Convergence With IFRS - Initial Steps

The world over, there is much talk on IFRS and convergence of local GAAP to IFRS. The SEC in 2007 abolished the requirement for the foreign companies from providing a reconciliation statement between their financial prepared under IFRS to financial in US GAAP. Thus, the SEC made a major statement in 2007 itself that foreign companies listed in the US need not convert their IFRS prepared financial to financial confirming to US GAAP.

The first foreign company in US to file its financial without a reconciliation to US GAAP is Novartis AG when it submitted its Form 20-F on January 28, 2008.

There has been much buzz since then about IFRS and convergence of US GAAP with IFRS as issued by IASB. This buzz is synonymous with the buzz that was created when the Sarbanes Oxley Act (SOX) was made mandatory in US in 2002.

Its a known fact that the industry heavyweights in US would have to start reporting their financial under IFRS from 2014 onwards. And once that is done, it would be sooner than later that IFRS mandated financial would become the norm of the day for all the listed companies.
Now that we have understood the importance and the implication of IFRS in US, let us now understand how would companies approach this new mechanism.

Since its a new concept, it would be better to involve professionals like Indian CPAs, who would already have experienced the transition process (since India is moving to IFRS in 2011) and would have a 3 years experience in reporting under IFRS.

The transition to IFRS would first need to be broken into 3 steps:

1. Initial Stage:- The professionals would need to understand the business as the first step towards transitioning to IFRS and then define the scope of the work as well as define time period for the process.

2. Planning Stage:- In this stage, the professionals would need to

(a) Clearly define the limitations in the business
(b) Select the team for enabling a smooth transition
(c) Study the transactions in detail to understand the implications

3. Execution Stage:- This is the crucial stage of actual execution of the process and would involve

(a) Preparation of checklists by the professionals
(b) Interviews and discussions with the concerned individuals controlling the
specific processes3
(c) Documentation of the transactions under IFRS
(d) Reporting the financial under IFRS
Although it sounds very easy, the transition will not be very easy process and companies need to be alert and cautious while going in for such a step.

The IFRS 1 states that:

(a) An entity's first financial statement under IFRS would be the statements prepared under IFRS.

(b) An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRS. This would

be starting point for the entity's accounting under IFRS.
(c) Such opening IFRS balance sheet need not be presented in its first IFRS financial statements.

(d) While preparing the opening IFRS balance sheet, an entity shall:
- recognize all assets and liabilities whose recognition is required under IFRS.
- not recognize such assets and liabilities as are not permitted by IFRS.
- reclassify those items that were recognized under local GAAP as one type of asset/liability/equity, but are a different type of asset/liability/equity under IFRS.
- apply IFRSs in measuring all recognized assets and liabilities.

It would be pertinent to note that IFRS grants limited exemptions from the above requirements in specified areas if the cost of compliance would most likely exceed the benefits therefrom.

Also, the IFRS prohibits the retrospective application of IFRSs in some areas, particularly if the retrospective application would require judgment by the management on past condition whose outcome is already known.

IFRS also requires the entity mention how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance and cash flows.

With so much requirements and so much at stake, it would only be wise to seek help of experienced professionals in transitioning to IFRS.
India would be converging to IFRS by 2011 and that means Indian CPAs who would have at least 3 years of experience in reporting under IFRS; businesses in US have a very nice choice to opt for when they transition to IFRS.

Steve is a qualified accountant (Indian CPA) and co-founder of APT Services, the fastest growing outsourced accounting service provider in India. Steve has over 10 years of expertise in audits, accounting (both US & Indian GAAP), payroll and tax preparation services. For details on services provided by APT Services, log onto [http://www.aptservicesonline.com]

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