GAAP to IFRS: Are you ready?

Prepare for the transition and be ready when the date arrives In the US, a tense wait is underway. From professional organizations to academia all are waiting for a deadline from the SEC before moving to support international accounting standards. In July 2007, the Securities and Exchange Commission put forward a proposal to allow American companies to file their financial results using IFRS. Very many factors have contributed to the transition from GAAP to IFRS. Chief among them is globalization of business and finance. IFRS has been successfully adopted by more than 12,000 companies in almost a hundred countries. The US is the largest of the few remaining hold-outs. The other factor is the cost savings and increased ROI due to simplified processes. This has got a number of forward-looking US companies already in preparation for the conversion to IFRS with an eye on substantial savings and efficiencies. In addition, US financial reporting environment is much complex, almost threatening to become a competitive disadvantage for US capital markets. This had led many influential people in the US, who are involved in corporate reporting, to call for a change. The commission's decision is due out in the later part of 2008 after it considers comments from the public on the conceptual framework and the accounting principles. To many, a move to IFRS appears inevitable, though the timing and nature of the transition period remain a shrouded in darkness.

The transition thoughts

Many experts and thought leaders opine that although a common set of accounting principle sounds good on the surface it will prove much more difficult to implement. Having grown accustomed to U.S. GAAP for over the last 70 years, the new set of principles will turn the comfortable accounting standards upside down. IFRS will give a completely different look to Corporate America's financial statements and how they are prepared. Hence they are on a consensus that a phased-out approach is much better than a one-time transition approach. At the time of writing, there is a wealth of debate and valid arguments on both sides concerning what is best for US companies and investors. And companies in Corporate America are jumping into the IFRS bus. Public companies are already gearing up for the transition and this is shown in the increased appearance of education of controllership staff and management in 2008 company budget. Given the scope, volume and the consequences of the transition the education process will proceed for years. The implications of IFRS conversion impact a large part of a company including their accounting software, staffing, investor relations, board education, and potentially their organizational structure. These elements will continue to feature in both annual and long-term budgets.

The transition thoughts

Many experts and thought leaders opine that although a common set of accounting principle sounds good on the surface it will prove much more difficult to implement. Having grown accustomed to U.S. GAAP for over the last 70 years, the new set of principles will turn the comfortable accounting standards upside down. IFRS will give a completely different look to Corporate America's financial statements and how they are prepared. Hence they are on a consensus that a phased-out approach is much better than a one-time transition approach. At the time of writing, there is a wealth of debate and valid arguments on both sides concerning what is best for US companies and investors. And companies in Corporate America are jumping into the IFRS bus. Public companies are already gearing up for the transition and this is shown in the increased appearance of education of controllership staff and management in 2008 company budget. Given the scope, volume and the consequences of the transition the education process will proceed for years. The implications of IFRS conversion impact a large part of a company including their accounting software, staffing, investor relations, board education, and potentially their organizational structure. These elements will continue to feature in both annual and long-term budgets.

Transition not as tough as SOX

If you are concerned that this transition will be as huge and painful as Sarbanes-Oxley transition then you can take some consolation. The fundamental difference between the two transitions is that US companies already have a precedent in their European counterparts who have taken the transition route. Sarbanes-Oxley transition did not have a precedent and hence the transition was a little tedious and novel.

Conclusion

Even though the date is not yet announced the general consensus among the experts and opinion leaders is that the transition is inevitable. So it would be better for companies to take a look at their transition procedures and prepare for the future. The transition from GAAP to IFRS involves and demands many things from the players. But above all, the transition demands a change in mindset from the current model to a new paradigm. That is because IFRS is not a mere technical accounting exercise. Hence it would be fair to grant Corporate America with a reasonable window of adjustment - say a time of 5-8 years.