The Tortoise, the Hare and IFRS
January 29 2009 by Barry Salzberg
Aesop’s fable of the tortoise and the hare should be required reading for every CEO today. This fable of consistent, deliberate action beating a procrastinating but faster-moving opponent to the finish line could play out again as U.S.-based companies make the transition to International Financial Reporting Standards.
It’s a race we’ve already seen run, in the European Union (which made the switch in 2005) and in Canada, which is making the transition now. Time and again we’ve experienced that no matter how established the company is, or what its size, the outcome is always the same: Slow and steady most often wins—and generally costs less money.
Of course, the animals in the tale have one advantage over today’s CEOs: At least they know when the race will begin. With a new administration taking the reins in Washington, and with other financial concerns demanding the world’s attention, the momentum for adopting IFRS in the U.S. may slow somewhat.
Two events in late 2008 signal that, although the exact start of the race may be uncertain, the racers would do well to begin warming up: First, the SEC released its long-awaited roadmap. And second, just hours later, the countries meeting for the G20 Summit declared: “Key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.” Not a starter’s pistol, perhaps, but still a sign of support for the transition.
According to the SEC’s roadmap, most CEOs will have five to seven years to transition financial reports to IFRS. That can seem like an eternity— especially when current events move as swiftly as they have of late. But transitions to IFRS are longer and more complex than many expect, particularly because three years of comparative financial statements will be required, beginning in 2012 for larger firms. So my advice is: Pack your company’s bags, assemble your traveling party and set out on the road to IFRS as quickly and efficiently as possible.
Not all companies begin their trips to IFRS from a standing start. Many U.S.-based companies doing business elsewhere in the world already have some exposure to IFRS, and have decided to do something about it.
We have been working on this with a large multinational client for three years. For this company, understanding IFRS was primarily an issue of risk management: they realized that they needed to get their arms around the myriad of reporting requirements for their international subsidiaries. IFRS also fit well into their goal of centralizing and standardizing their business processes globally.
We helped migrate their statutory accounting into existing regional centers to meet multiple reporting requirements— allowing the com pany to further improve its controls and achieve cost savings. At this stage, the company has enough IFRS-trained employees to handle adjustments required to the treasury, legal, technology and communications processes. But a smaller company—or one with a smaller global footprint—will also need to consider changes in human resource procedures when hiring for an IFRS-compliant operation.
This client—and many others— recognizes that IFRS is not a simple matter of technical changes in accounting. It’s a complex challenge that calls for a holistic solution. They don’t see IFRS implementation simply as a cost to the organization, but rather as a net benefit, if it is designed and executed properly.
Clearly, many companies may need every minute of the transition period to make the shift to IFRS. Reaching the IFRS finish line requires a holistic plan and the steady, consistent leadership to implement it that only a CEO can provide.
Barry Salzberg is chief executive officer of Deloitte LLP.