The effect of convergence on US GAPP, IAS and IFRS

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The saying "if it's not broke, don't fix it" has for years stood as a behavior standard of operational efficiency. This statement does not seem to apply to the FASB, or its time-honored tradition of creating and implementing accounting standards. Following the creation of the International Accounting Standards board in 2001 (including actions by the IASB's predecessor organization prior to 2001), world-wide convergence to a single financial reporting and accounting standard seemed all but certain except for one basic premise: The U. S. Federal Accounting Standards Board is not accustomed to being told what to do. With the FASB being subtlety forced to slide to the passenger seat of accounting policy-making boards it is becoming apparent that many attributes of US GAAP, especially those that deal specifically with accounting standards for reporting period financial information, will be subject to legal, procedural and technological strain. The corporations who will endure the convergence will be encouraged (any many forced) to employ international experts in the design and development of new software to facilitate the internal, external and governmental reporting requirements. This impact will test for decades the anticipated global integration of accounting standards and information data platforms for both management and financial reporting systems alike.

2.0 Convergence Platform Corporation

Let us consider the existence of an imaginary company called Convergence Platform Corporation (CPC). CPC is taking advantage of fictitious SEC rule which would allow the company to transition its financial reporting from US GAAP to IFRS over a set period of time. CPC, being a natural leader in its industry, has decided to adopt the new standards first and will face the challenges of convergence first.

2.1 Point of view from the Chief Information Officer (CIO)

All corporate officers will face new challenges as a result of US GAAP to IFRS convergence but none of them will be as consumed with the laborious transition than that of the Chief Information Officer and Chief Financial Officer. "The most important fact about IFRS is that it should be considered by the IT departments of companies as unlike a typical IT projects", said Prasad Kulkarni, KPMG (Raval, 2009, 1). Typical IT projects generally consist of several team members who each play an important role in the planning, research and implementation of a specific nature and scope. To accommodate this type of system restructure, however, an enterprise can chose one of the following options: abrupt program replacement, a real-time system component roll-out and simultaneous phase-out or system concurrence with post-implementation system phase-out. Each of these options must pass each of the three following tests: a compliance/legal test, a practicality test and a planning test.

Each option possesses its own unique set of challenges and benefits. The practicality of the first option of scrapping the current system for an unproven upgrade can create massive legal and financial liabilities. While this option is the least expensive in the short term, this selection may cause massive expense for the enterprise if basic operational and compliance requirements are not met due to a lack of system capacity or improper system functionality.

The second option is a far greater option than the first consisting of upgrading one system at a time while phasing out the legacy system at the exact same time. This option is certainly the least expensive of the three options but is still far from ideal. Aside from cost, another advantage to this system is in the way it allows the enterprise to remain functioning on proven legacy systems which provides stability over the conversion. However, this option can cause challenges if earlier installed components require programming or functional adjustments prior to the new IFRS system being completely installed and implemented. This downtime may prove to be devastating depending on the resource availability to rectify a down system while still working to roll-out a new phase. However, this option adequately passes the legal and compliance test due to its ability to continue running legacy systems while new components are being installed. This may become an issue if convergence is not complete prior to the deadline of reporting for the new system. Patches or conversion programs may have to be used in order for IFRS-compliant financial reports to be generated prior to complete system implementation causing more distractions for the programming and IT teams. This option though is still practical on many different levels except for the glaring defect that it has major lack of initial system redundancy. Processing redundancy may be necessary in the short-term in order to ensure accurate financial reporting as well as a smooth operating environment. The planning test may also be adequate to the extent that the quality of the program can be anticipated prior to rollout. This would require massive amounts of reimplementation testing and depending on the depth of the programming teams, may satisfy the redundancy requirement as mentioned above. This option, while thorough, may not be the best.

The third option is a boxed package solution andmay provide the greatest level of security and least amount of post-convergence debugging. By running a total system upgrade while continuing to allow the old system to work may seem like a lot of extra work (and it is). This option would require running both systems at full capacity thus causing a need for massive system redundancy as transactions are processed at least twice. This may or may not be noticeable to the user depending on the quality of the input interface but is essential in order to facilitate a proper transitional period of moving from one standard to another as the nuances of the legacy standard loom in the collective psyche of the organization. This type of rollout certainly meets the legal and compliance test requirements provided that enough time has elapsed form system rollout to a system reporting period to analyze the new financial reports prior to a live release. However such differences caused by the transition to the new IFRS system may not be noticeable for several reporting periods after the conversion as nuances associated with IFRS reporting would not be fully understood from the point of conversion due to the tendency of the operator to continue to utilize his frames of reference from the original US GAAP standard (Larson and Street, 2004, 4). These concerns truly begin to migrate from an issue with systems to a concern with personnel with can make of transition to any new standard, much more the transition to IFRS from US GAAP, tougher for an executive team to manage.

2.2 - Point of View from the CFO

According to Terry Byrd, the tangled web of IT infrastructure can be divided into two distinct channels: a technical IT infrastructure and a human IT infrastructure (Byrd and Turner, 2000, 169). If the CIO is more concerned with program quality as a result of convergence, it is certainly the CFO (along with the CEO) who must ensure that the system, including its users, is sound and complete.

This point is reemphasized by Eva Jermakowicz in her 2006 study where she determined that while there are early adopters to the IFRS program for a multitude of reasons, users (and offers alike) will tend to implement those portions of the program that are absolutely crucial to the reporting goals of the enterprise (Jermakowicz and Gornik-Tomaszewski, 2006, 172). That point being for all European Union (EU) firms publically traded on American exchanges that could adopt the standard, most only adopted for the purposes of reporting consolidated accounts only and left idle the accounts of the parent organization. This lack of organizational transition confirms the user's reluctance to conform to new standards even though the SEC allows EU firms registered on US markets to report using IFRS (SEC Rule 33-8567).

Aside from a pure reluctance to converge, other human components to the IT infrastructure make convergence difficult. These challenges can result from nationalistic ideology (community level) to the individual (user level) in how a certain IFS can be implemented or just pure confusion or uncertainty moving from a standards-based system like US GAAP which proclaims conservatism to the principals-based IFRS which secrecy seems to proclaim a more dominant position (Tsakumis, et al, 2009, 1).

Another consideration of the CFO in regards to convergence is the perpetual concern of cost. The costs considered here may not be limited to simply direct costs, but also indirect costs which may be categorized as collateral damage as a result of convergence. According to Hail, Leuz and Wysocki these costs may be in the form of information disclosure which may "…reveal proprietary information to competitors" (Hail et al, 2003, 13). In the macro economic sense, however, the same author argues that this information can provide benefits which extend beyond the cost of the enterprise (Hail et al, 2003, 14) and this benefit "…indicates that capital markets and investors reward higher transparency and high-quality reporting" (Hail et al, 2003, 14). These considerations may grant the CFO greater creditability with the board of directors as open reporting policies have recently been launched as the new standard of proper corporate behavior.

3.0 Accounting Systems Convergence and Consultants

As mentioned earlier, the people involved make up only half of the process of convergence. The technology required to bring convergence to reality will test the preparation and diligence of those professionals who have worked tirelessly to bring the new standard to reality.

Global accounting firms play a pivotal role in the service of consulting companies of all sizes in the strategic implementation of IFRS convergence. We will discuss two specific firms and explore their consultation strategies and products to assist their clients through the conversion process.

3.1 KPMG

KPMG, among its competitors, has separated itself as a leader in the IFRS technology discussion as a simply observation of the quality of material that they have made available on the subject. In its newsletter titled "The Impact of IFRS on Technology: A Practical Introduction", the professionals at KPMG have yielded thoughtful insight to the overall decision-making executive whose to the change agent level who can absorb this information and begin championing the process to the rest of the enterprise.

3.1.1 KPMG Executive Call to action

As mentioned earlier in this paper and acknowledged by KPMG, the transition to IFRS is more than a new system, but is a new need of information that is more than just how a firm views its data, but what that data means and how its treated in terms of macro financial reports to micro transaction-based rule applications. As KPMG explains, "The effects of IFRS conversion on IT systems arise from differences in the accounting treatment between current accounting standards (US GAAP) and IFRS (KMPG, 5).

KPMG has utilized the following procedure on a "system-oriented conversion to IFRS" (SOUCE: KPMG, 7, Fig 2):

Assess: Understand impact and plan conversion

Design: Design tools for conversion, create blue-prints for system changes and design training

Implement: Reach capability to compile IFRS financial statements

Sustain: IFRS is "Business as usual

By breaking the conversion plan down in this manner, executives can gain the unique insight of breaking down the process into a simple step-by-step process to achieve total organizational compliance.

3.1.2 KMPG System Conversion Process

KPMG makes light of the fact that IFRS implementation may not involve reinventing the entire wheel. As a matter of asset conservatism, KPMG acknowledges that convergence may have less to do with hardware upgrades and instead focus on the current system capabilities and the modifications "…required for conversion… with accounting and reporting changes [required]. (KMPG, 8). Their five key focuses in the IFRS conversion process are (KMPG, 8, Fig 3):

Accounting, Tax and Reporting

Systems and Processes




These key focuses align closely with Tsakumis, Campbell and Doupnik's dimensions of cultural convergence (Tsakumis, 2009, 1-2) KMPG appropriately placed systems last as systems will only converge to the level that the overall organization can converge. These organizational barriers will only serve to hinder organizational growth as new reporting standards become the law-of-the-land and compliance becomes mandatory.

3.2 Deloitte

Deloitte, like KPMG, has promoted itself with publications concerning IFRS convergence and (also like KPMG) has very little public information on the topic. A Deloitte subsidiary, Deloitte Consulting LP, published a brochure entitled "Technology Implications of IFRS Adoption of US Companies" in which they attempt to classify the adoption of IFRS as "more than a technical accounting change" and more of a "significant impact on accounting and financial reporting functions".

3.2.1 Deloitte's impact model

Deloitte has broken IFRS convergence into three main "impact levels". Those being (Deloitte, 1, fig 1):

Core Impact

Extended Impact

The "Enablers: People, Process and Technology"

By breaking the convergence ideal into these simple, mentally digestible nuggets of information, this helps the executive break down the convergence problem and helps to consider all the impacted internal lines-of-business in a manner that is easily aligned with Deloitte's consulting services.

3.2.2 Deloitte speaks to the CFO and CIO

Unlike KPMG, Deloitte immediately aligns itself with the firms' accounting experts who can take the information and began to understand the scope of the project that is about to get underway in the following areas: Upstream Systems, General Ledger, Reporting Data Warehouse, Downstream Reports and Systems and Infrastructure. By assisting CFOs and CIOs in understanding their firms' potential defects early in the process executives can adequately plan the conversion over an appropriate timeline and not rush to unnecessary steps which an individual may use to unintentionally derail their own process and create deficiencies which will must be corrected in order for the enterprise to function as "business as usual".

4.0 Conclusion

Many convergence proponents may testify that IFRS convergence may be the single greatest regulatory improvement to the financial system since the New Deal legislation. There are many similarities in the way the market responds to uncertainties in financial reporting in those days just as they do today. The technological advances in financial reporting over the past 80 years exposed many uncertainties that have hindered investment, however, while sitting in the eve of convergence it is evident that the opportunity of financial reporting convergence spans well beyond that of accounting information systems and financial professionals alike. This standard has the power to speak beyond language barriers and cultural differences to promote commerce and trade beyond international borders by impacting the global integration of accounting standards and information data platforms to champion transparency and inspire capital investment through a set of financial reporting tools that the world can call its standard. IFRS.