The Language Of Financial Reporting

If you’re going global, you need to use IFRS. Here’s why

by Denise Cutrone, Partner, Transaction Services PricewaterhouseCoopers

January 7, 2009

T hese days, most Atlanta companies are doing business globally. Some are selling products in other countries or sourcing materials from other parts of the world, while others are looking to further expand their business outside the United States. In today's environment, doing business overseas has almost become a requirement. But while the trade channels are wide open, crossing financial borders isn’t nearly as easy. The greatest challenge: Many U.S. companies’ current financial reporting standards are not compatible with those used in other countries.

Today most publicly traded companies outside the US report their financial results using International Financial Reporting Standards (IFRS), a global financial reporting framework that is quickly becoming the financial "language" of the world. In fact, more than 100 countries have already adopted IFRS; the United States is the largest of the few remaining holdouts.

The Benefits Of IFRS
Why have so many countries embraced IFRS? It offers the marketplace several benefits:

• The goal of IFRS is to make doing international business as easy as possible. Ultimately, the ability to report in a common accounting language on a global basis can put U.S. companies on a more level playing field with their foreign competitors by minimizing financial reporting barriers.
• Compared with current U.S. standards, IFRS has fewer bright-line rules and exceptions. This allows companies to exercise greater professional judgment when determining how best to present the financial facts of their business transactions.
• The move to adopt IFRS has advanced the transparency of financial statements around the world, which academic studies have shown ultimately boosts international investor confidence.

The benefits are not just limited to the marketplace. Moving to IFRS can help companies realize substantial benefits, too:

• The opportunity to take a fresh approach to financial reporting processes.
• The potential for a reduction in compliance costs through simplified processes and shared services.
• Increased flexibility in capital-raising initiatives.
• Improved global comparability of financial results among peers.
• Increased ability to move personnel to different countries.

Moving To IFRS In The US
In late August 2008, the U.S. Securities and Exchange Commission (SEC) voted to release a proposed road map for a mandatory migration from Generally Accepted Accounting Principles (GAAP) — the current financial “language” used in the United States — to IFRS. The transition would begin for U.S. public companies in 2014, with an option for some companies to adopt IFRS as early as 2009. 

Shortly after that vote, however, events in the financial markets caused the SEC to focus its resources on matters needing immediate attention, which stalled other initiatives on the SEC's agenda — including releasing the proposed IFRS road map. Although the ultimate impact of these financial events on the road map is uncertain, the move to IFRS in the United States remains inevitable. Despite the economic challenges companies are facing, the benefits of moving to IFRS remain unchanged.

What Companies Can Do To Prepare
To adopt IFRS successfully, U.S. companies will need to address more than just differences in technical accounting issues. With a conversion comes a change to the underlying financial language of a company's business — a task that brings with it significant opportunities and challenges – from technical accounting, tax, business and operational process standpoints. Analyzing the impact of those opportunities and challenges now could save time and money in the long run. In planning early, companies might want to consider the following:

• Assess how long the conversion process could take and how much initial adoption could cost, including (1) staffing, education, and training, (2) changes to internal controls and processes,  (3) updates or modifications of systems, and (4) the impact on the effective tax rate and cash taxes paid throughout the world.
• Determine whether efficiencies can be realized in the company's reporting and accounting environment, such as developing a centralized IFRS policy department or shared-service centers. 
• Develop an understanding of key differences between U.S. GAAP and IFRS that might affect the company and its financial performance.
• Determine other fundamental business changes that could result from a new accounting framework, including ongoing systems projects or regulatory ramifications.
• Educate investors and other stakeholders on how IFRS affects financial reporting and benchmark progress against peers.

Although a mandatory conversion to IFRS may seem far away, preparing and executing a conversion can be a multiyear process. It makes sense to start sizing up the volume and variety of financial, business, tax and operational changes now to avoid a resource-intensive effort at the eleventh hour. Allowing sufficient lead time to evaluate where IFRS conversion can deliver substantial benefits is perhaps just as important.

Ultimately, the key to a successful IFRS conversion is getting engaged now. Think globally, plan for the transition, and don't be afraid to embrace the benefits that moving to IFRS will bring.

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Denise Cutrone is a partner in PwC's Transaction Services Group.  She provides clients with advisory services in conjunction with conversions to International Financial Reporting Standards ("IFRS"). She is one of PwC's conversion and embedding experts and has assisted global companies with IFRS conversions for 11 years.  Cutrone spent four years in PwC's Zurich, Switzerland office and another four years in Brussels, Belgium, where she was responsible for helping companies convert from local accounting practices to IFRS. While in Europe, Denise led the development and world-wide roll-out of PwC's TransitionIFRS Conversion Methodology, which has been used on over 1,300 conversions. Currently, she has focused on delivering IFRS support services to assess the impact of IFRS on cross-border deals as well as assisting U.S. companies with the adoption of IFRS from US GAAP.