Transcript: Gearing Up for Change: Why U.S. Companies Could Benefit from International Financial Reporting Standards

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Moderator: Welcome to another edition of Deloitte Insights, a production of Deloitte LLP. Deloitte Insights is an audio news magazine that looks at important business issues. Today’s program:  Gearing Up for Change: Why U.S. Companies Could Benefit from International Financial Reporting Standards.

Twenty years ago, Congress passed legislation meant to encourage the adoption of the metric system, which is widely used elsewhere in the world. Americans greeted the news with a shrug. They still filled up their cars with gallons of gasoline, not liters, and measured distances in miles, not meters. American companies however won’t be able to afford such complacency when it comes to adopting a single set of globally accepted accounting standards known as International Financial Reporting Standards, or IFRS. Although many U.S. overseas subsidiaries have been using IFRS for years, it took recent rulings by the Securities and Exchange Commission, or SEC, to jump-start the move toward IFRS by companies in this country.

Not only is the adoption of a single accounting language desirable in an era of increasing globalization, but it carries many benefits as well, including reduced complexity, greater transparency and improved efficiency in financial reporting. With one global accounting standard, companies and investors can have better access to foreign markets, which can help stimulate investment.

But even if they can read the writing on the wall, are U.S. companies ready for the change? After all, accepting IFRS isn’t a matter of simply exchanging one set of accounting policies for another. Transitioning to these global standards may require companies to adapt or modify many aspects of their business. They will also need to consider the broader implications, which include considering the impact on their internal controls, taxes, cash management and legal responsibilities. And that’s just for starters.

For companies and financial professionals that have grown used to detailed rules, and the often prevalent right lines associated with U.S. Generally Accepted Accounting Principles, the prospect of IFRS presents both opportunities and challenges. But if companies can respond rationally and do their homework, they will find out that what now works well for companies in over a hundred countries, including [those in] the European Union, can work for them, too.

Here today to tell us what U.S. companies need to do to lay the groundwork for these new accounting standards are D. J. Gannon and Joel Osnoss.

D. J. Gannon is a partner, and the leader of the IFRS Center of Excellence, Deloitte & Touche LLP. And  Joel Osnoss is a partner, and the leader of the Global IFRS Service Line, Deloitte & Touche LLP. Welcome to Deloitte Insights.

D. J. Gannon: Well, thank you. It’s great to be here.

Joel Osnoss: Thanks a lot.

Moderator: Important changes have taken place recently in financial reporting and one of them is the growing adoption of International Financial Reporting Standards. Could you put the new standards in context for us?

D. J. Gannon: Sure. I think if you look at what’s happened in the financial reporting environment over the last 10 years or so, we’ve had some pretty fundamental changes in not only how we view accounting and financial reporting, but how accounting standards are written, developed and applied. And probably the biggest change I would observe is just the movement away from local standards and benchmarks to global standards and benchmarks. And IFRS is probably the best example of that. Where now we’ve got IFRS used in well over a hundred countries.

I think the other thing to think about in there to note is that if you look at the development of global standards, really not much has happened until recently. And, if you think back to the late 90s, early 2000 timeframe, things really started to happen there in terms of restructuring of the standard setting process. Back then, the old International Accounting Standards Committee was the body that set standards. That body was restructured at the time, and it was now formed into what is the International Accounting Standards Board. And why was that significant? Because it was one of the first times where standards setters and regulators got together and really developed a process to promulgate global standards. And from that point forward we’ve seen an evolution of not just the standards themselves, but also who uses them.

And I think it’s certainly noteworthy that what’s happened in Europe — you may have heard about the European, the “big bang” back in 2005 — where the European Union essentially mandated the use of IFRS for public companies. That affected alone about 10,000 companies, and we’re certainly seeing more countries today that have got on the IFRS bandwagon, so to speak. And so, certainly, there’s been a bit of an evolution here in the last 10 years or so. It's quite interesting to me that we’re actually talking about using IFRS here in the U.S. now. We’ve come a long way here in the last few years in terms of IFRS development.

Moderator: How does IFRS differ from U.S. Generally Accepted Accounting Principles, or GAAP?

D. J. Gannon: Sure, probably the biggest difference between IFRS and U.S. GAAP really is the underlying prospective of the standards. If you think about U.S. GAAP, the challenge is kind of sifting through the volumes of guidance. If you were to envision a stack of papers, that would be about 25,000 pages in total. The challenge that we have in the U.S. is trying to find out which of those pages the answer lies in. And so, as accountants, we’re typically trained to research those 25,000 pages. So we’re used to very, very detailed standards; oftentimes, standards that are prescriptive in terms of right line requirements and a bunch of rules. Whereas if you look at the International Standards, we’re talking about 2,000 pages of guidance, which still is a lot of guidance obviously, but the challenge there isn’t so much finding the answer, it’s actually thinking about what the answer is in light of what the underlying economics are in a particular transaction or event.

So, if you take an area of like lease accounting, for example, we have very detailed requirements in the U.S. that tell you exactly what you have to do in terms of accounting for leases. Whether it goes on the balance sheet or whether it comes off the balance sheet. Under IFRS, it is a different approach. You’re looking at some general concepts without all the bright line guidance, and you’re making judgments about whether or not something should be on balance sheet or not.

One other thing I’d mentioned in terms of differences is when you look at the technical literature itself, there’s different ways or different types of differences, if you will. You have areas where the standards are just different requirements. And there’s actually not that many areas where that’s the case, impairment testing comes to mind for assets.

Then you have the ability to make choices, alternative treatments, for example. While that category of differences has kind of been narrowed over the years, there’s still a number of areas within the International Standards where you can elect different options. And probably the best example of that would be in the area of being able to value assets at a fair value basis. Don’t have a lot of those options in the U.S. GAAP. Under IFRS you can do all more fair value accounting if you choose. That could create a difference.

And probably the last kind of category of difference I’d mentioned would be where you have differences in detail. What’s the old saying – the devil [is in] the details. And so you may have an area like pension accounting where you have very common principles, but the difference is in the details. And so you have a lot more volume of guidance, and go back to that 25,000 pages I’d mentioned. Take revenue recognition as an example. There’s over 200 pronouncements just dealing with revenue recognition alone with the U.S. GAAP. Under IFRS there are just two standards. That’s probably less than 200 pages of guidance, let alone 200 pronouncements. And so again, the challenge there is trying to sift through the guidance under U.S. GAAP, whereas under IFRS it’s trying to think through those general principles and concepts.

Joel Osnoss: And D. J. and I have been actually spending a lot time over the last few months talking to companies about the differences between U.S. GAAP and IFRS, and the common question is, “So what are the -- what are the five or six big differences between the GAAPs?” And it’s not something that’s easily determined for any company that you walk in to talk to, and you know what we tell our — the companies that we’re meeting with is that fact that, you know, that 25,000 page stack of paper that represents U.S. GAAP and that 2,000 stack of paper that represents IFRS, how you bridge that gap between the two sizes of stacks is basically by setting your own standards within a company. And so the big challenge for companies is really to set their own standards to be able to put some context around some of the judgments that are allowed to be taken under IFRS.

D. J. Gannon: I think one of things for companies to think about as they move to an IFRS model is actually how — what is their overall perspective in adopting the standards? And by that, I mean do you take an approach that minimizes differences between [what] has been done historically under U.S. GAAP in applying IFRS, or do you take out, what I’ll call a clean piece of paper, and actually come up with new policies based on one’s understanding of those underlying principles and concepts. And those are two very different approaches. I would say that in terms of a lot of the experience we’ve seen in Europe and other countries, companies have typically taken that minimalist approach, and that is they – they typically do the least amount of work in terms of creating differences between what they did historically in IFRS applications. But I think as we move away from this notion of local standards into global standards, it may be beneficial for companies to actually take out that clean piece of paper and think about, you know, what is the right accounting policy for them in light of their facts and circumstances.

Joel Osnoss: And frankly, D. J., I think you probably agree that a lot of companies in Europe actually are thinking back to the decision that they made in light of the fact that the SEC has eliminated the reconciliation. I think in Europe a lot of companies were looking to minimize the differences between IFRS and U.S. GAAP, because they reconciling to U.S. GAAP. And then once that reconciliation was eliminated it sort of gave those companies pause to sort of think to themselves, "Jeez, did I really make the right decision back then when I was initially adopting IFRS?" 

Moderator: Why are so many countries jumping on the IFRS bandwagon and leaving GAAP behind?

Joel Osnoss: I think what companies are quickly realizing, especially in the U.S., is that to the extent that they have multinational subsidiaries, companies located around the world, their subsidiaries often have to file statutory financial statements with local regulators, separate company financials for each of the subsidiaries, and in the past those financial statements have been generally under what was local GAAP. Well, there’s now an evolution toward IFRS in those countries, and as more and more countries adopt IFRS for statutory reporting, multinational companies are waking up to the fact that there are real efficiencies to be gained from centralizing the activities around the preparation of those international financial reporting standards, financial statements that [are] getting filed with local regulators.

Additionally, in the past for companies, I think because of the fact that there were all these various local GAAPs out there, there was a lack of an ability to have what I call visibility over the subsidiaries' activities, because nobody can really track effectively all these different GAAPs. If you have 150 subsidiaries, you could have 150 different GAAPs getting, you know, getting filed for statutory purposes.

And what we found is that as companies now have the ability to switch over to IFRS in those countries, they now have the ability to monitor more effectively the statutory reporting activities. And in many countries statutory reports are actually available to the public, and in the context of local GAAP financial statements, someone sitting in the United States may not be able to figure out a set of financial statements in Croatian GAAP. But if those financial statements are now required to be under IFRS, it gives the public more of an ability to get insights into what’s going on around the world for certain companies. And it could raise some concerns.

Additionally, there are transactions that could be entered into between subsidiaries and those transactions could be accounted for differently if you look at them under two different sets of GAAPs. When you look at that in the context of IFRS, the two different sides of a transaction really should be symmetrical and if not that could cause some issues. So companies are waking up to the fact that by using IFRS, they can achieve consistency and quality in a statutory reporting, minimize risk and improve efficiency.

D. J. Gannon: But one point to add, I mean, you think about it, if you’re a large multinational company and you operate in many different jurisdictions, your financial reporting really shouldn’t be dictated by where you’re domiciled, and that’s really been the case up until now. If you think about it, a company that’s domiciled in the United States, they have to follow U.S. GAAP for U.S. reporting purposes, but they also have to follow different GAAPs in different countries. And so, I think the approach that we’re talking about now is, if you’re a multinational company, you should be able to follow a global standard. And that’s actually what’s happening now with the emergence of IFRS.

Joel Osnoss: And another important driver for U.S companies is, where’s my competition? Where are the rest of the players in my industry? For companies in industries like energy and natural resources, like financial services, those companies are based in the U.S., but their competition, you know the people in the industry, the other companies in their industry, are all based around the world. And so, for analysts to look at a set of financial statements under U.S. GAAP while everyone else is preparing financial statements under IFRS, well it raises a question, why aren’t my financial statements under the same playing field with our competitors? 

Moderator: In 2007 the Securities and Exchange Commission approved a rule that makes it easier for foreign companies to use IFRS in the U.S. without having to reconcile it with GAAP. Why is that ruling considered a wake-up call for U.S. executives, especially those at multinational companies? 

D. J. Gannon: Sure. Let me put some context around that for you. Over the last, let’s say 10 years or so, the debate within the SEC here in the U.S. around global standard has really been in the context of what are called foreign private issuers. The non-U.S. companies, and those companies historically that have a reporting requirement here in the U.S., have had a couple of choices. They could follow their local standards, which may have been say U.K. GAAP, was a U.K. company. And they – what is called a reconcile to U.S. GAAP, in terms of their income statement and their balance sheet, or they could just use U.S. GAAP, which frankly most companies didn’t do.

And so the debate over the years at the SEC and other regulatory agencies, as well, has been, how do we get foreign companies onto a level playing field through a global set of standards? And so the debate has always been whether or not the U.S. should accept IFRS financial statements with no reconciliation to U.S. GAAP. And this goes back to actually 2000 when the SEC issued then what was called a concept release, which posed that very question. And if we fast forward from 2000 to 2007, last year, the SEC actually acted on that concept release, and it actually issued a proposed rule and finalized a rule as well that eliminates that reconciliation requirement if you’re a company following International Financial Reporting Standards. Why that’s significant for U.S companies is really the beginning [of] the process toward moving U.S. companies on an IFRS basis.

And what actually happened following with the final rule on the foreign issue side was an issuance of yet another concept release geared toward domestic companies, and what the context of that concept release was, is it given the commission recently changes requirements for foreign companies allowing effectively a choice between IFRS and U.S. GAAP. So the concept rule really posed the question, if it’s good enough for foreign companies, why wouldn’t be good enough for domestic companies? And what’s interesting about it is that if you look at the feedback that has actually come in, in response to that concept release, the vast majority of the respondents whether they be accounting firms, or they be companies, analysts, etcetera, have been very supportive toward the notion of having IFRS in the U.S. And again, the concept release was in the context of a choice.

What most respondents said is, “Don’t stop there. Don’t stop with a choice. Actually go beyond that, and at some point have a mandate,” which is quite interesting because just up until a year or so ago, I don’t really think anybody was talking about having IFRS here in the U.S., much less used by domestic companies.

And so really we’re seeing a fundamental shift in the regulatory environment as it relates to use of global standards, and at some point I do think you’re probably going to see, possibly sometime later this year, proposals coming out the SEC that will actually address these very issues in terms of when companies in the U.S. can possibly have a choice. And then the larger question of about at some point when would there be a mandate.

Joel Osnoss: And this really is a wake-up call for U.S. companies. I think a lot of people really never imagined that the U.S. Securities and Exchange Commission would actually allow U.S. companies to prepare their financial statements in anything else other than U.S. GAAP. You know, still when we meet with companies there’s still – people are incredulous about the concept of the SEC allowing U.S. companies to apply anything other [than] U.S. GAAP. But that’s clearly something that is in the cards for the future, and I think that more and more executives we’re meeting with are waking up to that fact, and they’re doing something about it.

D. J. Gannon: And I think the other point to note in terms of the regulatory environment – it’s interesting we’ve seen not just a fundamental shift in terms of a policy, that is the possible use of IFRS here in the United States, but we’re also seeing other fundamental changes within the commission itself and how the commission staff in particular is approaching the interpretation application of IFRS. And then again foreign companies have been using IFRS since 2005, and up until this year they’ve had to reconcile the U.S. GAAP. And so there’s been, certainly, a fair amount of commentary from the SEC staff on IFRS application, and what’s interesting about it is that we’re seeing a bit of a different attitude towards IFRS application. And to put it in some context, the staff has been, and certainly, very scrutinious of U.S. GAAP accounting. It’s not been, certainly, shy about voicing views in terms of what it believes the proper application of U.S. GAAP would be. We obviously have a lot of the detail coming out of the SEC in particular that relates to U.S. GAAP application.

And what’s interesting about it is that from an IFRS perspective, you know, again it’s much more principle objective based. And so the SEC has been very much hands-off in terms of trying to promulgate it’s over version, if you will, of IFRS, which I think is quite noteworthy. I think we’re in this transition phase here now where we’re seeing really a shifting attitude, and not just the SEC, but regulators in general. And I think the regulators understand that we’re in a different environment today. It’s much more global as I said. It’s a different perspective in terms of accounting and financial reporting, and I think that that is actually contributing to why we’re seeing some sea changes in terms of mentality toward of IFRS application.

Moderator: Well, although U.S. subsidiaries abroad have been working with the IFRS for some time, most companies in the U.S. are still using GAAP. Why have U.S. companies taken so long to adopt IFRS? Were they waiting for the cue from the SEC?

Joel Osnoss: I don’t think the companies really had much of a choice before. The evolution toward IFRS around the world has been fairly recent, and is still gradually happening. And so I think what’s really happening is that U.S. companies are by really at a requirement evolving to IFRS. They really never had a choice before from a global reporting perspective, because the SEC always required U.S. GAAP financial statements. The reporting requirements until only about three years ago were generally local GAAP reporting requirements. So it’s only over the last three or so years that countries around the world have been evolving to IFRS for statutory reporting purposes.

D. J. Gannon: And I think the other there to mention is that really up until 2005, frankly U.S. GAAP was in fact a global standard for public listing purposes. I mean, U.S. companies could go anywhere in the world, and they still can today, and they can take those U.S. GAAP financial statements and they can use them as a basis for reporting in Europe, in Asia, South America. That’s obviously starting to change now with IFRS being used more and more. But frankly, U.S. companies had really no incentive to use anything other than U.S. GAAP.

Moderator: What are the ramifications of adopting IFRS for U.S. companies?

Joel Osnoss: I think probably the biggest ramification, if you will, for U.S. companies is a change in mindset. As we mentioned before, U.S. GAAP is a much more rules-based set of standards. IFRS is principles-based. And the really, the big challenge, is going to be getting people on the same playing field, getting people to look at judgments the same way, getting people to approach accounting issues with the same methodology. And so that’s probably the biggest challenge. When you look at different countries around the world, each of their ideas of what IFRS should be is often colored by what their former local GAAP was. And so, for a multinational company it’s really time now to kind of get everybody ahead of the curve; to get people focused on what you need to do in order to form the judgments required under IFRS.

D. J. Gannon: I think that the biggest challenge is a cultural one. What we’re talking about here is really instilling more judgment back into accounting. And I think if you look at what’s happened in the U.S. going back to the late 90s, early 2000 timeframe, with some of the reporting failures here in the U.S., I think one of the lessons learned there was that oftentimes U.S. GAAP, only sometimes U.S. GAAP, doesn’t always result in kind of the best answer. And I think the focus in the U.S. has always been more on, what I call more of a compliance activity. Again, it’s a research function, trying to find out where in those 25,000 pages the right answer is.

And I think with this movement toward global standards and IFRS, what we’re seeing now is more judgment and more of a focus on what actually is happening economically. And that’s actually going to be, I think, a big challenge, because certainly business is complicated, and it will continue to be complicated, transactions will be complicated, and trying to figure out really what’s happening in terms of those transactions economically will be the big challenge. I think that’s really what IFRS is trying to get at, though, is that financial statements and financial information ought to result in accounting outcomes that actually mirror what actually is happening. And that comes back on the notion of transparency in financial statements. And so I think we’re certainly seeing more disclosure. We’re seeing more disclosure about judgments.

There’s been a lot of regulatory activity recently around the notion of judgments and trying to get on the table of discussions around frameworks to use, the companies could use, in terms of making those judgments. So I think a lot of – a lot of the cultural change will be in terms of, again, perspective on accounting, focus on economics, and then focusing on the process around how companies make judgments.

Joel Osnoss: But in addition to the judgment aspect of this there’s also the mechanical aspect of managing some of the differences between U.S. GAAP and IFRS, and that really can’t be overlooked. A company that I’ve worked with for the last couple years in their implementation of IFRS around the world, faced a huge challenge in actually calculating a difference between IFRS and U.S. GAAP and how they account for share-based payments. Something as simple as that when you have hundreds of thousands of employees around the world in various countries around the world, and those employees are moving around the world between subsidiaries, it creates all kinds of new challenges around how you capture the mathematical differences between the two sets of accounting standards.

D. J. Gannon: And I think the other thing to keep in mind is that this whole issue of transition to IFRS goes well beyond accounting. We’re not just talking about taking out a napkin and scratching in a few adjustments. We’re talking about really having something that really permeates all aspects of a company’s organizations. So we’re not just talking about technical accounting, we’re talking about things like accounting systems, accounting processes. We’re talking about an HR impact, in terms of human resources. We’re talking about a communication issue in terms of how you communicate results to your investors and your internal staff. There’s all kinds of effects here that companies are going to deal with as they transition from the U.S. GAAP to IFRS.

Joel Osnoss: One really positive ramification about this that I think companies are slowly waking up to is the fact that with the whole world on one set of accounting standards, the global pool of resources to be able to move around the world for financial reporting is amazing. To be able to go from having all these different countries reporting under various GAAPS to all speaking the same accounting language, and you can imagine the opportunities of moving some good people from Australia up to the United States, or moving people from Hong Kong to some place in the European Union, to be able to centralize the activities around financial reporting. It’s very powerful.

As I mentioned before, I’ve been working with a company for the last couple of years in the implementation of IFRS, and this has been a real positive for them to be able to interact with their auditors at the corporate level, rather than having separate conversations around accounting issues. It makes a big difference for them.

Moderator: Could you describe the benefits of IFRS? Why adoption of the new standard can reap significant cost savings, for example.

Joel Osnoss: The real benefit here is the fact that when you have people around the world that speak the same accounting language, the ability to move them around the world to centralize the preparation of statutory financial statements into shared service centers where you can have potentially a group of five or 10 people preparing financial statements for 40 or 50 countries. That really presents a huge opportunity for systemization, for standardization, for centralization of the activities around the preparation of financial statements. It could be a very big benefit for multinational companies.

D. J. Gannon: Yeah, I think one other benefit to know here too, is one involving just quality of information. I think when we’re talking about having centralization of accounting processes and systems, often what that’s going to result in is better information, not just at the local level, but also at the consolidated level. And again, many companies up until now really haven’t had a lot of visibility in terms of local reporting requirements at the corporate headquarters. And IFRS is started to change that. So I think while you’re certainly going to have the tangible benefits in terms of cost savings around resources and what not, I think you actually will have a lot of benefit in terms of getting better information for your investors in terms of your financial statements.

Joel Osnoss: And also better information internally out of your financial statements, because actually the statutory financial statement serve as the basis for things like your tax provision calculation. And so, tax directors are finding this to be a huge opportunity to be able to get better visibility into the tax provision calculation. Additionally, treasury people find this to be a real opportunity, because again the statutory financial statements serve as the basis for calculating the amount of dividends that a subsidiary can dividend up to the parent company. And so, what this gives companies and their treasury groups the opportunity to do is, actually get a better ability to project future dividends that can be sent up to the parent company.

Moderator: What risks and challenges should U.S. companies be on the alert for as they move to an IFRS world?

Joel Osnoss: Probably the biggest risk that I see is consistency. Achieving consistency for a company is going to be crucial, and getting ahead of the curve is going to be crucial. Without a timely approach to IFRS, companies could actually be adopting IFRS around the world, and they may not even know it. They may not be able to – they may not be supervising the activity around the adoption of IFRS, and therefore, in each of these countries where IFRS is being adopted for statutory purposes, a different brand of IFRS could be put in place. And so, what a company could find is down the road when they finally decide to begin the effort of converting to IFRS, that some of their subsidiaries are already on IFRS and applying it in a very different way than they would. And so, probably the biggest risk is the consistency question. And one of the important ways to get ahead of the curve in dealing with that risk, and one of the ways to mitigate that risk, if you will, is to ensure that around the world the people who are preparing financial statements are approaching judgments in the same way, in a consistent fashion. And so, companies, I think, really need to get in place a judgment framework that can be rolled out throughout their organization.

D. J. Gannon: Yeah, I think, the challenge here is trying to get through the cultural biases that naturally exist, and I think one of the issues that we’ve seen in terms of companies that have already adopted IFRS is, they tend to look through that local lens when applying IFRS. And certainly, drawing on local experiences and knowledge is helpful in applying a global standard, but I think oftentimes what happens is people lose sight of what actually the real principle is we’re trying to follow. And I think trying to have central processes around that as Joel mentioned in terms of judgments and really making sure that we have a common perspective that permeates throughout the organization is really going to be critical here in terms of making sure that you’ve got the right information that is being looked at, and that you’ve got the judgments being made on a consistent basis across countries.

Joel Osnoss: And I think I should also mention that in the context of reporting in the United States, a principles-based set of standards presents its unique risks. There’s no secret that in the United States we probably have more litigation than any 20 or so countries combined. And so, there is a risk out there when you’re actually applying a set of standards that requires judgments to be made, that in the cold, harsh light of a courtroom those decisions could be questioned. And I think it’s ever more important now in the context of IFRS, a judgment-based set of standards that companies get in place, a judgment framework to be able to point to, and say, “Well, we went through this appropriate process in order to achieve our judgment,” and hopefully that would help to mitigate the risks.

D. J. Gannon: Yeah, and I think it’s, I mean, in terms of just the environment here in the U.S., I do think we are seeing some changes in terms of the perspective that regulators in particular around judgments, and I think those are all positive signs, and again from my perspective the focus is going to be on how companies make judgments, what are some of the pieces of information they’re looking at in forming their judgment, what are some of the alternatives they considered. Why they chose a certain alternative versus another one. And all that comes back to the notion of having transparency in your financial statements. And so, it is a very different mindset as we’ve said here. One thing I mentioned if you look at U.S. GAAP over the years and how it’s evolved, again very detailed. And oftentimes, that detail is driven by an overarching concept of having uniformity in accounting treatments. And while that may be desirable on one end, it oftentimes is not desirable, because the outcomes don’t necessarily match what actually happened. And I think that this is where having a little bit different mindset around judgments is important because as we’re moving away from that uniformity concept into more of a transparency concept, judgments are going to be front and center, and I think, well, it’ll be a challenge. Certainly, companies and audit firms and others are going to have to get comfortable with how they go about making those judgments.

Moderator: If adoption of IFRS in the U.S. is inevitable, what can U.S. companies do to prepare themselves for the transition? How do they lay the groundwork?

Joel Osnoss: Well, I think the first step is actually doing a self-assessment to figure out exactly, you know, where the benefits are of adoption, where the pitfalls are going to be of adoption. The first step that I think a lot of companies are actually taking now is to get some visibility over their subsidiaries, and see who’s actually reporting under IFRS. Where is IFRS required? Where is it allowed? Where is it evolving toward IFRS? And so, that’s a very good first step that I think companies find to be a good toe in the water. If you can look at subsidiary separately from the rest of the company, use that as kind of a microcosm for the rest of the adoption. That’s a very powerful tool toward ultimate adoption as a corporation.

Additionally, what companies need to do is look at their systems. What we found in talking to companies on the trail over the last several months is that there are lot of companies out there that are sitting on antiquated accounting systems, and this could provide companies with an opportunity to upgrade their accounting systems. But the first step is to actually assess what’s out there. Access what systems are in place. Assess whether they have the ability to take a new set of accounting standards, and disseminate them around the world, and have them consistently applied. And also, there should be an assessment of the quality of the people that are in the company – who throughout the organization has the IFRS experience? How difficult would it be to train up people in IFRS around the world? What are the challenges in bringing people together under one common set of accounting standards? So it’s really about the people, the process and the technology.

Of course, as part of the self-assessment companies should be thinking about what are the differences that apply to me. What differences are going to be the most challenging ones to calculate, if you will? Where are the data points that I need to look to in order to get that information? What new information do I need to request in reporting packages, and things like that, in order to gather that information? So really as part of an assessment, I think it’s important to do kind of a directional analysis. What are the big effects going to be of adoption, and what is it going to do, how much is it going to cost, what are the challenges going to be in gathering the information in order to calculate those differences?

D. J. Gannon: And again, I think in terms of approach companies ought to again look beyond just the pure technical accounting aspect of this. I mean, they’re really taking much more of what I’ll call a holistic approach, in terms of, again, what’s the technical accounting difference, but also asking themselves, “What does it mean in terms of other things like income taxes, and my treasury function, my pension funding, my accounting systems, my accounting processes, how I communicate to investors?” And so really this assessment would go well beyond just analyzing accounting differences.

Moderator: Thank you both for joining us today on Deloitte Insights.

D. J. Gannon: Thank you.

Joel Osnoss: Thanks a lot.

Moderator: Visit Deloitte.com to find  International Financial Reporting Standards for U.S. Companies: Implications of a Growing Global Trend, which served as the basis for today’s discussion, as well as articles, newsletters and other information of interest.

You’ve been listening to Deloitte LLP’s production of Deloitte Insights, the program that looks at today’s important business issues. We want to hear from you. Contact us with your feedback, or suggestions for future podcast topics, and find Deloitte Insights at  Deloitte.com/US/podcasts . This has been a production of Deloitte LLP. Thanks for listening. And bye for now.

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