably available in their foreign subsidiaries. Leveraging those skills, experiences and existing policies and procedures can bring a global company quickly up to speed on IFRS. Have you reduced your time to close? Monthly, companies will often spend considerable time converting national GAAP financial statements of foreign subsidiaries to U.S. GAAP. This effort often includes related technology and other support costs. Done properly, a transition to IFRS should enable companies to reduce or eliminate these costs. In preparation for that transition, companies can make the closing process more consistent across entities and consider automating the closing cycle. By leveraging technologies such as consolidation tools or XBRL (extensible Business Reporting Language) now, companies can streamline the flow of information from subsidiaries. Taking these steps early will pave the way for greater efficiency once IFRS is implemented and enable subsidiaries to provide more consistent data. IFRS: Opportunity or Nightmare? 5

6 IFRS: What s In It for Alpha, Inc.? Let s consider a large, global, fictitious manufacturer Alpha, Inc., and review the factors Alpha should consider to determine whether it is prepared to adopt IFRS: Alpha competes with numerous non-u.s. companies that report using IFRS. Alpha should consider whether it qualifies as an early adopter under the proposed SEC rules and determine if it wishes to take that option. Alpha is actively acquiring companies in various markets. These activities may present an opportunity to apply IFRS-based economic models to the transaction, prepare non-financial managers to use IFRS and create settings for finance staff to apply IFRS. Alpha has more than 150 international entities and is likely completing numerous local GAAP and U.S. GAAP transitions. Alpha has the opportunity to reduce the cost and effort associated with those processes by streamlining polices and consolidating systems. Approximately two-thirds of Alpha s revenue is non-u.s. Again, this is a likely indicator of opportunities to streamline backoffice functions by leveraging a common IFRS platform. If Alpha is planning to change its tax strategy, implement new systems or has control or business performance issues with non-u.s. entities, those items would build an even stronger case for earlier preparation for the adoption of IFRS. Have you strengthened your company s ability to make significant accounting judgments efficiently? Principles-based IFRS requires financial statement preparers to make more accounting judgments. Companies need to strengthen controls over areas requiring accounting judgments. If making accounting judgments is a struggle today, it will only get more challenging under IFRS. Regardless of the accounting standards, senior management and the audit committee should establish an appropriate ethical tone across the company regarding accounting judgments. Next, those responsible for making these assessments need to implement frameworks for analyzing decisions and documenting conclusions. Finally, internal controls professionals should develop methods to review and validate those approaches. Companies can use the time available before the adoption of IFRS to solidify their approaches and methodologies for making such judgments. Preparing to adopt IFRS earlier and running systems and controls concurrently under U.S. GAAP and IFRS will increase understanding regarding the effect of these judgments, and identify risk management and control deficiencies before filing under IFRS becomes mandatory. Running parallel for some time will increase the confidence of the Chief Executive Officer and CFO when they are required to certify their first financial statements filed using IFRS. Under Sarbanes-Oxley, issuers are limited in the advice they can receive from their audit firms. They must either hire staff or partner with an experienced professional services firm that can make and support critical accounting decisions. Locking in those relationships early will help to prevent resource shortages, audit issues, material weaknesses and costly disagreements with external auditors later. Technology Are you using the current releases of your accounting systems with no plans to upgrade or make changes? IFRS standards require companies to collect and use different information than under U.S. GAAP. For example, inventory valuation impairment under IFRS is based on a comparison between cost and net realizable value. Implementation of new financial reporting software applications in the next few years will likely require substantial changes again during a transition to IFRS. As most systems have a seven- to ten-year lifespan, a system implemented today will still be in production when companies are required to begin filing under IFRS. Completing a system transition or upgrade now with an eye toward future IFRS requirements reduces technology risks associated with the eventual transition to IFRS and allows companies to leverage IFRS-based features embedded in their major Enterprise Resource Planning and financial systems. Companies can minimize rework by building IFRS requirements into current application system projects. 6 IFRS: Opportunity or Nightmare?

7 Have you reduced your total number of accounting systems? Companies can lessen the impact of the migration to IFRS by consolidating current systems. This reduces maintenance costs and enables gains in operating efficiencies in the short-term while decreasing the number of necessary data conversions during an IFRS transition. Skills Have you assessed the IFRS skills of key line and operational staff members outside of finance? Companies may focus on training finance personnel on IFRS, leaving business managers untrained and unable to understand their internal reporting results. Companies should identify who receives financial information and articulate a strategy for preparing key stakeholders to understand and use it. This process can begin early as many managers and line leaders will need IFRS skills to make competitive assessments, benchmark performance against competitors and complete strategic transactions in foreign markets. Have you assessed the availability of skills needed to implement IFRS? Do you have personnel with the breadth of skills necessary to implement IFRS technical accounting, financial analysis, project management, process management, information technology, tax, internal controls, etc.? It s wise to pull teams together during the assessment phase to cover the full range of issues, including regulatory and risk reporting requirements. This will help you identify and address all potential implementation issues and ensure the company has the required skills to manage the implementation. Since individuals with these skills may become scarce as more companies transition to IFRS, recruiting skilled resources before shortages occur will enable companies to obtain the talent, acclimate them to the corporate culture and avoid critical project delays later. Have you assessed the IFRS skills of the finance staff? Are employees experienced in working with IFRS? Implementing a training plan now will enable companies to prepare core financial employees for this transition and identify potential skill-building opportunities by rotating employees from other regions. Are you prepared to rotate staff members to leverage or build IFRS experience? Many multinational companies have IFRS skill sets in their entities outside the United States. That means companies should evaluate their employees to see whether moving work or individuals can result in efficiencies. Putting programs in place to leverage that experience for example, rotating employees to roles inside the United States for a period of time could benefit the employee and the company and lower the overall implementation cost by reducing dependence on outside resources. In addition, companies may be able to create centralized resource centers on specific, complex accounting issues. Instead of needing hedging or derivative experts in both New York and London to address local accounting standards, the adoption of IFRS will enable companies to centralize this work. IFRS: Opportunity or Nightmare? 7

8 Categories of Readiness Companies readiness to adopt IFRS usually falls into one of three categories. Category 1: If you can answer yes or are very likely to answer yes in the near future to most of the previous questions above, you are well positioned to adopt IFRS. Performing a high-level impact assessment will confirm the overall implementation timeline and highlight additional ways to optimize your finance function throughout the implementation. Category 2: If you can answer yes to some of the questions, or the discussions describe your plans for the future, a thorough impact assessment will enable you to understand the impact of a transition to IFRS and highlight improvements that can speed the transition to IFRS and selected strategic efforts that will enhance its benefits. Category 3: If you answered no to most of these questions, you have considerable work that needs to be done to prepare for a transition to IFRS when mandated by the SEC. An impact assessment will help you identify the key projects that need to be completed in advance of the transition to IFRS and action steps to mitigate the most significant risks. Regardless of your current strategies and structure, an initial impact assessment can help you determine when to start your transition and help you organize resources and your approach so you can successfully and efficiently complete the effort while creating business benefits. While not a complete list, companies should consider the questions as they devise their strategies for leveraging the implementation of IFRS to build a global finance function and preparing to file in the United States under IFRS. A broad-based, multifaceted assessment covering technical accounting, policy and procedure, financial process, accounting system, internal controls and staffing issues will allow companies to build a plan for this transition, addressing critical technical accounting, training, communication and project management questions. Conclusion Starting now to prepare for an orderly and staged approach to IFRS allows companies to take advantage of the time available and avoid a SOX-like fire drill. Most accelerated filers completed their initial-year SOX efforts with a just do it mentality that left companies cleaning up messes and streamlining processes in ensuing years. The current IFRS timeline offers companies the opportunity to begin the journey toward IFRS differently allowing them to control the timelines, resources and decision making, and avoiding the under-the-gun efforts that made SOX such a negative experience. 8 IFRS: Opportunity or Nightmare?

9 Companies should begin with a series of assessments to determine the impact to financial statements, organizational readiness, policy consistency, etc. Based on those assessment results, they can lay out a plan to train staff, develop and implement global policies, procedures and processes, and convert the systems of specific entities before making a final transition to IFRS. As companies initiate their analysis of the effects of IFRS, it is important to consider not only what the financial statements will look like, but also how IFRS affects the infrastructure used to obtain those financial statements. The movement toward IFRS provides visionary finance leaders with a reason to re-examine and simplify accounting policies, processes and technologies across the enterprise. Companies can leverage IFRS to build a truly efficient and flexible accounting infrastructure that streamlines cost, leverages global strengths and enhances enterprisewide decision making. How can Experis Finance & Accounting help? We are a global provider of comprehensive financial reporting and technical accounting services, including research, documentation, ongoing SEC reporting compliance and knowledge transfer. Experis Finance & Accounting can provide clients with the skills required to assess and implement IFRS including: Continuous controls monitoring Technical accounting Business performance management Project management Policy and procedure review and development Tax strategy and implementation Risk management Internal control assessment and implementation Shared service center optimization Financial process improvement Technology planning Works Cited: The Institute of Chartered Accountants in England and Wales. EU Implementation of IFRS and the Fair Value Directive: A report for the European Commission. October IFRS: Opportunity or Nightmare? 9

10 About Experis ExperisTM is the global leader in professional resourcing and project-based workforce solutions. We accelerate organizations growth by intensely attracting, assessing and placing specialized expertise in IT, Finance & Accounting and Engineering to precisely deliver in-demand talent for mission-critical positions, enhancing the competitiveness of the organizations and people we serve. Experis Finance & Accounting Experis Finance & Accounting delivers pragmatic project solutions and professional talent resourcing in the areas of risk advisory, tax and finance. We serve clients, including Fortune 500 and Global 1000 companies, through highly-experienced professionals working from offices worldwide. experis.com About ManpowerGroup ManpowerGroupTM (NYSE: MAN), the world leader in innovative workforce solutions, creates and delivers high-impact solutions that enable our clients to achieve their business goals and enhance their competitiveness. With over 60 years of experience, our $19 billion company creates unique time to value through a suite of innovative solutions that help clients win in the Human Age. These solutions cover an entire range of talent-driven needs from recruitment and assessment, training and development, and career management, to outsourcing and workforce consulting. ManpowerGroup maintains the world s largest and industry-leading network of nearly 3,900 offices in over 80 countries and territories, generating a dynamic mix of an unmatched global footprint with valuable insight and local expertise to meet the needs of its 400,000 clients per year, across all industry sectors, small and medium-sized enterprises, local, multinational and global companies. The ManpowerGroup suite of solutions is offered through ManpowerGroup Solutions, Experis,TM Manpower and Right Management. manpowergroup.com 10 IFRS: Opportunity or Nightmare?