Steering transactions through the new accounting environment

(As originally appeared in FEI Canada F.A.R. member e-newsletter, October 2010)

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By Michel Bergeron, Assurance Partner and Canadian Leader, Financial Accounting Advisory Services, Ernst & Young LLP

With the economy on the rebound, companies are eagerly searching for new opportunities to expand and streamline their organizations. As a result, the corporate transaction market is heating up again. This renewed business optimism to undertake mergers and acquisitions and financial transformations is coinciding with regulators’ focus on updating financial standards. Executives are now faced with complex new accounting rules and issues — changes that can impact the results of a transaction and the bottom line.

Governments are becoming more rigorous in implementing regulations to better prepare for a future severe global economic slowdown and to achieve a consistent global framework. Approximately 100 countries already require, allow or are in the process of adopting or harmonizing their national accounting standards with International Financial Reporting Standards (IFRS).

Global comparability and consistency

IFRS is a high-quality set of accounting standards that are here to stay and continuing to gain widespread adoption around the world. It is a common accounting language that makes it easier for organizations to compare information from one country to another. Preparing financial statements in accordance with IFRS can provide companies with information that is accepted and understood around the world.

As globalization continues to impact companies worldwide, the shift to IFRS will systemize financial standards and simplify business operations and transactions abroad. The centralization of accounting will increase transparency and provide organizations with more opportunities for growth and safer transactions overseas. Gaining heightened access to global markets will also increase a country’s competitiveness.

Preparing for the long road ahead

The price of consistency, comparability and utility is an increase in the complexity and volume of financial reporting — which usually means higher costs and more preparation time. IFRS is not just a technical accounting change; the shift will impact many areas of business, including information technology, human resources, investor relations and operations. For companies that intend to grow strategy through acquisition, it’s essential to know how IFRS impacts the target company, both for past and future results. Gaining this knowledge could delay a potential deal.

Additionally, expected conversion to IFRS has blurred the line between accounting and business transaction for financial reporters and accountants. Business executives have a growing concern over how to proceed with business decisions in light of IFRS as well as national generally accepted accounting principles (GAAP). Industry leaders expect the new accounting landscape will have consequences for reported results, and companies could see a change in their earnings and financial position.

Adopting these new ways of accounting and reporting is a big endeavour. Gaining a clear understanding of the implications and what role organizations play will allow businesses to continue to take on new financial transactions to thrive in the economic upswing.
To help ease into the adoption of IFRS, companies should follow these basic steps:

• Assess and anticipate impact: Thoroughly review the new accounting and financial reporting environment to prepare for — and try to avoid — unpleasant surprises down the road.

• Create a game plan: Companies should already be on the path to conversion. Those that began the process early are more likely to have a smoother transition process. Different organizations will take different conversion approaches.

• Open communication with stakeholders: Most executives don’t yet have a clear understanding of how IFRS can affect their business. Expectations of interested parties — the board, investors, audit committees, analysts and employees — must be managed.

• Implementation: Companies need to ensure they structure an appropriately skilled and resourced team. Project management will be key in successful adoption of IFRS and could involve the introduction of cross-functional IFRS steering committees to stay on top of progress.

Syndicated financial and accounting navigation

In response to the changing accounting backdrop, professional services firms are creating new services to guide organizations through conversion and advise on the implications of the financial and accounting changes. For instance, EY established its Financial Accounting Advisory Services practice in 2009 to bridge the gap between accounting acumen and business advice.

Implementing new accounting rules can be daunting when considering, for example, the IPO process, an acquisition of a company or the sale of a company division. Newly created cross-functional services can provide insights to prepare companies for the changeover to IFRS. Such specialized IFRS teams offer the industry knowledge, technical capabilities and global methodologies to help businesses make a smooth transition.