IFRS: a brief for the CEO
Way back in 1987, as a young consultant, I went to Tokyo to present a paper at the World Congress of Accountants. The keynote speaker of the Congress was the charismatic Chairman of Sony Corporation: Akio Morita. His speech is indelibly etched in my memory. He challenged the President of the International Federation of Accountants (IFAC) - his host- to devise a set of globally consistent accounting standards. Without them, he said, “reading the consolidated accounts of a global company is like looking at a distorted mirror”. Since different countries apply varying accounting principles and standards, the consolidation arguably becomes an aggregate of apples, oranges and pears.
More than 22 years later, the global accounting community is still struggling with the issue of harmonizing the measuring yardstick i.e. adopting a set of common standards, principles and interpretations. The International Accounting Standards Board (IASB) has adopted International Financial Reporting Standards (IFRS), a “principle-based” set of standards for this purpose.
The transition to IFRS in India is no longer a question of whether and when but a question of how. Reporting under IFRS, as proposed by ICAI, would be applicable for accounting periods beginning on or after April 1, 2011. Thus, the financial results of public entities for the quarter ended June 2011 would be reported under IFRS. If India goes for the adoption route, considering the requirements for comparatives under IFRS, entities would have to prepare an opening balance sheet as of April 1, 2010 (or other transition date), and compile full IFRS financial information from that date. However, if India goes for convergence of Indian standards with IFRS (which looks more likely) there may not be a need for comparatives from April 1, 2010 and accordingly, the opening balance sheet date would be April 1, 2011.
Europe was a pioneer in the adoption of IFRS. The initial wave happened in 2005. IFRS enabled a direct comparison of companies' financial statements for the first time. It facilitated their interpretation and understanding by the market. It resulted in reductions in the cost of capital and one could argue, a better allocation of capital. Over 7000 companies in almost 100 countries transitioned into IFRS smoothly without undue volatility in the market or any significant delays in closing of books or filings with the regulators.
However, the journey was not without pain and, for the unprepared, not without surprises. The key lessons that emerged from the European experience: it was not just the accounting, stupid. IFRS required more rigor and discipline in disclosures. Companies which did not perform a careful and meticulous impact analysis (dry run) had difficulties in store for them. Some companies faced last minute hiccups while gathering data required for new disclosures. Most companies had to work extensively on their ERP and internal control systems. Companies that did not consider the tax implications of IFRS were amongst the ones which looked like a deer caught in a head-light.
It is now universally acknowledged that a successful transition to IFRS requires a thoughtful, multi-disciplined approach. First and foremost, you must set up a competent and empowered Project Management Office (PMO) to ensure that the IFRS transformation project is on-time and on-budget. Secondly, you will need IFRS experts who will help you apply and interpret the new standards in your specific industry. Thirdly, you will need tax experts who will evaluate the impact of IFRS on your fiscal situation and these folks must know both IFRS and tax. Fourthly, you will need experts in areas like business valuations, retirement plans, share-based remuneration (if you have one) and acquisitions (if you have done one or are planning one). Finally, you will need a set of technology savvy people who know IFRS and have worked with the specific ERP system you deploy in your company (SAP, Oracle or any other).Most ERP vendors and consultants have done extensive work and there is no need to re-invent the wheel. One word of advice: do not farm the work out to multiple best-of-breed consultants. A single, seamless team will avoid the risk of finger-pointing and project management nightmares. And do not under-estimate the need for training and constant communications –internal and with the investor community.
CEOs do not have pleasant memories of the huge costs and time spent on Y2K projects and in compliance with the Sarbanes-Oxley Act (SOX). They are worried that the IFRS project would cause them more grief. They have concerns that unlike Y2K or SOX, adoption of IFRS would merely make them compliant with a regulatory requirement .With full conviction I will now utter the four dangerous words that Sir John Templeton warned against--- but with a slight twist,
“ This time it’s different”-----or at least it can be.
Both Y2K and SOX were time-compressed projects. Y2k was driven by a tryst with the unknown. At the stroke of midnight everyone plugged and prayed. In the case of Sarbox many were compelled to move with haste. In contrast, there is the rich experience of IFRS conversions spanning hundreds of countries and thousands of companies. In most cases, companies have used the IFRS project to transform their finance function to make it more effective.
Finally, if you begin early and plan well, the journey can be smooth and even enjoyable!