International Accounting Standards-Managing the Impact of Change: The Road to Transparent Financial Reporting Will Present a Number of Challenges in Resource Planning, Training and Communication, but Research Suggests That the Short-Term Pain Will Be Worth the Long-Term Strategic Benefits
Vandenplas, Yves, European Business Forum
A change in accounting standards is rarely the stuff of headlines. However, the move to International Financial Reporting Standards (IFRS, formerly IAS) that comes into effect in the European Union in 2005 is set to make a few front pages. For many companies, this transition will bring significant change not only to accounting processes and procedures but also to the way their entire business is run.
In this article, we explain some of the key implications of IFRS and some of the challenges that companies face as they manage both the change process and the communication of the new financial information to their critical stakeholders.
Making the change to IFRS is not just an accounting exercise. It is a transition that will require all within the organisation to learn a new language, a new way of working. Consider the case of one European company that recently prepared its first financial statement according to IFRS and found that its return on investment appeared to have fallen from 16 per cent to three per cent. Or the media company that saw a 54 per cent decline in net earnings under the international standards, with a non-cash goodwill write-off of [euro]2.4bn.
Such revisions are far from trivial. Indeed their size guarantees knock-on effects that will touch every aspect of a business's operations--from the external communication of corporate performance to the viability of some products and even the reported profitability of the business itself.
Step-change in standards
So why does IFRS result in such fundamental shifts in the financial numbers? Of the 35 effective standards under the new system, just a handful are likely to account for most of the notable changes from national GAAP (Generally Accepted Accounting Principles). These include the standards covering hot topics such as: financial instruments, business combinations, pensions, deferred tax, segment reporting and leasing.
The impact of IFRS on an entity's financial statements will vary according to the industry it is in and the requirements of the national GAAP that companies are converting from. In the telecoms sector, for example, companies will face significant revenue recognition and impairment issues; in pharmaceuticals, accounting for drugs in development, trademarks and patents may become more complex; and in financial services, the mark-to-market or 'fair value' provisions are likely to result in far greater earnings volatility.
Other issues are likely to affect companies across many sectors. Many companies, for example, have borrowing covenants that refer to published financial information. As this information is likely to change under IFRS, there is a risk that borrowing covenants could be breached. So considering the potential impacts and renegotiating covenants for periods from 2005 will be just one of the many critical issues on the 'to do' lists of companies making the change.
What is true for all companies, however, is the need to understand and prepare for the changes that lie ahead.
Ready for action
Planning and making the necessary changes, and integrating them across the business while continuing 'business as usual', is a tough challenge. A list of the key factors that need to be considered is given in the box: 'IFRS--the top implementation issues' (p.80). As an illustration of the hurdles that lie ahead, consider the following three areas that have been highlighted by PricewaterhouseCoopers surveys.
1 The cost of change.
Many entities making the change underestimate the time and resources required. For example, respondents to PwC's survey 'Illuminating value: The business impact of IFRS', estimated that IFRS would require 'significant investment' in new IT and data systems at group level. Less than one-third of respondents thought that implementation would take more than 5,000 man-hours--yet a major insurer that has been through the conversion process estimated that the total systems effort took 100,000 man-hours. …