Getting started with IFRS
More than 100 countries have mandated that public companies adopt International Financial Reporting Standards (IFRS). In Canada, the Accounting Standards Board (AcSB) has proposed that public companies will migrate from Canadian GAAP to IFRS over a transitional period, with full implementation required by the end of the 2011 fiscal year. Many advisors, however, recommend early adoption, with the Canadian Securities Administrators (CSA) supporting an implementation date as early as January 1, 2009. The move to IFRS will change the way Canadian companies present their business results to analysts, investors and other stakeholders. The size and complexity of the implementation effort can be managed if companies plan ahead.
For many organizations, implementing IFRS may be a complex process that goes well beyond a simple technical exercise for the finance or accounting function. Other business areas such as human resources, investor relations, business development and IT departments will likely be involved in the conversion plan. Companies that have already implemented IFRS know that the new standards place a sizable responsibility on management to be able to communicate effectively to the market in the new language. Below we highlight several key considerations for those moving toward implementation.
IFRS Transition Timeline
The Canadian AcSB announced in February 2008 that the transition to IFRS will affect interim and annual financial statements for fiscal years beginning on or after January 1, 2011. There are a number of areas that may cause uncertainty for adopters, including any transitional standards based on IFRS equivalents that will be introduced in Canada before the final adoption date. As part of the conversion, companies will be required to have comparative figures for 2010 and an opening balance sheet at the beginning of 2010.
Our experience in assisting numerous global companies that have already adopted IFRS shows that, for some, full adoption can take anywhere from two to five years, depending on the complexity of the organization. Smaller companies with few geographic locations and the requirement of limited systems changes will tend to have a shorter implementation period. Larger multinational organizations with decentralized operations around the world, legacy IT systems and numerous business platforms will typically have longer implementation periods. In addition, certain industries, such as banking, insurance, forestry, utilities and full-cost accounting oil and gas industries typically face some of the more challenging conversion issues.
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One of the most significant challenges to converting to IFRS is determining which variations from Canadian GAAP will impact the organization, depending on the accounting policy choices made to date. The AcSB will begin introducing revisions to existing standards based on IFRS equivalents during the transitional period in order to break the conversion process down into smaller steps. Organizations will need to be nimble to take these changes into account in their project plans.
Significant accounting differences between IFRS and Canadian GAAP often reside in the details, causing recognition, measurement and/or presentation differences. Careful planning and proper use of certain options available under IFRS, however, can eliminate some of these differences.
Some of the accounting areas where the more significant differences arise include:
- Financial Instruments (de-recognition of assets and liabilities);
- Full-cost accounting (e.g. oil and gas);
- New insurance accounting model;
- Fair value of biological assets (e.g. forestry);
- Hedge accounting;
- Consolidation of special purpose entities (SPEs); and
- Impairment of non-financial assets.
IFRS will present unique challenges for senior management, human resources, the treasury and taxation functions, IT and many other areas across the organization beyond the finance and accounting function. IFRS may impact existing management reporting including budgets, forecasts, performance measures, bonus structures, key performance indicators and debt covenants. Furthermore, organizations must consider new procedures to ensure that IFRS implications are included in the approval process for all new strategic investments.
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It is easy to underestimate the volume and complexity of the work involved with the implementation of IFRS. Communication and implementation throughout the organization will require careful planning and skilled resources. Our experience in Europe and Asia has shown that companies transitioning to or applying IFRS for the first time will often try to make manual adjustments from local GAAP to IFRS using spreadsheets or similar tools. However, this “quick fix” conversion can often prove to be costly and operationally ineffective in the long run - especially as it can be prone to error, confusion and typically lacks the appropriate internal controls.
Note: Much of this material has been adapted from the PwC publication Putting IFRS in Motion: International Financial Reporting Standards and their impact on Canadian public companies, which features our perspective on the issues involved in IFRS conversion. It is based on our extensive Canadian and global experience helping companies manage this process.
