Rob Dutkiewicz, Shareholder in Charge of Inbound International Services, recently spoke to a group of financial executives at a joint meeting of the IMA Michigan Council and the Institute of Internal Auditors. Rob was asked to address how Clayton & McKervey, P.C. guides clients through the GAAP to IFRS conversion.
To accomplish adopting IFRS, there is a six step systematic approach we implement.
1. Determine the preliminary assessment of the impact of adopting IFRS
The first thing a CFO or President wants to know is how this will effect the company’s earnings and other key financial information.
We first review the most sensitive areas that might result in any significant adjustments. For example, LIFO inventory is not allowed under IFRS. Another example is that development expenditures are capitalized under IFRS; whereas under GAAP, these costs are expensed when incurred. These changes can often be significant when converting to IFRS. In other areas, the changes may be more subtle, such as accounting for onerous contracts, recording component depreciation, or costing of inventory.
It’s important to understand that IFRS is a relatively broad set of standards with some degree in flexibility. You must assess the key accounting areas – such as revenue recognition, inventory, and doubtful accounts, and establish policies. However, under IFRS, all consolidated members must adopt the same policies. Therefore, it is typical for the parent company to establish these policies, and it is the U.S. subsidiaries’ task to implement these policies.
2. Quantify the impact on the financial statements
The next step is to quantify the adjustments and the ultimate impact on the financial statements. This often requires a great deal of effort because it is taking the conceptual areas you identified and getting into the nitty gritty detail. Depending on the size and complexity of the company, sometimes these changes can be somewhat easy to go through; sometimes they can be lengthy and timely.
3. Identify “other” effects of conversion
For many businesses, there are several business issues determined by the “final” year end statements. This includes payouts for executive bonus plans, pension and retirement plan contributions, debt covenants, etc. No one likes to be surprised by these matters. It is important to identify the potential changes that could arise and alert management so they can deal with the business issues.
4. Develop timeline and strategy to convert
As in any project, you should develop a plan. Determine who does what, the timing, and what resources are needed to make it happen. Also, having someone who has done it before helps identify the blind spots and areas where people often get tripped up and what areas take more time than people would expect. My experience is often companies are cast in a position where they must implement a full scale plan by using the current resources, and converting to IFRS becomes a task to accomplish after their day jobs are done.
IFRS must be implemented quickly, such as in the case of a business acquisition. In this case, you need to roll up your sleeves and just get it done. Remember to keep the communication open with the parent company. It is ultimately their responsibility to coordinate the financial reporting of all entities. Good communication helps move things along. Don’t be afraid to lean on them if needed.
5. Develop or modify systems to accumulate information
Since IFRS reporting will now be an ongoing reporting mechanism for your company, you must make sure you have all of the supporting systems. Often, some businesses maintain their books and records on a local GAAP basis. For smaller companies, this often happens because the leap from GAAP to IFRS involves just a few accounts. In these situations, often an Excel conversion worksheet will suffice.
In other situations, full-scale changes are required in their supporting systems, such as asset management and general ledger.
6. Perform the conversion under IFRS 1, including adjusting historical financial statements
IFRS 1 addresses issues such as prior periods, disclosures, and other reporting issues. The final step is to make sure you are in compliance with all of these requirements.
