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Scenario planning reveals few threats and many opportunities within the uncertainties about IFRS in the United States.
Bruce Pounder, CFO.com | US
July 29, 2010
As a result of the ongoing efforts of the Financial Accounting Standards Board and its overseas counterpart, the International Accounting Standards Board, U.S. generally accepted accounting principles and international financial reporting standards will both change profoundly and become more similar to each other in the next few years. Those certainties stand in sharp contrast to the uncertainties of whether, how, and when U.S. companies might switch from using U.S. GAAP to using IFRS.
In my previous column, I described three techniques that enable CFOs to plan intelligently for the future despite the many unknowns associated with the use of IFRS in the United States. This time I'll drill down on the first technique, scenario planning, which involves planning responses to possible future scenarios without focusing on how likely any scenario is to happen.
Scenario planning starts with an assessment of key areas of uncertainty and their possible outcomes. With regard to IFRS, there are four specific areas of uncertainty that vex CFOs in the United States. The first is the degree to which standard-level convergence between U.S. GAAP and IFRS will be attained by FASB and the IASB.
Some observers see standard-level convergence as both inevitable and bad, when, in fact, it is neither.
Folks who believe that FASB and the IASB are intent on converging U.S. GAAP and IFRS for the sake of convergence — without regard to the quality of the resulting standards — simply haven't been paying attention. The boards' high-profile project on financial instruments is perhaps the best evidence that the standard setters aren't willing to agree on just any standards, which means that quality is unlikely to be sacrificed in favor of sameness. It also means the boards might never get anywhere close to having the same standards.
From a scenario-planning perspective, if U.S. GAAP and IFRS do become substantially similar to each other, U.S. companies will be better off than they are today because it will be possible to drive significant costs out of the financial-reporting supply chain on a global basis. Such costs include operating expenditures (e.g., the cost of preparing financial reports), as well as capital costs. And if U.S. GAAP and IFRS don't become substantially similar to each other, then companies won't be any worse off.
What possible scenarios do U.S. CFOs need to plan for? If substantial standard-level convergence doesn't happen, there's no need for a special plan because that scenario isn't different from our present situation. But CFOs should plan to take advantage of cost-cutting opportunities to the extent that a significant standard-level convergence comes about, which would be especially beneficial for multinational companies and their subsidiaries.
The second key area of uncertainty is the degree of uniformity in the adoption, interpretation, and application of IFRS by other companies. Critics of IFRS make much of the fact that today the international standards are implemented differently in different countries and even in different companies. This is clearly inconsistent with the desire of the IASB and many other participants in the global financial-reporting supply chain to have one set of standards implemented the same way everywhere.
Will IFRS be implemented more uniformly over time? If so, companies will be better off than they are today because of the same cost-reduction opportunities explained above. But if diversity in practice persists, at least companies won't be worse off than they are today.
Further, if diversity in practice with regard to implementing IFRS does persist, no special plan for the future is needed because that's the situation we're in today. In contrast, if the globally-uniform application of IFRS becomes a reality, CFOs of multinational companies and their subsidiaries should plan accordingly to manage costs downward.
The SEC's Decision
The third key area of uncertainty is the decision the Securities and Exchange Commission will make regarding the future use of IFRS by public U.S. companies. The possibilities here are a bit more complicated: the SEC might or might not require or allow its registrants to use a future set of standards (i.e., future IFRS) that may or may not be very different from future U.S. GAAP.
If the SEC declines to require or allow public U.S. companies to use future IFRS, companies won't be worse off relative to their current situation. If the SEC decides to allow its domestic registrants to use future IFRS, some registrants may be better off, but at least none will be worse off.
The critical scenario in this area would be the one in which the SEC requires U.S. public companies to use future IFRS. But there are two significant subscenarios, which depend on the outcome of FASB's and the IASB's standard-level convergence efforts. If the boards attain significant standard-level convergence between U.S. GAAP and IFRS, the implications for U.S. CFOs to switch to future GAAP would be very different from the implications of switching between highly dissimilar sets of standards.
In terms of scenario planning, the first subscenario would require minimal planning but the second scenario could reasonably be considered the "worst case" scenario and require extensive planning and preparation.
What are the specific planning implications of each scenario/subscenario? First, if the SEC continues to require public U.S. companies to use U.S. GAAP, no special plan is needed. Alternatively, if the SEC allows its domestic registrants to choose between future U.S. GAAP and future IFRS, CFOs will need to adopt a methodology for choosing and implementing their choice. If the SEC requires all of its registrants to use future IFRS without significant standard-level convergence having been attained between U.S. GAAP and IFRS, significant assessment and conversion efforts must be anticipated. Fortunately, those activities are now fairly well defined and widely accessible, thanks to the fact that thousands of companies around the world have converted from various country-specific GAAPs to IFRS in recent years.
The fourth key area of uncertainty is whether the private-company standard-setting process will remain closely coupled to the public-company process in the United States. The outcome of the "blue-ribbon" panel that is currently studying this issue may be that private-company financial-reporting standards will be separate and distinct from public-company standards, in which case, private companies will be better off than they are today because significant costs will be driven out of their financial-reporting supply chain. If decoupling doesn't happen, private companies won't be worse off than they are today, and in neither case would public companies be affected.
Planning for the alternative scenarios in this area resembles planning for other areas. If there's no change to the status quo, no special plan is needed. If decoupling does happen, private-company CFOs should be prepared to exploit the cost-reduction opportunities that will arise.
To be sure, CFOs who apply scenario-planning techniques to the uncertainties about IFRS in the United States often will be pleased to discover that the future holds many opportunities and few threats.
Contributor Bruce Pounder is president of Leveraged Logic and is the immediate past chair of 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."