Five IFRS issues that merit boards’ attention

From the perspective of corporate boards, what are the most important IFRS (International Financial Reporting Standards) issues that merit attention? When posed this question, N. Venkatram, IFRS Country Leader, Deloitte Haskins & Sells, Mumbai comes up with a list of five issues, viz. set the tone and develop an oversight plan; take a holistic view; determine timing and resource needs; understand the risks; and determine the need for board education.

“The board of directors needs to take a high-level overview role in the crucial phases during the process of convergence over the coming months, as the board along with the audit committee can help shape an organisation’s IFRS direction and strategy,” reasons Mr. Venkat during a recent telephonic interaction with Business Line.

Excerpts from the interview.

On setting the tone and developing an oversight plan.

The board has to champion the cause of establishing IFRS as an important initiative the organisation must prepare for. This helps provide appropriate buy-in from functions and business units.

Raising key questions early may ultimately determine the optimal adoption approach and help establish the proper tone at the top. The board should have an oversight plan for IFRS adoption, including the implementation process.

On the need for a holistic view.

The board should take a holistic approach to the conversion and ensure that the management analyses the potential effects of IFRS throughout the organisation, focusing not only on the impacts to accounting and systems, but also devoting attention to such areas as income taxes, sales contracts, loan agreements, and employee compensation arrangements.

The board should consider short- and long-term planning issues to determine what the organisation needs to do now versus later. The board should be mindful of opportunities in the IFRS conversion process that could translate into longer-term benefits, such as increased standardisation and centralisation of statutory reporting.

On the importance of determining the timing and resource requirements.

Early on, the board members should focus on overseeing the organisation’s approach, timeline, and budget for transition. The amount of time and resources companies have for preparation may be less than many would expect, and a thoughtful approach to conversion can help in controlling costs.

The board, along with the management, will have to assess whether there are sufficient internal resources available to engage in all aspects of the projects, else authorise management to identify and appoint suitable external providers.

On the imperative of understanding the risks.

Boards will have to be aware of potential risks, including the implications of waiting too long to develop a plan. Also, because IFRS is more principles-based than rules-based, it requires an increased use of professional judgment. The board should understand how management will ensure that IFRS is applied consistently throughout the organisation and how financial statement disclosures will be consistent with other industry participants.

On the tricky topic of board education.

The board will have to assess its educational needs and goals. If the board does not have a sufficient understanding of IFRS to exercise the appropriate level of oversight, it could result in the adoption of inappropriate policy elections.

IFRS provides an opportunity to reconsider accounting policy elections and implementation. Boards must understand and oversee policy elections, with a focus on achieving greater transparency and improved financial reporting

The board should develop a plan that outlines timely education for all members. Building proficiency will allow board members to lead a productive dialogue and provide useful insights in IFRS planning discussions.

What are the transition issues that organisations are likely to face?

The date that IFRS reporting becomes an external reality for many entities is April 1, 2011. The general focus on the changeover date of ‘April 1, 2011’ does, however, gloss over the fact that it is the financial reporting system (along with its collateral activities such as financing, contracting, processing, etc.) that is being converted and not simply the financial statements.

To get from here to there with minimum disruption and to reduce the risk of untimely completion will require an intelligent and systematic approach, which recognises the fact that certain components of an implementation plan will have early deadlines and that these would have to be adhered to, to avoid a last minute scramble to issue the initial set of financial statements prepared under IFRS.

IFRS-compliant data may have consequences for the organisation’s contracting and business practices. In particular, if the adoption of IFRS could have consequences for an organisation’s business condition, such as from contractual or tax consequences, prudent risk management would dictate that the organisation is aware of such consequences in advance of the date the consequences become real.

Finding solutions, or at least minimising adverse consequences, by amending or replacing arrangements prior to IFRS becoming effective may accelerate deadlines for completion of all or some of the changeover components before April 1, 2011.

Finally, the conversion experience of other jurisdictions indicates that there is an increased likelihood of errors in the initial implementation of IFRS. Since IFRSs are not static and keep on evolving, any further changes in IFRSs may challenge implementation capabilities. The best preventive mechanism would be to provide sufficient time for reflection and quality review prior to publication.