More Preparation Needed for Accounting’s Perfect Storm

Do Not Let Habitual Complacency Reduce Your Readiness
By William F. O’Brien, MBA, CPA
Executive Education, Inc.

According to Wikipedia, a perfect storm is a rare combination of circumstances that drastically aggravates a situation.  While the storm’s intensity has somewhat abated, the accounting profession still is facing a storm which could significantly alter many company’s income statements and balance sheets presentation over the next few years.
Three events have the potential to dramatically impact financial reporting for both public and non-public companies in different degrees of intensity.  The events are:

  • International Financial Reporting Standards (IFRS) adoption by public companies
  • Introduction of reporting alternatives for private companies and
  • Completion of the convergence effort including the potential reformatting of everyone’s financial statements

What makes the situation even more complex is the fact that different agencies are driving each initiative.  The Securities and Exchange Commission (SEC) is responsible for IFRS adoption.  The Financial Accounting Foundation (FAF) and the American Institute of CPAs (AICPA) are driving the GAAP revisions.  The Financial Accounting Standards Board (FASB), as the third party to the process, owns the reformatted financial statement convergence project.

This article will briefly update you about status of the storm’s components, as well as explore how to Prepare for Accounting’s Perfect Storm.  My goal is to both alert and alarm you about the approaching changes to generate action to help you weather the impending storm.  Never before in the history of United States accounting, have so many critical events occurred together.  Let us continue to prepare ourselves for the impact!  Do not let habitual complacency enter into your world!

The Storm’s Status
IFRS Adoption is on the SEC’s back burner, but has not gone away.  Although, SEC leadership appears more concerned about enforcement, a uniform, global financial reporting model remains a very real possibility.  The transparency of worldwide economic results depends upon the direction taken in the U.S.  If the world’s economic leader does not choose to go along with the accepted international model, other nations might not adopt full IFRS as well.  Washington is aware of this reality, so adoption is clearly still alive.

Convergence plods along—three years behind schedule.  The major topics of revenue recognition, lease accounting and financial instrument accounting are likely to be finalized in 2014.  Reformatted financial statement presentation should move to the forefront in 2015.

Lastly, private company financial reporting options abound in 2014.  The Private Company Council (PCC), FASB carve-out model, is actively working.  Similarly, the AICPA, non-GAAP, Financial Reporting Framework (FRF) is gaining momentum.  Non-public entities need to study the business aspects of these options and make an informed choice of the appropriate model.

Ten Tactics for Preparation

Determine What Impacts You
The initial step a company needs to take is to decide which perfect storm elements will affect your business.  The division between public and private company may seem trivial; however, lending, underwriting or business strategy considerations may force many private companies into the public company reporting arena.

Identify Your Experts
The number of IFRS, SME reporting and convergence experts currently on the payroll will surprise most companies.  These employees bring formal education, IFRS-based reporting experience and direct foreign subsidiary management expertise to the office every day.  Take advantage of their skills.  Prepare a roster of these critical subject matter experts.

Consider the Relevant Issues
Using your team of financial subject matter experts, meet with senior management and assess how the storm will impact your business.  Impact areas will include at a minimum, computer systems, financial reporting policies and procedures, user education, incentive compensation, loan agreements, tax planning, and performance metrics.  Brainstorm each of these areas to avoid surprises as your implementation plans move forward.  Remember, the more your can do without consultant assistance the less costly the process becomes.

Develop a Plan for Success
Approach this process as product development or construction project.  Prepare an activities timeline with deadlines and individual responsibilities.  Review the plan frequently since the storm is dynamic and may suddenly change direction.  Use this plan as a vehicle for updating senior management and other key stakeholders, including your external auditors.  Recall the old adage: “Those who fail to plan; plan to fail.”

Generate Pro-forma Financials
Access the FASB’s website and download a copy of the staff draft of the financial statement presentation exposure draft.  Use this document to prepare several pro-forma financial statement alternatives.  Once again, your financial subject matter experts will provide valuable assistance in completing this task.  Depending on your company’s unique facts, circumstances and business strategy, I would suggest three sets of pro-forma financials:

  1. New format  financials based on current U.S. GAAP
  2. New format financials based on IFRS or proposed private company U.S. GAAP
  3. Current format financials based on IFRS or proposed private company U.S. GAAP.

These modified financial statements will highlight the most significant measurement and reporting changes areas.  Identifying these key areas will help focus your management team’s efforts in dealing with the relevant day-to-day business issues, including the all-important loan covenant discussions with your lenders.

Keep Executive Management Informed
Do not keep executive management in the dark.  Although your operating management will most likely participate in transition activities, executive staff will generally remain interested observers—some more interested than others.  Take the time to positively support the reasons for these changes and the numerous long-range benefits of globally consistent financial reporting.  Consider this fact.  Research showed a sixty basis-point drop in the cost of capital when the European Union adopted IFRS in 2005.

In addition, keep the Board of Directors and C-Suite occupants up-to-date on the current status of the storm’s three components and your company’s preparation efforts.  Quarterly updates should become a standard reporting practice.

Finally, encourage executive management to critically respond to the regulators serving as the decision makers in the process.  This is an extremely important task.  If the regulators do not hear from the issuers, the entire implementation project can veer from a practical enhancement to a more theoretical exercise.

Monitor the Landscape
Stay current!  Begin with the AICPA’s IFRS website and continue with your auditors website.  Routinely scour the media for updates in each storm component.  You may nominate one of your financial subject matter experts as your company’s “Weather-person”.  This individual will have the responsibility to monitor the information sites and report on any significant happenings that might potentially impact the company.  The landscape will change.  Don’t get caught in an unexpected downpour!

Continuously Improve Your Competencies
Begin a personal commitment to continuing education not only in the financial reporting field but also in the business areas impacted by the storm.  If you initiate the process now, the large volume of required knowledge will not seem as daunting in the future.

Lay out a formal curriculum for both yourself and your staff.  Look for sources of interesting, but relevant, courses.  Discover what other companies are doing in response to the storm.

As you become more knowledgeable, it will be easier for you to communicate concepts to your co-workers.  In addition, you will become more versed in dealing with the business issues related to the transition efforts.  This will ultimately help to ease the the entire process’s complexity.

Communicate with Critical Stakeholders
Communicate, communicate, communicate!  As the storm clouds gather closer to our shore, rumors and concerns will heighten.  Consider producing a periodic newsletter relating current status, preparation activities and issues important to each stakeholder.  For example, employees are generally more concerned about workload rather than bond ratings.  Keep the various readers’ perspectives in the fore-front of your mind.

Pay special attention to your external auditors.  Make sure that they are clearly on the same page as your financial subject matter experts.  Failure to do this could result in some unexpected reporting surprises downstream.

Don’t Panic

Remember this is simply a process, rather large and encompassing, but none the less, a process.  Approach it step-by-step.  Do not allow yourself to become over-whelmed.  Your company will not be the only player in this game.  Listen and learn from what other organizations are doing.  Become an information sponge.

Study your unique organizational environment carefully.  Determine how to keep your people in the game without pushing the panic button!

Most importantly, start now!  Do not procrastinate.

Some Final Thoughts
Change is never easy.  Learning to adapt to new environments and embracing new perspectives is equally challenging.  Ten simple steps of anything rarely solve the complex issues we face in business and life.  It is my desire, however, that these Ten Tactics for Preparation will encourage you to adapt and embrace the changes and challenges you face, as the “Perfect Storm” gets closer in the months ahead.

The preparation you take today will help protect you from the future’s unknown impact.

WILLIAM F. O’BRIEN, MBA, CPA, a Santa Clara University and San Jose State University faculty member, is an internationally recognized author and lecturer in the areas of corporate financial management and international accounting.  He is an Executive Education, Inc. discussion leader and a frequent speaker at professional CPA events.

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