IFRS - Key Questions For Success

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3 Questions that help decide if Your IFRS Transition is under control

By Pradeep Shakespeare, June 10, 2009
The timeline for adopting International Financial Reporting Standards (IFRS) by Canadian publicly accountable companies is fast approaching: 2011 interim and annual reporting and a restatement of 2010 comparatives using IFRS. Canadian GAAP and IFRS share a common conceptual framework and are generally converged other than for a few notable exceptions. Differences in recognition, measurement and disclosure and an increased emphasis on fair value and judgments and estimates are some of the challenges for Canadian public companies converting to IFRS.
Whilst there was a fair degree of satisfaction with the current suite of IFRS, certain standards were singled out for criticism, including IAS 39 Financial Instruments: Recognition and Measurement. - ICAEW Financial Reporting Faculty Study on the Adoption of IFRS in the EU, Oct. 2007

The European Union experiences1 in adopting IFRS provide great insights for Canadian public companies here are three key questions or litmus tests based on EU experiences, which are designed to help evaluate your own IFRS journey. 1. What are your expected impacts of IFRS on your reported profits, balance sheet, investor communications and management structures do you have a detailed game plan to deliver a smooth IFRS transition? Your external advisor (or your internal IFRS team) has already assessed the estimated impact of IFRS on your reported results, given you a checklist and perhaps provided you a set of model IFRS financial statements. Ideally, this high level assessment stems from a line by line review of your financial statements and includes preliminary research on potential issues, impact on existing policies and alternatives and a suggested priority for next steps. Many issues require input from the board (see next question) and from other stakeholders. Assessments also require frequent updates to address potential impacts of ongoing IASB2/AcSB3 initiatives revisions to existing standards and or introduction of new standards that are applicable before 2011. IASB has accelerated its efforts to address financial reporting issues magnified by the recent global economic crisis and other noted deficiencies in IFRS. When selecting policies, minimizing the impact of IFRS on your reported results is one alternative among many: better reflecting the economic substance, consistency in reporting within your industry and across different industries and adopting best practices are other considerations, ultimately requiring a balanced approach upon management consideration and judgment. While your IFRS conversion is reflective of the unique elements of your company, some common areas to deal with are: recognition and measurement of financial instruments4, judgment and estimates, property plant and

1 2005. 2 International Accounting Standards Board. 3 Canadian Accounting Standards Board. 4 IAS 39: Financial Instruments: Recognition and Measurement, is widely acknowledged as a rule based standard.

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equipment, intangible assets, asset impairment, deferred taxes, leases, defined pensions and consolidation of group entities. Anticipating needs of investors and other stakeholders will avoid rework during and after implementation. As a Canadian public company (or if you opt to report using IFRS), you are required to disclose5 key elements of your IFRS conversion plan and progress updates including expected impacts6 in the balance sheet and income statement. Beyond initial conversion, expect more disclosures under IFRS due to an increased emphasis on judgments in the selection of policies and rationale a significant change that needs to be managed carefully to avoid any negative perceptions by the users of your financial reports. Internal reporting and management performance structures typically track earnings and balance sheet metrics. IFRS based reporting will require changes to management performance contracts, debt covenants and contractual arrangements that are based on reported results. Fair value asset write up/down, bringing off-balance sheet pension deficits and operating leases onto your balance sheet are few examples that have the potential for impacting earnings and financial position, which in turn impact covenants, compensation and possibly, accounting systems and processes. In short, a company wide impact, no less. The EU experiences indicate that an IFRS conversion is best handled a practical game plan with a as a change management process. The question is not IF you are high level project schedule, going to embark on the IFRS conversion but whether you appreciate supporting rationale and the significance of what needs to be achieved within a compressing resource requirements will timeline. A large organization may benefit from an existing change explain the how to your management team for leading the IFRS conversion. In a smaller board and win the buy-in company, outside expertise can supplement finance staff with an experienced IFRS project management resource and deliver your IFRS objectives including training. They can help minimize risks associated with board/stakeholder communications, project complexities and governance, documentation, employee training and IT/data management needs. In either scenario, a practical game plan with a high level project schedule, supporting rationale and resource requirements will explain the how to your board and win the buy-in to get the project underway. 2. Is your Board informed and prepared to deal with the impacts of IFRS, their significance and are they ready to make decisions for implementing and addressing all stakeholder needs?

The tone at the top is a crucial factor in ensuring success in the IFRS conversion: board involvement is required at the outset due to the significant impact of IFRS on earnings and net assets. Board approval will be required on many policy choices and related financial statement disclosures. In 2011, boards will need to differentiate between period over period changes in financial position driven by accounting changes and

5 Canadian Securities Administrators CSA Staff Notice 52-320 - Disclosure of Expected Changes in Accounting Policies Relating to Changeover to IFRS, May 9, 2008; AcSBs exposure draft Adopting IFRSs in Canada, April 2008, and Adopting IFRSs in Canada II, March 2009, Canadian Performance Reporting Board Publication Pre-2011 Communications about IFRS Conversion. 6 Where expected impacts can be quantified with a degree of certainty.

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changes driven by business performance, and be aware of the increased volatility7 in reported earning and performance. Push to set IFRS as a standing board agenda and have a good strategy to answer questions at the board level and minimize confusion or resolve them early to keep your project on track towards the finish line. Companies adopting IFRS will take advantage of transitional guidance and relief available under IFRS 1: First time adoption of IFRSs. This standard requires an explicit and unqualified disclosure on the conversion to IFRS and contains 15 elective exemptions and five mandatory exceptions; a few more will be available prior to 2011. Your board will expect support and rationale for your selections and their impact on reported results. Careful analysis is required at the outset to prevent rework later. It is worth repeating that a well thought out and realistic project plan will reassure the board on your ability to get the job done on time. Consider how routine financial reporting activities will be performed in addition to IFRS conversion responsibilities. Explain your project methodology to perform detailed assessments, research, presenting/adopting appropriate policies, training, handling new data requirements (e.g. componentization of capital assets, additional valuation data for financial instruments) and other organizational impacts.

Meaningful board updates each quarter (e.g. policy decisions made, significant issues, draft financial statement formats, changes to internal management reporting, impact of recent AcSB/IASB pronouncements) are prerequisites for avoiding bottlenecks and a last minute scramble for compliance. Other matters worth noting are: the approach to 2010 accounting and reporting (dual or shadow accounting, full conversion to IFRS plus Canadian GAAP reporting done offline, or topside IFRS entries to convert consolidated Canadian GAAP based financials), identifying associated risks of incomplete or missed disclosures and the impact on CEO/CFO certifications on internal controls over financial reporting. Consider changes to 2010 and 2011 budgets and internal management reporting to ensure internal management structures, tax accounting, debt covenants and other performance metrics appropriately reflect the impact of IFRS. These are only a few of the myriad examples of the complex decisions to make - a well thought out senior management and board communication strategy will establish awareness, allow for an efficient decision making process and gain support for achieving all the milestones in your IFRS journey. 3. Do you have the requisite talent and expertise in-house to deliver your promise?

It was particularly important to explain clearly to the Board differences between IFRS numbers and the figures previously reported under national GAAP, analysts and other stakeholders, because of their unfamiliarity with IFRS concepts, vocabulary and requirements. Review of Practical Implementation Issues re IFRS, UNCTAD, November 2008

So your Board is happy with your IFRS conversion plan and timeline to execute. Whats next? A successful change management initiative stems from the CFO and board support but the rest is up to you for

7 For example, IAS 36: Impairment of assets requires companies to recognize an impairment of PPE and intangible assets, including goodwill; the standard also allows impairment reversals for non financial assets except goodwill. Canadian GAAP is similar but the method for evaluating impairment is different and prohibits subsequent reversal of impairments on PPE, intangibles and goodwill.

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embedding good project management principles, structure and skills and seeking key stakeholder input (including finance, HR, taxation, treasury, investor relations and IT) for launching and sustaining the project. The IFRS conversion may be one of many concurrent initiatives competing for attention from the same groups mentioned here. Having the right project leadership talent at the helm is a prerequisite for delivering the promises of a complex project such as an IFRS transition. The ideal candidate is a master project professional with an exemplary track record and a jack of all trades combined into one: an ability to understand technical issues and manage technical resources, avoid bottlenecks, deliver decision support, mentor team members, overcome IT issues or develop workarounds for increased IFRS data needs, re-engineer processes as needed and last but not least, the ability to communicate issues and recommendations with clarity and confidence to senior management and across your organization. Regardless of whom you pick as a project manager, what type of qualifications and international experiences they bring to bear, the challenges involved with introducing IFRS in a Canadian GAAP based reporting environment will require even the most experienced professional to monitor the Canadian Context (i.e. IASB interpretations, AcSBs convergence activities and the CSAs8 staff notices) and develop a local solution. Canadian companies have clearly demonstrated in the past that they can complement their internal team talents with seasoned external project management professionals and achieve full compliance with Sarbanes-Oxley/NI 52-109 legislation. IFRS conversion projects can draw on the experience of these resources to insure companies such as yours, from risks of non compliance and protect the hard earned confidence of all your stakeholders. These questions are by no means a checklist to ensure your overall readiness, but are designed nevertheless to prompt action if you dont have a formal plan to implement IFRS: if you answered yes to these questions, congratulations, you are well on your way, however, evaluate progress towards your goals on a regular basis. If your IFRS conversion journey has just begun or havent progressed beyond a high level assessment of differences, you still have a runway - a short one, for getting ready to report under IFRS. European conversion experience in 2005 indicated that despite challenges and complexities of adopting IFRS, companies succeeded in meeting the transition timeline, albeit acknowledging some degree of degradation in the quality of their first year disclosures9.

The run for IFRS expertise will intensify as companies shore up their internal talent with external advisors to meet their transition timeline ensuring you have the right ingredients for project success throughout your company is a decision to make today for charting a course and realizing your IFRS goals in 2010 and 2011.
Pradeep Shakespeare is a financial reporting and governance specialist with over 15 years Canadian experience in large public and private companies specializing in strategic change management, Sarbanes-Oxley/NI 52-109, business process/systems reengineering and project management. As a former Corporate Controller and as a Director, Treasury, he also improved financial reporting, related systems and processes; through effective collaboration among operations and other stakeholders he reduced SG&A expenses and contributed to profit improvement. Pradeep is a Chartered Management Accountant (England) and an Executive MBA. He can be reached at (905) 609 4105 or via email at pshakespeare@solutionsthink.com. 2009 Solutionsthink Consultants Inc. All rights reserved.
8 Canadian Securities Administrators. 9 Review of practical implementation issues relating to international financial reporting standards, Case study of the United Kingdom of Great Britain and Northern Ireland (prepared with substantive input from the Institute of Chartered Accountants in England & Wales (ICAEW), 25th Session of the United Nations Conference on Trade and Development, Geneva, 4-6 November 2008.

IFRS Solutions that Go Beyond the Numbers