U.S. SEC clarifies its position around IFRS adoption

Yesterday, the Securities and Exchange Commission (SEC) provided their much anticipated announcement on the adoption of International Financial Reporting Standards (IFRS) in the US.

You may remember that back in 2008, the then SEC chairman Christopher Cox published an outline roadmap for US transition to IFRS with likely adoption in 2014. However since then much water has passed under the bridge – much of feedback on the roadmap both good and bad, leadership changes at the SEC with Mary Schapiro taking over from Christopher Cox and, of course, a global economic crisis! So it’s perhaps understandable that it’s taken the SEC some time to follow up on their plans for IFRS... well until yesterday that is when they announced the work plan with 2015 as the earliest likely date for public companies to report in IFRS with a final decision to be taken in 2011. The workplan also introduces a checklist which includes steps to ensure that the global standards themselves will be suitable for U.S. use. – effectively “convergence” between IFRS and US GAAP. You can read the full press release here.



So what should we take away from this announcement?

For me it can be interpreted as SEC Chairman Mary Schapiro clearly setting a stake in the ground to confirm that adoption of a single set of independent global accounting standards remains firmly on the SEC’s agenda. Clearly there is pressure on the respective standards setters (IASB for IFRS and FASB for US GAAP) to ensure that IFRS is fit and ready for adoption in the U.S before the transition finally takes place. However the move to a single set of global standards unequivocal. The train is at the station, so to speak, it’s simply a question of ensuring it’s properly provisioned and scheduling an appropriate departure time.

It’s tempting to focus on the fact the SEC have effectively introduced a delay. We won’t now know whether IFRS will finally be adopted until at least 2011 and even then adoption won’t be before 2015. This seems far into the future – so why not relax and take our foot off the pedal? This would be a mistake, 2011 is less than 12 months away and any adoption of the new standards is likely to involve dual reporting for a couple of years during a transition period as was outlined in the original roadmap. So actually there isn’t that much time at all!

So what single piece of advice or guidance can I offer to folks impacted by the transition to IFRS? Quite simply, get your house in order! IFRS is coming – this has now been confirmed. Ensure that the systems and processes you have in place will be ready to easily adapt when the time to transition comes. Your first steps should be to carefully assess your situation, do some advanced planning, and assemble cross-functional teams from accounting, IT, and your auditing partner. You will need to understand the impact that IFRS reporting will likely have on your organization, your financial reporting procedures, and your staff. With the right planning and the right people, you will be able to choose a path that fits your needs — and the process will be straightforward.

If you’re interesting in discovering more about IFRS and in particular the associated technology challenges please do take a moment to read my White Paper. I’d also love to hear your feedback on the SEC announcement… feel free to add your comments to this blog entry or drop me an email.

Quick wins with intercompany reconciliations

In difficult economic times it’s always easy to focus on the bottom line and simply slash costs. However it’s also possible to achieve quick wins that require little investment whilst laying the groundwork to support future growth for when things do pick up again. A good example of a quick win and one which a number of customers have been investigating in recent months, is that of intercompany reconciliation.

Dealing with intercompany transactions is an essential aspect of the group financial close process and can be split between two key tasks – reconciliation, (sometimes known as matching), and elimination. The two are often confused so let’s first be clear about what these terms represent.

Reconciliation is the process whereby reporting units agree their respective intercompany amounts. For example, if reporting unit A provided $1000 of services to Reporting Unit B, they both need to agree on this in their respective books – intercompany accounts receivable of $1000 for unit A and intercompany accounts payable of $1000 for unit B. The counterparty reporting unit should also be recorded. It sounds simple. However in many organizations there can be hundreds of reporting units with literally thousands of invoices between them. To further complicate things amounts don’t always match exactly as, for example, there may be differences in VAT rates for reporting units in different countries. Often the “matching” is agreed to be within reasonable monetary threshold with narrative provided to explain the why the amounts do not match exactly.

Elimination is the process of ensuring that the reconciled intercompany balances are treated appropriately when consolidating the local accounts of each reporting unit into the group as a whole. Accounts such as revenue are aggregated across reporting units. However intercompany amounts should not as this would result in double accounting – they need to be eliminated. The elimination process can only start once all intercompany amounts have been reconciled and agreed.

In the traditional intercompany matching and reconciliation process employed by most companies, the responsibility for resolving discrepancies in the intercompany balances declared by reporting units often falls on corporate headquarters. Generally this means that staff members in the central finance function are involved in checking balances, correcting errors, and contacting reporting units to resolve issues and intervene in disputes. This process results in an inefficient vertical flow of information between headquarters and reporting units and back again, as shown in the diagram below. The process is also hindered by the means of communication employed which typically involve telephone calls, e-mails and faxes, all of which are is time-consuming and delay the corporate close.





A more direct approach, one based on best practice, is where reporting units adopt a peer-to-peer reconciliation process to communicate and resolve differences directly with each another. This transfers responsibility for getting things right from the central finance function to the reporting units themselves. At the same time, the units could use any improvements in process automation as a catalyst to eliminate errors from the process, thus improving the accuracy of reported figures as well.

The bottleneck slowing down the reporting process is the time taken at headquarters to participate in the reconciliation process. If reporting units could deal directly with one another in a peer-to-peer fashion, this obstacle would be eliminated, and the intercompany process would fall away from the group financial close’s critical path. Such an achievement would free central finance staff from time spent on non-value-added tasks, enabling far more time to analyze data rather than just gathering and reconciling it, as shown below.

While many financial consolidation and reporting systems available today do provide functionality that supports the intercompany reconciliation and elimination processes, they are strongly oriented towards elimination and serve to maintain the status quo where corporate headquarters is the bottleneck. However, dedicated peer-to-peer intercompany reconciliation systems also exist and can be deployed alongside any consolidation application to gain that much needed quick win.

If you’re interested in learning more about peer-to-peer intercompany reconciliation, download our white paper Improving Intercompany Reconciliation for a Faster Close which also includes cost/benefit examples that allow you to estimate the type of ROI you can expect.