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.

IFRS adoption - lessons from the European experience

I’ve been monitoring the adoption of International Financial Reporting Standards (IFRS) for several years now staring with Europe’s transition to IFRS in 2005. However, nowhere is IFRS hotter right now than in the United States. Last year Christopher Cox, the outgoing chairman of the US SEC, published a roadmap for IFRS adoption starting in 2014. Now, after some apparent silence from the SEC, Mary Schapiro has recently indicated that we’ll likely be getting a final decision on adoption in the near future.

The question I’ve been hearing a lot recently from customers (it’s generally assumed that IFRS will be required in the US at some point so it’s just a matter of when) is what do folks need to do to get ready? This is where things get a little tricky. Every organization is different – both from a structural, organizational, and a technology perspective. There’s no “silver bullet” that can turn on IFRS at the flick of a switch - the scope of IFRS is simply too broad.

Interestingly some recent AMR research indicates that organizations in the U.S. are not well prepared for IFRS adoption. Only 9% are implementing now with the vast majority of respondents (63%) yet to define an IFRS strategy or waiting until IFRS deadlines are well articulated.

From the technology perspective, I think we can learn a lot from what already happened in Europe – both good and perhaps less good practice. The timeframe for adoption was very short (far shorter than we might expect in the US) so the vast majority of organizations looked for a quick fix. Typically they decided to leave the transactional and ERP systems well alone and only perform adjustments in the consolidation and reporting layer to provide IFRS specifics as and where needed. This is the approach often referred to as “top-side adjustments”. This allowed companies to meet the initial deadline in the easiest way possible but increased the complexity and cost of reporting in the medium and long term.

In the USA, a lot of folk seem to be focusing their efforts around getting the ERP and General Ledger systems running in parallel to support the expected dual US GAAP / IFRS reporting phase. However I think this approach is incomplete. In order to transition to IFRS all aspects of the financial reporting supply chain need to be considered – from sub and general ledgers all the way through to the group consolidation and reporting systems. The more US GAAP and IFRS data you have at the transactional layer the easier it actually becomes to transition the consolidation and reporting layer and with this approach there should, in theory, be no need for top-side adjustments. However this represents the perfect idyllic world - which for most organizations is still a distant reality. The group reporting layer doesn’t simply exist to enable top-side adjustments - it also provides a comprehensive group reporting mechanism that addresses the IFRS specifics of consolidation methods, reconciliation reports, commentary, report layout, - right through to digital disclosure in the form of XBRL. All of this is remains an essential part of the process irrespective of whether all required US GAAP / IFRS information is readily available in the underlying transactional systems.

So my point here is – organizations should study and learn from the European experience, but resist the temptation to perceive the consolidation and reporting layer purely as the ugly stepsister that at best enables a short term solution via top-side adjustments. Instead, think about how to get the best from all worlds and how each area can make a relevant and lasting contribution to your IFRS strategy. Take a long term view and start focused – perhaps by considering a gradual, phased approach across the entire reporting supply chain.

One thing is clear though – starting the strategy and planning process now will leave time to take a balanced view and avoid the asphyxiating pressure associated with an imminent deadline that feeds short-sighted “tick in the box” solutions. It was the short deadline that resulted in the top-side approach in Europe – something that’s not expected in the U.S.

I recently published a White Paper that discusses some of the technology challenges associated with moving to IFRS, so if this is on your radar and you’d like to discover more, please do check it out.