IFRS - plan now!

I was in Seattle last week where, in my hotel bar, I met a bunch of folks who were attending a Business Intelligence (”BI”) conference. Road warriors are used to striking up conversations with strangers and, given the week, I thought most of my discourse would be about politics (the presidential debate was on) or the economy (what is going on with the Dow?). Imagine my surprise when I stumbled into a conversation about International Financial Reporting Standards (”IFRS”) and its effect on BI! Much to the delight of my new found friends, these are two topics I know alot about. The group had three questions for me and since they apply to many of you as well, here goes …

When do companies in Canada and/or the US need to make changes to adapt their accounting practices for IFRS?

As I mentioned in a previous post, IFRS will be mandatory for publicly traded companies in Canada beginning January 1, 2011. Just recently the SEC announced that they are considering a roadmap that would make mandatory use of IFRS by US issuers beginning in 2014. Both of these dates seem a long way away but Canadian publicly traded companies need to start considering this now.

Why so soon?

Most of you are (or should be) creating your 2009 operating plans right now for approval by your management/board in December. Now, let’s work backwards from January 1, 2011. Public companies in Canada need to do year-on-year comparisons as a part of their public filings so you actually have to be IFRS compliant by January 1, 2010 (transition date). In order to be ready to go on the transition date you need to do all your planning and infrastructure creation throughout 2009 which means you should be including it in the budgets which you are creating today. As well, your note disclosures for December 31, 2008 and 2009 will require you to discuss what the entity anticipates as a result of adopting IFRS. So yeah, now is the time to get started.

2009 should be dedicated to preparing for the transition. It’s an opportunity to really step back and take a big picture review of all the financial reporting requirements and underlying systems because IFRS is going to affect the entire organization.

Here are the basic steps to get started today:

• Appoint a project team! This team should include Accounting and Finance, IT and even Human Resources. Your auditors should act in an advisory capacity;
• One of the teams (possibly all, if budget allows) should go for training in IFRS. There is a plethora of courses, conferences, seminars and self study programs - I’ve been suggesting that people attend this course put on by Canadian Institute of Chartered Accountants (”CICA”). Can’t wait for the course? Check out this overview by Deloitte.
• Assess the impact on your specific situation and, in particular, the options under IFRS 1. You should be aware of the one-time options allowed under this standard. Yeah, I know it’s 75 pages long but welcome to IFRS! Two good resources to review for impact are: (1) the CA website for Transition to International Standards and (2) the actual AcSB Transition Guide.
• Draft a plan that lays out responsibilities and transition times - this definitely needs to be conveyed to your Board of Directors, auditors, investors, lenders, employees and stakeholders.
• Your 2009 budget should include increased resources for additional headcount (the administrative burden may be too much for your current team) and capital (your underlying software systems will definitely need modifications and production environments to test in). This is alot more than just ‘an accounting exercise’.

Next question …

What impact, if any, will it have on existing reporting practices?

How can I say this without scaring you … uhm … well … everything changes. Want just a brief visual? Check out these samples that show you the presentation of IFRS financials. The actual presentation of the financial statements changes dramatically. For example, notice that the income statement doesn’t use “sales and marketing, product development, general and administrative” despite the reality of how business units are managed. Note disclosures are much more extensive. Remember, each one of these facts comes from an underlying data system somewhere so reporting practices will need to adapt to the new format.

Now, I know what some of you are thinking: “We’ll just continue on our old system and manually, in a spreadsheet, adjust for IFRS at a top level.” Well you could, but (1) that is a WHOLE lot of pain for your Finance department and is exceptionally time consuming, and (2) if I were your CFO, I would not sign the internal control certificate. Without pushing IFRS standards down to the transaction level there is no real way to make sure internal controls that support your IFRS reporting are adequate.

Where do you anticipate the biggest headaches to be?

I don’t want to underestimate the effort that is required to convert to IFRS. Key problems can arise in such areas as:

• project launch and planning activities;
• revision of accounting policies that require interpretation and judgment (get your auditors involved!);
• application of IFRS-1 - someone has to read and understand the 75 pages and digest their meaning;
• development of skeleton IFRS compliant financial statements (including disclosures) - so you can work back to the transaction level;
• identifying and resolving data capture issues to support the new format;
• retraining personnel - IFRS is not an easy thing to understand at the transaction level … the devil truly is in the details and some of your folks may not be able to step up. And I’m not just talking about employees. What about your audit committee? Your board? Who is going to train them all?
• managing the message to external groups regarding the impact of IFRS.

But where do I anticipate the biggest headache? Running dual systems in 2010 - what a freakin’ nightmare that’s going to be! Remember that IFRS reporting to the public begins January 1, 2011. Prior to that it must be in Canadian GAAP but in order to be ready for 2011 you need to compile comparative data in 2010. Doing the ‘tick and tie’ to make sure two separate books are accurate? Yuk. Reporting systems will play a HUGE part in this exercise.

Speaking of systems, the next biggest nightmare? Internal Controls. As I mentioned before, in Canada management signs internal control certificates that are quite extensive. The conversion to IFRS and the nature of the changes at the accounting, functional, transactional and internal control levels increases the risk of both misstatement and fraud. Auditors will be all over this to make sure internal controls are adequate during the transition and after.

Perhaps now you can understand why my new BI consultant friends were at the bar. Hah!

I would like to give them two more pieces of advice:

1. Read the ‘20 questions‘ guidance put out by CICA. It’s what your customers are thinking about so you should be too.
2. It’s true, your clients are going to have to change the way their data rolls up and is reported. That means: new standard reports, metrics, KPI’s, dashboards, the whole works. Because this occurs at the transaction level, talk to your clients about Extensible Business Reporting Lanugage (”XBRL”) - it’s best practices in the finance world and if they are overhauling their financial systems they may want to consider this too. I even found you an article that relates XBRL to BI.

It was nice meeting you all. Good luck!

… and to my regular private company readers: aren’t you glad you’re private? Best practices always evolve from public company requirements. It will be interesting to watch the impact of IFRS on the way we do business.