The move to IFRS is the single most important initiative in the financial reporting world. What can you do to prepare?
- How do you ensure that your interpretation and application of IFRS is consistent across the countries in which you operate?
- How will you keep up to date with the shifting demands of IFRS, as new standards are added or existing ones refined?
- How quickly can you assess the impact of new IFRS rules and standards on your business and identify priority actions?
- How robust and complete is your plan for making the transition to IFRS?
- How capable are you of explaining changes in your results to investors and lenders once you are under IFRS?
How could IFRS affect your fast-growth business?
Summary: This is a high-level overview for entrepreneurs and other executives who are encountering IFRS for the first time. It briefly describes what International Financial Reporting Standards (IFRS) are and why they should be on your agenda, regardless of whether your business has to comply with them yet. There are also some key questions that you can ask in preparation for the challenges — and potential opportunities — of IFRS.
The global move to IFRS — the most significant accounting project in decades — is a significant shift that impacts not just accounting, but most aspects of your business.
However, what this specifically means for you depends on a range of factors, including the size and maturity of your business, where it is headquartered and what markets you operate in. Some companies have operated with IFRS for a number of years; for others, IFRS is only on the horizon.
International Financial Reporting Standards (IFRS) are a set of accounting standards and interpretations produced by a global body based in London, the International Accounting Standards Board (IASB).
The idea of getting every country to follow the same accounting standards has been around for decades, but IFRS really took off in 2005, when they became compulsory for listed companies in the European Union.
They received a further boost in 2009, when world leaders at the G20 summit encouraged the development of a single set of standards as part of the global response to the financial crisis.
Now, IFRS are used globally. Over 100 countries around the world require, permit or base their standards on IFRS. Some major economies are in the process of transition, including Brazil, Canada and India. Others, like the US and Japan, have yet to adopt IFRS, but they too are working on convergence.
In many cases, countries use national standards for private companies, but IFRS for those that become publicly listed. Therefore, a transition to IFRS is often a required step in a company's growth journey.
The move to IFRS involves more than switching to a new set of financial reporting rules. First-time adopters will face challenges across their business operations, from reporting processes to IT systems to tax planning.
There are risks, but the move offers significant benefits for those that make a smooth transition.
- Comparing apples and pears? Using the same accounting standards as other companies around the world makes it easier for investors and lenders to compare your performance. This in turn makes capital allocation more efficient.
- Global access. Accounting standards are a global language. Use IFRS and you can source equity or debt funding from a much wider range of international capital providers.
- One set of accounts. IFRS may eliminate the need to produce numerous financial reports that reconcile your accounts with local standards.
Financial reporting under IFRS remains a complex and challenging exercise for all companies, as the rules and guidance change frequently. Any errors or restatements can jeopardize your company's reputation, create regulatory consequences and slow your journey to market leadership. But if you keep these things in mind, you'll likely stay ahead of the game.
- Early planning. The move to IFRS is a major change-management project; there are significant IT and business process implications. Start your planning early.
- Assess the impact. Wherever you are in your IFRS compliance journey, understand the potential impact of any new standards before their use is mandated. Otherwise, you may struggle to get ready in time.
- A full pipeline. The IASB will be especially active in 2011 as it and the US standards body work towards a deadline of converging certain major standards. There are big projects in the pipeline, including new standards on financial instruments, revenue recognition and leasing.
- Avoid surprises. A transition to IFRS can have a sudden affect on your reported financial performance. Prepare your investors and key stakeholders by helping them to understand any big moves in your numbers.