This article is the seventh in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we summarize some of the challenges faced by European companies when they converted to IFRS in 2005, and how U.S. preparers and auditors can capitalize on that experience.
The conversion to IFRS is not simply an accounting exercise, but rather a project embracing the company as a whole. Whether a large multinational company or a small single-location company, European experience has shown that underestimating the complexity of an IFRS conversion project can result in unnecessary efforts, unexpected costs, and missed opportunities. Following is a summary of the most common pitfalls Europeans experienced when converting to IFRS in 2005:
- IFRS conversion projects were started too late generally due to preparers not having a proper grasp of IFRS and thinking it would be a “journal entry” exercise focused on differences between their previous accounting framework and IFRS. The conversion process is much more than that.
- Not enough time was dedicated to the preliminary stage. Early identification of difficult issues to be faced and judgment calls to be made is an indispensable preliminary step for proper set up of the conversion project.
- Expecting to find solutions overnight. The solution to a complex issue is the result of a thorough process. Entities need to start researching issues early and share information throughout the process with consultants and auditors.
- Unexpected issues arise. The conversion to IFRS is comparable to a home remodeling project – you always end up spending more time and money than expected. Be prepared for the unexpected by allowing plenty of time, and budgeting accordingly.
- Underestimating the time needed to develop the financial statement footnotes. Companies should not be so absorbed in the preparation of the financial statements that they fail to notice the extensive disclosures required by IFRS.
- Focusing on the short-term impact of IFRS on the financial statements. Management should realize that some accounting choices made at the time of conversion to IFRS will bear consequences for a long time in the future.
- System changes require lots of time. The conversion to IFRS might impact the entire IT system; it is not simply using conversion spreadsheets.
- Lack of knowledge made some companies dependent on external consultants. External consultants can be helpful, but ultimately the company should possess the internal knowledge and resources necessary to convert to IFRS.
With 20/20 hindsight, many European companies likely would have approached the conversion to IFRS differently. Hopefully, their experience will be used by U.S. companies to avoid the common mistakes and pitfalls described above.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group. |
