New accounting standards are coming. Are you ready?
As world markets inch toward economic recovery, Canada’s publicly accountable enterprises (PAEs) face an added bump in the road: mandatory conversion to International Financial Reporting Standards (IFRS).
Although the switch from Canada’s Generally Accepted Accounting Principles (GAAP) to IFRS doesn’t officially change over until 2011, PAEs will need to provide comparative IFRS statements for 2010 when they issue their 2011 financial statements. Private companies have a choice to make between IFRS and private company GAAP, with the same deadline.
This means organizations with a Dec. 31 year-end should essentially have strived to be IFRS-ready as of Jan. 1, 2010—unlikely, given the recent economic challenges most companies are dealing with.
Since virtually every Canadian manufacturer is looking for ways to reduce costs, that timeline may have tempted firms to scale back their IFRS conversion plans. But that could prove risky.
Enterprises can reduce the costs of conversion striking the right balance of internal and external resources to minimize potential conversion errors. So, what’s the optimal mix that won’t expose your organization to financial reporting-related risks?
Input costs will arise from three categories: internal human resources; external advisors, legal counsel and valuation experts; and information technology resources.
The key to minimizing these costs is careful planning and strong project management. Start early and maximize the use of internal resources by following these principles:
1. Consider costs and benefits. Develop a plan that focuses on resources, costs and benefits, as well as deadlines. Consider both the long-run and short-run costs. Prioritize the specific areas—including disclosure matters—that need attention. Obtain commitments for external assistance, such as engineering, valuations, IT and tax resources, and include collateral matters, such as loan agreements, compensation arrangements, treasury plans and budgets.
2. Set realistic deadlines. They should allow enough time to develop internal resources. Be realistic by providing buffers and time for quality assurance, and consider there may be deadlines earlier than the statutory requirements. Consider the options under IFRS 1 (first-time adoption of IFRS), and build relevant activities into your conversion plan.
3. Focus on the important changes. Consider the adoption of IFRS as a separate decision from major systems changes and avoid making unnecessary changes to financial reporting systems at the same time. If you plan to use temporary workarounds, identify what additional controls are needed to ensure there are no adverse implications. Distinguish between changes in estimates that are necessary, and those that aren’t. Address any anomalies in GAAP financial statements prior to 2010 to avoid conversion issues and focus on areas where differences in assets, liabilities, revenues and expenses related to future cash flows may be significant.