IFRS – a Few Considerations Before Taking the Plunge

It sure seems like it was a long time ago that I had anything to say on the subject of IFRS. Quite recently, a client approached me requesting assistance with the conversion of their US GAAP basis financials to IFRS to conform to their parent company’s presentation. And as I explained the key differences to them, I thought to myself, wouldn’t it be nice if I had a cheat sheet of considerations for making the switch to IFRS? To me, understanding the differences between the two standards and the advantages (or disadvantages) of one over the other can go a long way in deciding whether IFRS is the more logical choice and if so, how to plan the conversion.

1. Know your audience: Are the financials being prepared for a foreign parent company? Or for an investor or lender? It seems logical that if the parent company follows IFRS, the US subsidiary should follow suit. But rarely is the demand for IFRS financials prompted by a request from lenders or domestic investors. Also, consider if the user of the financials would be satisfied with a set of US GAAP financials alongside specific conversion adjustments that help arrive at the IFRS presentation without an actual full-blown conversion or implementation exercise. This can certainly be the easier and less expensive route.

2. Study current accounting policies as they apply to the business to understand if there are any deal-breakers: for instance, a Company that uses last in, first out (LIFO) method for inventory valuation would no longer be allowed to use LIFO as it is not a permitted inventory valuation method under IFRS. The other wrinkle is that under the IRS rules, if a Company uses the LIFO method to value inventory, then it is precluded from using any another method for book/financial statement purposes. So to put it plainly, it is important to know the tax consequences of violating IRS’s LIFO conformity rule.

3. Understand the specific differences between the two standards to know how much work is involved in the short-term and in the long run: IFRS standards may appear simpler than US GAAP in concept at present, viz., the one step goodwill impairment process, principles-based revenue recognition, lease accounting, etc. However, several of the FASB’s convergence projects are resulting in shrinking the differences between the two standards. A case in point is FASB’s recently issued simplification of goodwill impairment which removes step 2 of the goodwill impairment test, making it more similar to IFRS.

4. Don’t forget that the conversion is more than just a financial reporting exercise: it will likely affect the Company’s operations in more ways than one. Besides the obvious costs (manpower and possibly consulting) of transition and implementation, revenue contracts may require revision, key ratios, covenants and tax reporting could get impacted, and IT systems may need to conform to name a few other areas.

So my final words of advice: walk into this exercise once you’ve done your homework, discussed with your advisors and are convinced this is the way to go.