Read full article. - Plante Moran

Published 2010 1 

IFRS is coming. 

Is Your Organization Ready? 

8 Proactive Steps Public Companies Should Be Doing Now 

By Mark zajac

8 Proactive Steps Public Companies Should Be Doing Now


For those that have yet to hear the four-letter acronym, IFRS is short for International Financial Reporting Standards. 

Although the United States has yet to adopt the standard for domestic SEC registrants, it is the required or permitted 

accounting and financial reporting standard in more than 100 countries around the world. Since 2005, all public companies 

in the European Union (27 countries in total) have been required to use IFRS as their accounting backbone. Canada will be 

migrating to IFRS beginning in 2011. 

IFRS accounting standards are produced by the International Accounting Standards Board (IASB), similar to the Norwalk, 

Conn.-based Financial Accounting Standards Board (FASB). The IASB is headquartered in London, England and has been 

around in some form or another since 1973. IFRS accounting standards are principles-based, whereas U.S. GAAP is more 

rules-based. As a result, IFRS standards necessarily require increased interpretation and judgment in their application, 

along with additional disclosures. Critics of international accounting standards argue that there’s so much room for 

interpretation that users of these financial statements won’t be able to compare a company’s financial statements to one 

another, even within a single homogenous industry. Proponents of IFRS argue that a global set of standardized accounting 

rules will allow companies more diverse access to capital markets and allow organizations to be more capital-efficient and 

globally responsible. 

Because of the highly interpretive nature of IFRS and the increased amount of disclosures needed to comply with these 

standards, it’s in the best interests of SEC registrants to evaluate the key functional support areas and internal control 

environment to determine what effects a conversion of this magnitude will have on the sustainability of the company. 

Although some larger U.S.-based public companies may begin transitioning to IFRS in the near future, assuming the SEC’s 

Roadmap for the Adoption of IFRS includes an early application provision, most of these companies are a few years away 

from being required to implement the new standards. Regardless, organizations shouldn’t be sitting dormant and letting 

precious time elapse. Below are eight steps your organization can take to immediately gauge what key functional areas will 

need to be addressed once the SEC flips the switch to IFRS reporting in the United States. 

This IFRS article focuses on 8 steps public companies should be doing now 

Step 1: Perform a High-Level Financial Statement Review of the Impact of IFRS Adoption 2–3 

Step 2: Evaluate the Impact of IFRS Transition on Debt Covenants and Borrowing Facilities 4 

Step 3: Evaluate the Impact of Your Inventory Costing Method – No More LIFO? 5 

Step 4: Evaluate the Impact of IFRS Adoption on Compensation Policies 6 

Step 5: Evaluate Information Technology Systems and Processes 7 

Step 6: Involve Internal Audit Early 8 

Step 7: Evaluate Organizational IFRS Knowledge and Training Needs 9 

Step 8: Become Familiar with IFRS 1 — First-time Adoption Guidance 10

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Step One: 

a High-Level Financial Statement Review of the Impact of IFRS Adoption 

According to the 2007 Citigroup study of 73 large European companies with stock traded on U.S. 

exchanges as American Depository Receipts (ADRs), profits were on average 23 percent higher under 

IFRS than U.S. GAAP. Further, the study cited that 82 percent of firms reported higher profit figures 

under IFRS. Another study conducted by RG Associates of Baltimore, Md. similarly found 63 percent of 

organizations reporting higher profit numbers under IFRS. 

With such convincing statistics, it’s fair to expect that your organization could report a higher level 

of profits under IFRS than under U.S. GAAP. The magnitude of the change however, will depend 

heavily upon the nature of your entity’s operations and the elections made under IFRS. For example, 

as described below, IFRS provides for optional elections to account for property and equipment and 

intangibles using a “revaluation” model. Under a revaluation model, long-lived assets are periodically 

adjusted to fair value. 

Before reconciling your books to IFRS (even at a high level), perform some preliminary research. Prior 

to 2007, all non-U.S. based companies with stock traded on an exchange located in the United States 

(ADRs or ADSs) were required to reconcile their IFRS books to U.S. GAAP using SEC form 20-F (Foreign 

Annual Report) and show every reconciliation detail along the way. As a first step, consider finding an 

IFRS-reporting public foreign company with stock traded on a U.S. exchange that’s in your particular 

industry. Go back to years prior to 2007, and download their 20-F forms from the SEC website (sec.gov). 

Find the area of the report where the reconciliations are highlighted in detail, and compare and contrast 

the conversions you may have to make. This could be a great start starting point in highlighting some of 

the key issues your organization will face in adopting IFRS. 

Additionally, take advantage of the lessons learned from European entities that adopted IFRS in 2005. 

As with any significant, organization-wide change, there’s the possibility for mistakes to be made along 

the way toward first-time IFRS adoption. Why not minimize or even eliminate those potential mistakes 

by reviewing what European entities did and didn’t do correctly when they were going through firsttime 

adoption. 

So, what can you expect to encounter when reconciling your books to IFRS? Here’s a small sampling. 

Inventory Costing Methods – As discussed in Step 3 below, if you currently use LIFO (last-in, 

first-out), expect to have to discontinue in favor of FIFO (first-in, first-out) or average costing. 

Many companies in the United States carry inventory using the LIFO method and, with the 

adoption of IFRS, there will be an impact on their bottom lines.


Research and Development (R&D) – Under U.S. GAAP, R&D is expensed as incurred with very 

few exceptions. Under IFRS, research costs are expensed as incurred, but development costs 

(representing internally generated intangible assets) are capitalized and amortized when 

specific criteria are met. 

Asset Valuations – IFRS provides an optional election to revalue property and equipment 

and intangible assets, whereas under U.S. GAAP these adjustments are strictly prohibited. In 

addition, asset impairments under IFRS can be temporary; under U.S. GAAP they’re permanent. 

Leases – IFRS provides broad principles for distinguishing between operating and finance 

(capital) leases. U.S. GAAP, on the other hand, has specific “bright-line” criteria that allow for 

the structuring of agreements to achieve the desired accounting. In general, more leases are 

accounted for as capital leases under IFRS than U.S. GAAP. 

Revenue Recognition – Consistent with its principles-based nature, IFRS provides broad 

guidance on revenue recognition with few specific rules. Under U.S. GAAP, revenue recognition 

is the area where its “rules-based” label is most evident. Significant differences often result. 

Debt Classification – IFRS classifies debt on the balance sheet based on the facts at the 

reporting date. As a result, the curing of debt covenant violations after year end aren’t reflected 

in the balance sheet presentation. 

Guidance and Interpretations – There’s significantly less available guidance and interpretations 

under IFRS than U.S. GAAP. U.S. GAAP prides itself on offering a robust array of information 

and interpretive guidance on the complex accounting rules. IFRS is the opposite, which is 

consistent with its principles-based standards. U.S. GAAP has approximately 17,000 pages of 

interpretive guidance, while IFRS has about 2,500 pages. 

Understanding the magnitude and reasons behind your organization’s income and asset value changes 

after adopting IFRS will allow you to better understand where increased attention will be required in the 

future. Once known, you’ll be able to allocate the right resources to those areas in a timely fashion.

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2 

Step Two: 

Evaluate the Impact of IFRS Transition on Debt Covenants and 

Borrowing Facilities 

Many organizations are financed with debt and, as a result, compliance with covenants is critical to the 

overall success of the organization. Regardless of whether a company’s balance sheet will look stronger 

or weaker or whether earnings will improve or decline under IFRS, a change to IFRS will directly impact 

financial covenants in debt agreements. For example, many agreements require that U.S. GAAP financial 

statements be provided to the lender. In addition, restrictive financial covenants negotiated with the 

lender were based on the company’s U.S. GAAP historical financial statements and projections. 

Individuals who have been involved in arranging debt financing will be well aware of the need to be 

proactive and allow for plenty of time to modify agreements. There is an education process that will 

need to be completed on both sides of the table to understand the impact of IFRS on a company’s 

financial statements before negotiation of revised covenants can begin. This highlights the importance 

of the IFRS impact assessment described in Step 1. 

Understanding your bank’s position and opinions on the topic could give you an edge compared with 

your competitors who might just end up scrambling at the last minute to strike a deal. At a minimum, 

you’ll be able to communicate to your lenders that you’re taking the potential adoption seriously and 

being proactive about the issue.


3 

Step Three: 

Evaluate the Impact of Your Inventory Costing Method – No More LIFO? 

Among the many differences between IFRS and U.S. GAAP, not one is more controversial than inventory 

costing methods. Many companies in the United States use the LIFO (last-in, first-out) method for 

inventory costing. This is not surprising because LIFO has tax advantages associated with it, since 

companies will tend to report higher cost of goods sold figures and, therefore, lower net income under 

LIFO versus other inventory methods. 

Under IFRS accounting, however, LIFO is not permitted. The change will require companies currently 

using LIFO to switch to a non-LIFO method such as FIFO (first-in, first-out) or average costing for financial 

reporting purposes. Consequently, this change could place these companies in violation of the IRS 

conformity rule, which states that if you use the LIFO method to value inventory for tax purposes, you 

must also use it as an income measurement in your financial reporting. Unless the IRS changes this rule, 

companies could face large income tax liabilities from accelerated income recognition in the future. 

With this potential issue looming on the horizon, companies may wish to consider inventory planning 

options in addition to tax-planning strategies. For example, the company’s natural business cycle or 

economic cycles may provide opportunities to make changes that minimize the income tax impact of 

adopting a new inventory costing method. 

Also, in addition to the potential income tax obligation resulting from the change in inventory costing 

to non-LIFO methods, the move could present challenges for some organizations as they will have to reengineer 

their inventory costing systems to accommodate the newer method. It’s important to involve 

cost accounting and IT functional areas into the IFRS project as soon as possible, as these groups will 

play a critical role in making the transition successful.

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4 

Step Four: 

Evaluate the Impact of IFRS Adoption on Compensation Policies 

The move to IFRS adoption is not going to be isolated to the accounting and finance department. 

Undoubtedly, IFRS is going to force dramatic changes within organizations across all functional areas 

— accounting, production, legal, and human resources, just to name a few. Lately, all the attention 

of IFRS adoption in the United States has been on the technical accounting side with little talk of the 

intra-departmental effects of moving to the new standard. One of the more problematic non-technical 

accounting matters related to IFRS adoption will surely be in the area of compensation. Since many 

organizations link incentives and bonuses to operating profits, and operating profits will be different 

under IFRS than U.S. GAAP, it will be hard to ignore this area any further. 

As studies have shown, income under IFRS will tend to be higher than under U.S. GAAP, possibly leading 

to the achievement of financial objectives sooner. Further, potentially volatile changes in revenue and 

asset values could be expected as well, since these areas will tend to have the greatest interpretive 

variations between IFRS and U.S. GAAP. Reporting of incentive compensation metrics will need to be 

revisited as a result of this, since certain thresholds for the payment or accrual of incentive bonuses for 

executives and employees might be met (or not met) based purely on the accounting change to IFRS 

and not on performance. Additional controls and risk management oversight will need to accompany 

the calculation of incentive and compensation-based metrics. 

Additionally, adoption of the principles-based IFRS may pose a risk to an organization. The increased 

need for IFRS interpretation could allow more opportunities to influence the specific incentive-based 

metrics embodied in compensation arrangements. 

As a starting point, companies should evaluate incentive-based compensation metrics (operating 

income, EBITDA, net profit, etc.) and determine whether the evaluations from Step 1 above will have any 

effects on the calculations of incentive-based payments or accruals. For example, many organizations 

use EBITDA as a primary metric for the calculation of incentive-based compensation. Since EBITDA 

doesn’t include depreciation and amortization expense, this metric would be considered a more 

IFRS-neutral compensation metric (assuming no other accounting differences exist), because the 

differences between IFRS and U.S. GAAP related to recognized asset values will have less influence on 

the calculation. 

For companies that are in the process of restructuring compensation policies or have made a decision 

to change because of IFRS adoption, incentive-based metrics should take into account not only the 

technical difference between IFRS and U.S. GAAP, but also the interpretive nature of IFRS. Consideration 

should also be given to the use of cash flow-based measures that eliminate some of the concerns related 

to accounting influences, assuming these metrics are in line with the organization’s goals.


5 

Step Five: 

Evaluate Information Technology Systems and Processes 

An organization-wide change to IFRS will undoubtedly have a significant impact on information 

technology systems and processes. For companies that have adopted IFRS, out-of-pocket spending on 

information system changes and upgrades are often the most significant external cost incurred. The 

impact on systems and processes is easily highlighted by focusing on what’s thought of as one of the 

more mundane aspects of accounting – fixed asset depreciation. 

One common difference between U.S. GAAP and IFRS experienced by virtually all companies is 

component depreciation of fixed assets. Currently, under U.S. GAAP, fixed assets such as buildings and 

major equipment are permitted to be accounted for as one item, which makes monthly depreciation 

calculations fairly simple – for example, one building, one depreciation charge. Under IFRS, the same 

fixed assets such as buildings and equipment will need to be broken down into their significant 

components and depreciated separately – the building now is broken down into the roof, walls, 

foundation, etc. All of these pieces or components will need to have their own values, useful lives, 

and depreciation calculations. This added complexity will require organizations to have sophisticated 

fixed assets software that can accommodate these detailed calculations and additional recordkeeping 

steps. To make it even more interesting, fixed asset systems must be able to accommodate revaluations 

of these same fixed assets. Under the elective revaluation models under IFRS, assets are periodically 

adjusted to fair value. In addition, unlike U.S. GAAP, asset impairment charges can be reversed; 

therefore, asset impairments are no longer permanent but variable. 

Giving consideration to the impact of IFRS adoption on information technology systems and processes 

will save you many headaches in the future.

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6 

Step Six: 

Involve Internal Audit Early 

Internal Audit (IA) is best positioned to assist in the adoption of IFRS. As such, it should serve as a liaison 

to accounting and finance by offering expertise on planning, scoping, execution, and remediation. 

Although IA may not have the expertise to assist with technical accounting conversion matters in some 

organizations, it can nonetheless be instrumental in other project management areas. The scope and 

magnitude of a project like this will require the support and commitment of all areas of an organization, 

which will require team members to understand the intricacies of the organizational structure, 

something IA is an expert at. Further, IA brings its expertise in project and knowledge management 

of the internal control environment, which will be invaluable to the IFRS transition team. Changes to 

transactions and process controls will need to be evaluated under the supervision of IA, since they 

possess the primary knowledge of the inner workings of those controls as well as its documentation. 

IA’s high-level view of the organization will likely be critical to the IFRS conversion project team. Not 

only does IA know all the key decision makers within the organization but it knows all the staff that is 

actually performing the processes and controls, since they were most likely the team that documented 

it. Also, IA has the experience acquired through Sarbanes-Oxley (SOX) implementation to hit the ground 

running, since many lessons learned from SOX are applicable to a mega-project like an IFRS conversion. 

IA professionals can also provide value-added services to the organization during the IFRS transition. 

They can help to quickly identify controls and supporting processes and transactions where changes will 

be needed because of the change to IFRS. Additionally, they can work in conjunction with the external 

auditors by identifying controls, systems, documentation, and processes affected by the IFRS adoption. 

Once the required changes to the processes and controls have been identified by the transition team, IA 

can quickly make changes to documentation to reflect the new or changed items. 

Lastly, IA can lead the transition to new accounting policies and procedures that will need to be 

implemented because of IFRS adoption. They can help draft the new policies and make sure those 

policies go through the checks and balances required.


7 

Step Seven: 

Evaluate Organizational IFRS Knowledge and Training Needs 

According to a 2008 survey on IFRS conducted by the American Institute of Certified Public Accountants 

(AICPA), approximately 80 percent of participants responded that they need to know more about IFRS. 

What’s more staggering is that close to 70 percent responded that they have either no knowledge or 

just basic knowledge of IFRS accounting standards. Another study conducted by Deloitte in March 2009 

found 40 percent of respondents acknowledging they had “no IFRS in-house knowledge or experience.” 

These are troubling statistics for companies that will be required to implement IFRS. Organizations 

will need to train and support accounting staff before, during, and after adoption. It is important to 

acknowledge that IFRS training is not just needed for accounting and finance staff. There are numerous 

members of an organization, from board members to any individual with profit and loss responsibility, 

who will need to understand IFRS and how it differs from U.S. GAAP. 

For accounting and finance staff, however, investments in accounting support and training will need 

to grow exponentially. The sooner an organization realizes this, the better off it will be. One area that 

organizations can get a jump start on right now is IFRS training. It’s easy to do and minimally cost 

invasive. It all starts with the “tone at the top,” similar to Sarbanes-Oxley. 

Because IFRS is principles-based rather than rules-based as U.S. GAAP is, there will be the need for more 

judgmental thinking within the organization by frontline people — the accountants and staff personnel 

making the journal entries and managing those spreadsheets. In most cases, this will be a monumental 

change for staff, as they have always been accustomed to looking up rules and guidelines within U.S. 

accounting standards and implementing those standards word-for-word. Bringing this group out of 

that comfort zone may add some additional complexities and inefficiencies to the process. 

To make the transition easier on your people and organization, consider assembling a temporary 

committee made up of a subset of human resources, IT, organizational development, recruiting and 

training, accounting and finance, and at least one person from senior management to explore the 

various IFRS training options available to the organization. Whether it’s in-house training (preferred by 

many organizations for cost reasons and because accounting and finance staff may not be accustomed 

to traveling for their job), local or regional seminars, or external classes, some type of training will be 

worthwhile — especially to people who have never been exposed to IFRS. At a minimum, consider 

purchasing IFRS guidance either in hard copy or electronic format to supplement your current 

accounting literature. Encourage your accounting staff to begin thinking in IFRS terms, not only in U.S. 

GAAP terms.

10 8 Proactive Steps Public Companies Should Be Doing Now 

8 

Step Eight: 

Become Familiar with IFRS 1 — First-time Adoption Guidance 

IFRS 1 — “First-time Adoption of International Financial Reporting Standards” — sets out guidance on 

IFRS for prospective adopters. An evaluation of the standard will be invaluable for organizations just 

getting started with project planning and scoping. The reading in IFRS 1 is critical to a prospective 

adopter since it introduces key exemptions and optional elections available only to first-time adopters 

and provides detailed guidance on financial statement presentation. The adoption of IFRS provides an 

opportunity for companies to critically analyze and select accounting policies that will have an impact 

for years to come. An opportunity like this may not come again in the life cycle of a company, thus 

highlighting the need to evaluate and plan in advance of a change.


In Conclusion 

It’s hard to argue against the positive impact a globally accepted accounting standard may have on 

organizations. Not only will it bring increased financial comparability to organizations around the world 

but it will create a more efficient and robust global capital market with the complementary benefit of 

bringing down costs. 

Following the eight steps described above will allow your organization to get a jump start on 

IFRS adoption as well as communicate your organization’s proactive stance on IFRS adoption to 

key stakeholders. Embracing IFRS adoption today coupled with a little planning could save your 

organization valuable time and money in the future.

12 8 Proactive Steps Public Companies Should Be Doing Now 

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