The Wider Implications of Transitioning to IFRS—10 Things to Consider

The transition to International Financial Reporting Standards (IFRS) or to International Public Sector Accounting Standards (IPSAS), which are accounting standards and guidance for use by public sector entities, has been an increasingly significant feature of global financial reporting in the last decade. At this time, more than 120 countries require or permit the use of IFRS, or financial reporting standards substantially based on or converged with IFRS, by some or all of their reporting entities. The International Accounting Standard Board (IASB) is confident that the use of IFRS will grow in the next decade and organizations including the World Bank, the G-20, and the International Organization of Securities Commissions (IOSCO) support the concept of harmonization of corporate reporting.

Thousands of companies, public sector entities, and other organizations have gone through a transition to IFRS-based financial reporting in the last decade, and many more thousands will do so in the next few years. The huge advantage that relatively late adopters of IFRS have is that they can learn from the experience of those that have already gone through the transition. Early adopters of IFRS faced a significant learning curve, and those yet to move to IFRS can capitalize on their experiences in terms of developing an appropriate transition strategy.

When faced with applying the principles and requirements of a new financial reporting framework, the planning issue that most financial statement preparers will think of first is identifying differences in accounting treatments and disclosure requirements. There will need to be a thorough review and revision of accounting policies, choices made in respect of presentation, and identification of transitional adjustments. When planning the transition to IFRS, a reporting entity should carefully consider IFRS 1, First-time Adoption of IFRS, and do the following to ensure successful implementation:

• Clarify when to apply IFRS 1, i.e., which financial statements fall under the scope of IFRS 1;
• Identify the date of transition to IFRS and prepare an opening statement of financial position at that date;
• Select appropriate IFRS-compliant accounting policies to be applied retrospectively to all periods presented in the financial statements;
• Decide whether to apply any of the optional exemptions from full retrospective application of the new accounting policies; and
• Prepare the extensive disclosures required in the notes to the financial statements.

While these accounting-related issues are undoubtedly significant matters to be considered, the wider implications of moving to adopt IFRS have a tendency to pose the greatest difficulties and be more likely to result in unforeseen consequences, but with careful planning, the transition can also bring benefits and opportunities.

Some of the wider implications that should be considered in planning the transition include the following:

1. Impacts on business processes at the business-unit level, particularly the need to capture information for disclosure under IFRS;
2. The need for systems changes and internal control enhancements to ensure rigor in applying the new financial reporting requirements and in dealing with transitional adjustments;
3. The changes to internal information systems and reporting that may be considered necessary;  
4. Implications for performance measurement due to changes in how profit is measured, and knock-on effect on bonuses and remuneration packages;
5. Implications for how liquidity and solvency are measured, and impact on debt covenants and other agreements;
6. Planning for tax implications and identifying whether the tax treatment of items will differ from the accounting treatment;
7. The need to educate finance staff and some non-finance personnel to ensure they are IFRS literate and know how to respond to requests for information;
8. Managing investor relations and communicating with external stakeholders regarding the changes they will see in the financial statements;
9. Estimating the cost of the transition, and ensuring there is sufficient budget and funding for the project; and
10. Considering the need to secure executive-level sponsorship for the transition project, so that it is not perceived as “an accounting problem” and that the transition team is fully supported in their activities.

This is not an exhaustive list of wider implications and many more may be relevant, especially in a large, multi-national organization, particularly those with a complex group structure, or where there are additional regulatory requirements in relation to the transition.

Proper planning is therefore essential to ensure that these wider implications are identified and for an appropriate response to be developed. A well-designed transition project should ensure that pitfalls are avoided, costs minimized, and that potential benefits are also considered. I often advise reporting entities to prepare a SWOT [strengths, weaknesses, opportunities, threats] analysis when they begin to plan their transition, in order to highlight the opportunities that the transition may bring. An example is shown below:

There can also be direct cost and efficiency benefits that arise as a wider implication of transition. A study by the Canadian Institute of Chartered Accountants (CICA), based on interviews with senior representatives of publicly listed entities, found that some interviewees mentioned significant benefits that occurred as a result of the transition. For example, a representative of one company involved in exploration activities commented that as a result of a different accounting treatment for exploration costs, and changes in the allocation of costs to different projects, there was more attention paid to costs incurred. This could have significant implications for reducing operating cash outflows and for the cost control of significant development projects.

In summary, when faced with a transition to IFRS, the preparers of financial statements might feel overwhelmed by the scale of the task ahead of them, and may concentrate on the accounting issues at the expense of considering the wider business implications, both positive and negative. Making use of sound project management techniques will facilitate a smoother transition, from which benefits will accrue, potentially making a difference to business operations by providing an opportunity to overhaul old practices and introduce more efficient ones. Approaching the transition in this way is likely to result in IFRS becoming embedded within the organization, making year-end financial reporting easier on an ongoing basis.