Written by Natalia Warren Wednesday, June 16 2010
Although IFRS adoption in the US is still a few years away (according to the last SEC proposal: 2014 for large accelerated filers, 2015 for accelerated filers, and 2016 for non-accelerated filers and smaller companies), some US-based issuers may have the opportunity to report financials using IFRS standards sooner, depending on their industry and relative market share. Still, the SEC has not made its final decision and won’t until at least 2011, though it has renewed its commitment to move forward with adoption.
Nevertheless, outstanding issues that are not yet resolved – and may not be before the various deadlines – will affect filers, contributing to the chaos and confusion of any significant transition in reporting requirements.
For example, IFRS does not yet have standards for the treatment of insurance contracts, recapitalization transactions, extractive activities, some common control transactions, reorganizations, and other similar transactions. Also, IFRS permits various accounting practices based on local standards, something the SEC seeks to eliminate. But even today U.S. GAAP also does not have a single standard for property, plant, and equipment or even revenue recognition.
In addition there are known differences between U.S. GAAP and IFRS. For example, IFRS does not permit accounting for inventory on a LIFO basis and instead requires FIFO which could impact taxable income based on differences in inventory valuation using the two methods.
Complications would also impact companies that invest in entities that don’t report using IFRS or private companies planning an IPO that need to switch to IFRS from a different standard. And companies that do not operate globally will be challenged to adopt IFRS both for financial reporting and auditing, e.g. reporting on the effectiveness of internal controls over financial reporting (SOX Section 404).
The SEC has asked for comments to help it assess two alternative reconciliation proposals, neither of which has yet been selected. The first proposal would require a one-time reconciliation from U.S. GAAP to IFRS1, whereas reconciliation in the second proposal would cover a three-year period. If option 2 is approved, large accelerated filers would need to reconcile 2012 – 2014, accelerated filers would reconcile 2013 – 2015, and non-accelerated filers would reconcile 2014 – 2016. In effect the companies would need to issue two sets of reports in each of the three years, one set following U.S. GAAP rules the other set using IFRS standards. Of course, some large global companies may already have to report using both.
Depending on company size and the number of times reconciliation disclosure is required, the SEC estimates modest costs for the IFRS roll-out, anywhere from 0.125% to 0.13% of revenue, a number that is expected to drop over time. However, if the SEC’s SOX compliance estimates are used as a predictor, then their cost estimates for adopting IFRS are much too low.
Although the SEC decision is not expected until 2011, the time to prepare for what appears to be an inevitable future is now. The difficulty and complexity in IFRS reporting will only be exacerbated for organizations that frequently acquire other companies, frequently reorganize, or have different charts of accounts (COAs) for various business entities. It stands to reason that compiling period-end reports for them is already difficult and will only be more so as U.S. GAAP rules morph into IFRS standards.
At the very least, organizations should move toward adopting a single COA for all business entities. At a minimum this will mean that all of the convoluted mapping during period-end consolidation will be minimized, if not completely eliminated, along with the myriad spreadsheets consumed in the effort. IFRS compounds the issue for U.S. filers accustomed to following rules by establishing standards and not publishing a recommended COA. The sky is the limit, or so it seems. But adopting a COA that can accommodate various lines of business in different countries and industries is not an insurmountable task if best practices are followed. The question then becomes, what are those best practices?
In If IFRS…Then, Part 2 we share best practices in COA design.
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January Puzzle
A traveler gets lost on a deserted island and finds himself surrounded by a group of n cannibals.
Each cannibal wants to eat the traveler but, as each knows, there is a risk. A cannibal that attacks and eats the traveler would become tired and defenseless. After he eats, he would become an easy target for another cannibal (who would also become tired and defenseless after eating).
The cannibals are all hungry, but they cannot trust each other to cooperate. The cannibals happen to be well versed in game theory, so they will think before making a move.
Does the nearest cannibal, or any cannibal in the group, devour the lost traveler?
Solution
The short answer is the traveler’s fate depends on the parity of the group. If there is an odd number of canibals, the traveler will be eaten, but if there is an even number, the traveler will survive.
To prove this, we will consider small groups and use mathematical induction to explain the solution for larger groups.
Case n = 1: this is an obvious case. If there is one cannibal, the traveler will be eaten. It doesn’t matter that the cannibal will get tired because there are no other cannibals around as a threat.
Case n = 2: this is a more interesting case. Each cannibal wishes to each the traveler, but each knows he cannot. If either cannibal eats the traveler, then he will become defenseless and the other one will eat him. So each cannibal uses backwards induction to realize that the only strategy is to not eat the traveler. The hapless traveler finds a bit of luck, therefore, and actually survives.
Case n = 3: this is where the problem gets interesting. The best strategy is for the closest cannibal to make a move and eat the traveler. The cannibal will be defenseless after eating, but ultimately he will be safe. Why is that? The reasoning is due to induction: once the cannibal eats the traveler, the resulting situation has 2 unfed cannibals and the 1 defenseless cannibal. But as we just showed above, when there are 2 unfed cannibals, neither will make a move for fear of being eaten by the other! Thus the first cannibal to make a move will be safe as the remaining 2 cannibals block each other.
We can prove the higher cases using mathematical induction. If the number n is odd, then the closest cannibal can safely eat the traveler because the remaining number of unfed cannibals is even (and by induction, with an even number of unfed cannibals no one makes a move). If the number n is even, then no cannibal will eat the traveler, for if he did, the remaining number of cannibals would be odd, meaning he will get eaten by the induction hypothesis.
Success Tips for Oracle Project Management
- Create a standard for documentation at the beginning of your project, and hold team members accountable for completing documentation requirements as well as keeping them at and above the standards required.
- Before promulgating user documentation or training, it’s also a good idea to choose a representative from the among the business users base to review materials first.
- If you are not sure about the resources and budget required, obtain several estimates from people that have experience with the same size and scope of your project.
- Be explicit, before beginning the project, what internal resources are required for execution. This includes people, infrastructure, hardware, and software.
- Help the project champion understand the impact your project will have on the organization and how its successful completion will make him or her an internal hero or heroine for supporting it.
- Break up your project into smaller projects (try for projects that can be completed in 4-6 months, especially early on) to get success and demonstrate momentum.
- Make sure that your testing includes reports, upstream and downstream interfaces, customizations, enhancements, and workflows.
- Ensure that comprehensive transition reports and meetings between departing and incoming personnel are completed.
- Instead of spending time and resources implementing third-party reporting, consider consolidating multiple instances, moving to a global chart of accounts (CoA), and/or standardizing on a consistent calendar.
- Include governance, risk, and compliance management as part of the project plan.
- Finally, celebrate the successes. Too many projects focus on defects, failures, or small cost over-runs without looking at the big picture and what was accomplished.
The Analyst Corner
John Van Decker, Research VP of Gartner, states:
"A single chart of accounts allows consistency in financial reporting across the enterprise by standardizing on common metrics and reporting structures, reduces dependencies on a separate financial consolidation system, and significantly reduces the costs incurred with ongoing, complex conversions and translations."
