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Friday, April 15, 2011

IFRS transition-more than just an accounting change

While the Big4(and others) have covered this in depth via white papers, this post just intends to bring up the major issues(with examples) for investors and non accountants  to be aware of. So next time your Finance Dept brings up the issue of IFRS adoption, you would hopefully be agog with questions about its impact on you and your Dept/profit centre. Following are the functions which would see major workload:-

Corporate finance—If key numbers on which certain debt covenants are based change due to the transition to IFRS then early discussion and negotiation with the banks is critical. Though most agreements do have a clause covering accounting changes, it is still safer to run a test on that
Tax—The tax team needs to be in the loop, so that they can properly account for the transition differences, and subsequent impact(s) in the tax returns.
Human resources—Given the growing trend to use accounting based numbers for compensation plan(rather than shareholder return only), executives should be concerned about the impact of transition to IFRS on their key metrics and incentive plans.
Technology—Changes are required in the consolidation systems and in the general ledger
accounting systems.Also, to present the required segment information, the systems would need to be built.
Internal controls—IFRS requires a higher level of judgement and estimation than US
GAAP.  This means the controls and process surrounding accounting judgements and
estimate must be robust since it will be challenged by the internal controls testing process.Also, given the increased scope for fraud/mistake, the controls need to be fraud proof as far as possible.

Investor relations—Investors need to be educated about the initial upfront changes(say in equity) and the subsequent income statement volatility when earnings smoothing is no longer allowed/much more difficult. This would impact companies with heavy pension liabilities, financial instruments etc.
Operations—Given the asset component method for depreciation, impairment testing and other asset specific tagging requirements, Facilities/Operations would need much more information about their fixed assets than they have presently. This may lead to outsourcing of this labour intensive function

In passing, we will see much more activity on this in the coming year 2011-12 on the Indian front. Those of you interning in those companies may already get to see some of these changes

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