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Author's profile photo Philip MUGGLESTONE

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.

US Company Plans for IFRS Adoption

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.

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      Author's profile photo Gregory Misiorek
      Gregory Misiorek
      deemphasize European (remember metric system?) and stress international - kind of global GAAP. a lot of IFRS has US GAAP elements already and complying with the former doesn't preclude from reporting in the latter. i don't expect the sec to replace US GAAP with IFRS, but only allow IFRS for those who want to follow it. remember P is for practices and principles, so one can consider IFRS a form of GAAP already.
      Author's profile photo Philip MUGGLESTONE
      Philip MUGGLESTONE
      Blog Post Author
      Thanks for sharing your thoughts Greg. Indeed IFRS and US GAAP already have a lot in common and you're right we don't yet know what the SEC will finally decide as regards adoption of IFRS. Clearly the “I” in IFRS is a crucial aspect and I think we're already well on the way to achieving this. The reason why I was citing Europe was not in context of the nature of IFRS themselves – simply that Europe has already been through a transition process and there's plenty we can learn from their experience.
      Author's profile photo Former Member
      Former Member
      I work with several global organizations throughout the US and most of them don't know how to proceed. That has been the largest hurdle that we've seen in the consulting world. And yes, hard to believe, some people in Finance do not have a clue what IFRS is.

      Our company Relevante, provides seminars on such subjects and one that we are providing in June is on IFRS - taking a look at the updates and what some of the early adopters have done.

      IFRS = Moving Target
      - and most people don't own a gun let alone know how to operate one.