IFRS: Paralyzed or Prepared?
Despite many uncertainties, U.S. CFOs can still plan intelligently
for the impact of IFRS on their companies.
In
my previous column,
I noted that U.S. CFOs have been wasting time and money in anticipation of an
event that will not happen. Specifically, U.S. companies will not be forced
to switch from using U.S. generally accepted accounting principles (GAAP), as
we know GAAP today, to using international financial reporting standards
(IFRS), as we know IFRS today.
I
also noted that most U.S. CFOs are unprepared for several related phenomena
that will happen and that, in many cases, are already under way. Topping that
list are the profound changes to U.S. GAAP and IFRS that will result from the
ongoing efforts of the U.S. Financial Accounting Standards Board (FASB) and
the International Accounting Standards Board (IASB) to improve and converge
their respective standards. Most of the boards' work is focused on developing
common standards that will be very different from existing standards.
Beyond
these few certainties, there are many uncertainties associated with IFRS,
especially from a U.S.
perspective. Here's how U.S. CFOs can plan intelligently for the future
despite all of the unknowns.
What's Key?
First,
financial executives should identify key areas of uncertainty — those areas
for which different actual outcomes would have significantly different consequences.
It's also important to identify relationships among areas of uncertainty,
including how outcomes might influence each other or be influenced by common
factors.
While
different companies will reach different conclusions regarding their key areas
of IFRS uncertainty, the companies I've worked with have most frequently
identified the following four key uncertainties:
•
the degree to which standard-level convergence between U.S. GAAP and IFRS
will be attained;
• the degree of uniformity in other countries' adoption, interpretation, and
application of IFRS;
• the decision of the U.S. Securities and Exchange Commission (SEC) with
regard to the use of future IFRS by public U.S. companies; and
• whether the private-company standard-setting process will remain closely
coupled to the public-company standard-setting process in the United States.
What Are the Possibilities?
For
planning purposes, there's a big difference between not knowing what will happen
and not knowing what might happen. The CFO who can imagine a
reasonably complete and realistic set of possible future scenarios can plan
effectively. So let's examine the possible outcomes for each of the four key
areas of uncertainty identified above.
Standard-level
convergence between U.S. GAAP and IFRS is very much a matter of degree.
Currently, at the standard level, IFRS and U.S. GAAP exhibit a large number
of similarities — and a much larger number of differences. The two sets of
standards will surely become more similar over time, and eventually they
could end up identical to each other. But given the outcomes and pace of the
FASB and IASB convergence efforts to date, it's understandable that many, if
not most, of the boards' constituents have serious doubts that perfect
convergence will be achieved anytime soon — if ever.
With
regard to the degree of standard-level convergence between U.S. GAAP and
IFRS, there are three broad possibilities: (1) minimal convergence at the
standard level; (2) standard-level convergence that is substantial (e.g., on
major issues) but incomplete; and (3) substantially complete standard-level
convergence.
Uniformity
of IFRS use throughout the world also is largely a matter of degree. At one
end of the spectrum, IFRS as issued by the IASB, without variation, could
widely be seen as the only rational choice for countries to adopt and
enforce. At the opposite end of the spectrum, IFRS as issued by the IASB
might be considered only a "starting point" subject to legislative
or other endorsement, with few countries using IFRS in its "pure"
form.
As
for the SEC's decision regarding the use of future IFRS by its domestic
registrants, the SEC might (1) reject the use of future IFRS by domestic
registrants, (2) allow domestic registrants to choose between future U.S.
GAAP and future IFRS, or (3) require domestic registrants to use future IFRS.
Finally,
the private-company standard-setting process in the United States
might remain closely coupled with the public-company standard-setting process
as it is now, possibly with some exceptions for private companies built into
future standards. But we may also see the creation of a separate
standard-setting infrastructure and process specific to the United States (as we have seen recently in Canada), or
we may embrace the country-neutral standard-setting infrastructure and
process for "non-publicly accountable entities" that has already
been created by the IASB.
Planning Techniques
Once
alternative possible outcomes are identified for each key area of
uncertainty, there are several planning techniques that can be used. These
include scenario planning, risk analysis, and proactive influence. Here's a
"crash course" on how these three techniques work individually and
together.
Scenario planning is useful when a company's
managers don't know (or can't agree on) the probabilities associated with
possible future scenarios. This technique involves planning a response to
each possible scenario without focusing on how likely each is to happen. No
time or effort is wasted trying to "handicap" future events or
distinguish more- from less-likely possibilities. Managers tend to embrace
scenario planning once they realize that their best guesses about the future
often turn out to be wrong. While the specific probabilities of future
possibilities are often hazy, the planning implications of each possibility
are often quite clear. Therefore, it's generally feasible to develop plans
for each alternative possibility. The plans don't have to be detailed, but
collectively they should cover all of the possibilities identified.
The primary value of
scenario planning is that it helps companies anticipate and prepare for a
wide variety of future possibilities. It can also increase the confidence of
executives in their ability to handle whatever may come.
Risk analysis differs from scenario planning in that it
assumes that the probabilities associated with each identified possible
future scenario are determinable. Planners who use risk analysis invest time
and effort in figuring the odds, individually and jointly, of the various
possible outcomes in key areas of uncertainty. It doesn't have to be
complicated — relative probabilities work just fine. For example, here are
the outcomes that well-informed U.S. executives usually conclude
are most likely to occur in the next five years:
•
At the standard level, future U.S. GAAP and future IFRS will be significantly
— but only partially — converged.
• Country-to-country variations in the adoption, interpretation, and
application of IFRS will persist.
• The SEC will allow U.S.
registrants to choose between future U.S. GAAP and future IFRS.
• In the United States,
the private-company standard-setting process will remain closely coupled with
the public-company standard-setting process.
The point of this example
isn't for each company to reach the same conclusions. Rather, the example
illustrates that conclusions such as these can form the basis for detailed
plans. Once detailed plans are created for one or more highly-probable
scenarios, those plans are used to supplement the less-detailed plans
developed with scenario planning. By combining scenario planning and risk
analysis, managers are ready for anything — and most ready for what they
think is most likely to happen.
Proactive-influence planning
differs dramatically from the preceding two techniques. Scenario planning and
risk analysis assume that there is little or nothing a company can do to
influence what actually happens in each key area of uncertainty. But
proactive influence assumes that a company can, at least to some degree,
influence what happens in the future.
In
short, this technique is about determining which possible future scenario
would most benefit a company's stakeholders, and then developing a plan of
action to increase the likelihood of it happening. For example, CFOs can
participate in the standard-setting processes of FASB and the IASB, as well
as the rule-making process of the SEC.
By
following the three-pronged planning approach I've described, U.S. CFOs can
exercise exactly the kind of leadership that is needed in the
financial-reporting supply chain today.
Article by Bruce Pounder is president of Leveraged Logic and chairs the Small Business
Financial and Regulatory Affairs Committee of the Institute of Management
Accountants (IMA). He is also the lead developer and presenter for the
Webcast series "This Week in Accounting."
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