Beyond accounting issues, the IFRS transition is likely to impact how management communicates with investors as well as companies’ business relationships, daily operations and employees.
Communicating changes to investors
Going forward, financial performance may appear differently. To mitigate potential confusion, companies should evaluate the impact on key performance metrics and consider how the changes are communicated to investors and shareholders.
To give an example, although a company’s actual performance remains the same, management may need to explain the changes in the performance figures as a result of the IFRS conversion and show a comparison of old numbers to new.
Similarly, the change in debt-to-equity due to the effect from the new reporting framework which requires taking more assets and liabilities onto the balance sheet must be explained to financial institutions and other stakeholders.
Furthermore, companies should also be prepared to disclose how their numbers compare to those of their competitors after transition, as well as why the transition’s impact might be more or less significant compared to their competitors.
IFRS may affect how companies report the economics of business arrangements. Assessing these arrangements in advance will allow management to minimise post-conversion problems.
For instance, companies may need to renegotiate financing agreements and adjust debt covenants, which could be costly or complex.
As more companies will have to consolidate other businesses under the new financial reporting requirements, some may prefer to substantively restructure ownership of their investees.
Management should also consider the implications for other long-term contracts, such as leases, derivative arrangements, and sales contracts so that they can deal with any consequences.
Key business processes such as sales and information technology may need to be altered, offering the potential for greater efficiency in a number of areas. The transition may require modification of internal processes, business practices, information technology systems and financial reporting policies to accommodate and optimise the new reporting framework.
Transition-related modifications in business operations could change employee responsibilities. Compensation may change as well, both in the form it takes and in the underlying performance targets.
Businesses may also decide to reconsider their general compensation structures before transitioning, especially if compensation is equity-based or primarily driven by performance. In considering potential changes to stock option plans, sales commission formulas and the like, management will need to balance both employee morale and company expense.