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Cross-border deal potential rising? Know what it takes to convert to IFRS — quickly

Observations from the front lines

Many US companies assume IFRS isn’t relevant to them — until the potential for a cross-border deal emerges. The current economic climate brought on by the COVID-19 pandemic has created conditions ripe for global merger and acquisition (M&A) activity. As a result, understanding IFRS and potential GAAP differences is perhaps now more important than ever as businesses and their advisors need to respond quickly to analyzing and concluding deals arising beyond our shores.

While many deals were put on hold or cancelled in the early part of 2020 as a result of the pandemic, the M&A market saw a significant rebound in activity in the second half of 2020, which we expect to continue into 2021. Several important indicators have led to a jump-start in this activity, including historically low interest rates, the significant number of distressed companies that have emerged as potential acquisition targets, rapid growth in the popularity of special purpose acquisition company (SPAC) IPOs in the US and overseas markets as discussed in PwC publications and  PwC Deals Blogs in 2020, and record levels of deployable corporate and private equity capital. 

This increase in the level of cross-border deals activity has directly correlated with the number of US companies requiring various types of GAAP conversion, including in the following scenarios:

  • To carry out financial diligence procedures on a target acquiree that does not report under US GAAP, focusing on quantitative impacts of GAAP differences to key deal metrics;
  • Preparation of full financial statements under Regulation S-X for a significant acquisition of a foreign business by US acquirer;
  • Preparation of full IFRS financial statements for the historical track record relating to an acquisition of a US business by a foreign company or IPO by a US company on a foreign exchange;
  • New group reporting obligations due to increased significance of a US subsidiary to a foreign parent company’s financial reporting following growth of the US business; 
  • Loss of foreign private issuer (FPI) status resulting in conversion from IFRS to full US GAAP financial reporting; and
  • Broader financial reporting integration and accounting policy alignment of a material acquired business that currently reports under a different GAAP.

In this competitive deals market, we anticipate businesses will continue to engage in global M&A activity, seeking opportunities to create value as they reconfigure their operations, integrate new businesses and look forward to the post-pandemic future; to do so efficiently will inevitably mean getting to grips with the potential impact of GAAP differences on the ability to measure and articulate key value drivers.

In addition to the impetus of M&A activity alone, some of the recently implemented accounting standards have created new areas of difference between US GAAP and IFRS reporting, including among others, accounting for financial instruments and leases. Not all businesses will be affected in the same way by the adoption of new standards under either US GAAP or IFRS, but these recent changes may create complexity in an otherwise steady-state multi-GAAP reporting environment, which will need to be understood and assessed before requisite changes to data inputs, process and financial analysis can be embedded in a company’s ‘business-as-usual’.

Why it matters

Current market conditions mean that bridging the gap between US GAAP and IFRS reporting may become relevant at a moment’s notice, and embarking on a conversion exercise is more than an accounting task, particularly when executed at deal speed. Converting GAAP results and reporting is a transformative involving:

  • Changes to and reconfigurations of a company’s systems and processes, 
  • The collection of new or enhanced data, and 
  • The involvement of a wide network of stakeholders across the organization to examine the company’s performance through a different lens. 

Those who can navigate this process achieve a critical step in the overall deal process, whether it be inbound/outbound M&A or an overseas IPO, and in doing so, lay the foundation for future reporting success. However, in these scenarios, time is frequently of the essence and the final product often informs a deal’s value drivers, meaning there is no room for compromise on quality. Companies that fail to adequately understand or address their GAAP differences risk delays to transaction timelines, potential financial control issues and additional strain on their teams. 

Bridging the GAAP

Whether a set of new financial statements is required, or simply an assessment of GAAP differences on key deal metrics, a well developed approach that includes an assessment of the major reporting, regulatory or transaction related issues is critical to the success or failure of any GAAP conversion. By establishing a multi-phased GAAP conversion framework across the organization and introducing digital elements to the conversion process, entities can consistently and efficiently identify and address key differences and plan to meet key deadlines. Such an approach would typically include a scoping and assessment phase to be followed by an implementation phase:

Scoping and assessment: Once committed to a plan to complete a conversion, a critical first step is the completion of a comprehensive gap analysis focused on the identification of GAAP or other accounting policy differences, process to conform to the accounting policies and account mapping of the acquirer in a M&A transaction, data and information gaps, and possible technology or process changes that may be required. The completion of this Phase 1 assessment is crucial to the development of a structured conversion plan that contemplates the major issues and obstacles to achieving success.

Implementation: Upon completion of the Phase 1 assessment, the focus then shifts to the implementation phase, in which new policies are documented and related adjustments quantified for the periods to be presented, stakeholders are trained on the key differences, system and process changes are implemented, and the initial financial reporting under the new basis of accounting takes shape.

As part of the implementation phase in a full conversion to IFRS, careful assessment of the impacts of reporting under IFRS for the first time is a critical stage in the process. This is particularly true for a company’s consideration of the transitional provisions for recent IFRS standards, which may differ to those applied by existing IFRS reporters. Adequately planning for such first time reporter issues is imperative to avoid costly delays in the completion of the conversion.

Process involved in a GAAP conversion

Converting between US GAAP and IFRS involves a number of steps, including:

Conversion approach

Overall entity-wide conversion approach and project plan developed.

Accounting policy

Policy differences identified and new policies drafted.

Data gaps

Additional data requirements identified and data gaps documented.

Conversion adjustments

Conversion adjustments quantified for topics subject to new or revised accounting policies.

GAAP reconciliation

Bridge between GAAP and IFRS prepared for all periods subject to conversion.

System and process changes

Targeted system or process updates implemented where possible, new processes implemented as required.

Financial reporting

Initial financial statements and footnotes prepared on new basis.

Conversion audit

Communicate results of the conversion with the external auditors.

The bottom line

Companies, buyers and sellers alike need clear, translatable financial information to guide decisions, some of which may happen to currently be presented on a different basis of accounting than they are used to. Our team understands the unique issues and challenges that companies face when confronted with the identification of GAAP differences or a conversion to or from IFRS, particularly the pressures related to a conversion mandate that arises as part of a transaction. PwC can help you through this process, identifying issues early, sharing insights and providing advice on various approaches to your conversion. Our tested tools and methodology will keep focus on both the immediate transaction milestones as well as opportunities to enable reporting efficiencies in the future.

“Observations from the front lines” provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities and what companies should be thinking about to effectively address those issues. For more information, visit www.pwc.com/us/cmaas.

 

Observations from the front lines

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Andrew Del Boccio

Partner, Deals, PwC US

Darryl Schwark

Director, Deals, PwC US

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