For months, the U.S. Securities and Exchange Commission (SEC) has been debating whether to incorporate International Financial Reporting Standards (IFRS) into the U.S. financial reporting system for public companies, which currently adheres to the Generally Accepted Accounting Principles (GAAP). But the exact timeline for an SEC decision on migrating to IFRS in the U.S. remains elusive, according to experts.
"In July 2012, the SEC came out with a report that said it was still looking at IFRS, and it pushed off any final decisions almost indefinitely," said Joel Osnoss, global IFRS leader and partner-in-charge of Global IFRS at New York-based advisory firm Deloitte. Also, because of turnover within the SEC and the appointment of a new chairwoman, "there's a feeling that the final decision on U.S. adoption is going to be pushed off for quite some time.
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"My guess is it's going to be longer than two years," he added.
And despite the potential benefits of standardizing on IFRS worldwide, American businesses aren't exactly clamoring for the change. Some are pushing back against the adoption of IFRS standards, due in part to the time and effort involved in implementing a new system of accounting rules and standards. Indeed, to adhere to IFRS standards, companies will have to modify or change their IT and finance systems.
"Businesses just don't have an appetite for it right now, so you wonder how long it is going to be pushed off," said Kenneth Gabriel, partner and ERP advisory global leader at New York-based KPMG Advisory.
IFRS adoption could simplify reporting for U.S. multinationals
Moving to one set of accounting principles like IFRS would provide a more uniform language for financial reporting, and financials from companies across the globe could be compared on an "apples to apples" basis. Additionally, U.S. companies with subsidiaries in other countries will save time and money because the same standards will apply no matter the location. If IFRS is implemented in the U.S., it could affect over 12,000 publicly traded corporations that the SEC oversees, according to Deloitte.
Despite the resistance from some U.S. companies about the transition, IFRS is more important to U.S.-based multinationals, since companies that have entities in various countries have had to modify their ERP systems to conform to the financial accounting standards of each country, Osnoss said. The U.S. adoption of IFRS would mean the ability to use a common language for all financial statements.
He added that many companies are now modifying their ERP systems to be able to centralize and standardize their processes to transition from U.S. GAAP to IFRS, which is not as difficult a process as it might seem.
"It's not like you have thousands of adjustments to make, it's really three or four standard adjustments that need to be made however many times depending on how many companies there are within the subsidiary structure," Osnoss said.
However, other organizations are using business analytics tools to aid in the transition rather than doing a full ERP system implementation or upgrade. These tools can delve into an organization's financial systems and build data cubes and rules engines that map the U.S. GAAP financial information into the language of IFRS, or something similar, Osnoss explained.
IT preparation for IFRS no small feat
Then there's the standard that's scheduled to come out sometime in the next quarter -- with an adoption date of January 1, 2017 -- relating to revenue recognition. Osnoss said because the standard will be virtually the same between U.S. GAAP and IFRS, the change won't make much difference for most public companies that only operate in the U.S.
"But for some domestic companies, like those in the telecommunications industry, those changes are going to result in some pretty sizeable potential ERP or data analytics efforts, because under the proposal [they] have to readdress the way they account for the components of their contracts to consumers," he said.
Some domestic companies will also have to change the way they account for leases in their financials, Osnoss added, which could necessitate serious IT modifications
"But I would say, given the SEC's current stance, for domestic companies IFRS will be a non-event," Osnoss said.
Still, the IT and business changes necessary to comply with IFRS requirements are not to be underestimated, said KPMG's Gabriel.
"The efforts that are going to be required to update the systems to comply with the IFRS requirements [will] be major," he said. Although mega-vendors such as Oracle and SAP say they're ready to tackle IFRS, "that just means they have applications that can address it. But companies are going to have to implement those [applications], and those are significant projects."
Gabriel said some organizations that use SAP or Oracle are frustrated that they have to upgrade now because the vendors have come out with new versions, even though they will likely have to again when IFRS is finally approved.
"These companies want to take advantage of the new functionalities of these new versions but they can't necessarily go ahead with IFRS because the rules haven't been finalized," he said. "So they're stuck in a situation where they do an upgrade now and then in a few years they're going to have to change their systems again to comply with IFRS because now -- especially for domestic companies -- they just can't switch over to IFRS."
Another difference between GAAP and IFRS that implicates IT legwork concerns assets. James Dahlby, vice president at PowerPlan, a vendor of financial systems in Atlanta, Georgia, said with today's U.S. tax and accounting requirements, many organizations use spreadsheets or ERP customizations to handle assets, and companies should bear this in mind when preparing for IFRS. "From an IT perspective, companies should focus on understanding what those business requirements are early so you can get out in front of understanding what the customizations are and how you want to solve those problems," he said.
Until IFRS is implemented, Steve Austin, managing partner at San Diego, Calif.-based Swenson Advisors, recommended that companies have two accounting systems -- i.e., a U.S. GAAP software and IFRS software. Companies will have to develop new internal accounting and reporting guidelines, evaluate new systems needs and controls, evaluate and implement controls over conversion and changes in current control processes and structure, and develop a transition plan, he said.
"And then they have to think about how they do the actual convergence from U.S. GAAP to IFRS, so that means more accounting people, larger audit bills, more audit time, so it has an effect on these as well as on workflows and the accounting finance function," Austin said. "It's not a small issue. In my mind it's akin to the effort it took to get Sarbanes-Oxley implemented."
About the author:
Linda Rosencrance has written about technology for more than 10 years and has been a reporter for more than 20. A former Computerworld reporter, she is a freelance writer in Massachusetts and also an author of several true crime books.
This was first published in July 2013