Making the decision on the accounting standard to use for a company is one that shouldn’t be taken lightly. In the United States, using US GAAP as a reporting standard is not rare if operations are mostly within the country. When activities start to expand internationally, having financial statements under US GAAP might not be sufficient and companies start looking at IFRS. Transitioning from one standard to another is not unusual but requires a lot of thought and labor. In this article, we will be looking at the key elements on how to reconcile GAAP to IFRS.
How to Reconcile: Step by Step
Changing the accounting framework used and adopted by a company is not a simple task. It requires a detailed action plan, a proper time frame and patience. There is no perfect way to complete a transition but we will provide a guide with some crucial steps to take into consideration.
- Determine scope and approach: Before starting any project, it’s good to have an action plan to guide you through all the essential steps to succeed. This is where you draw your roadmap and determine what needs to be done, the departments it will affect, the timeline on each task, who needs to be involved, how much money this project needs, whether the project requires a change in accounting systems or configuration. These are only a few of the questions that will need answers before starting a framework transition. Essentially, you need to have a plan you can follow and also think about backup plans in case you encounter issues along the way.
- Identify accounting policy differences: Once a plan is drafted, start identifying all the current accounting policies used by the company based on GAAP and summarize how transactions are recorded based on each standard under GAAP. Once completed, find the equivalent IFRS standard for each policy currently used and review any differences between the two frameworks. Update and revise accounting policies to adapt them for IFRS standards.
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- Identify any information or data gaps: When changing accounting frameworks, the standard you are transitioning to could need different types of data for financial reporting than what you are currently used to. Remember that differences in accounting standards mean that transactions might need to be recorded differently. If you identify any gaps in the information needed to report with the new framework, take note of the gaps as this will be a key information in evaluating whether your current information systems are still relevant with a new framework.
- Quantify impact of transition: Once steps 2 and 3 are completed, for any accounting standards that are different between GAAP and IFRS, quantify the impact of any adjustments needed to go from GAAP to IFRS. This gives you a good idea of the changes resulting from the transition and what the stakeholders can expect to see as an outcome.
- Prepare a reconciliation of GAAP and IFRS: For the transition period, a reconciliation is needed to show the accounts from a GAAP and IFRS point of view. Prepare a balance sheet, income statement and reconcile equity as at the date of transition from GAAP to IFRS. This is especially useful as these reports could be requested by investors, management or regulators.
- Identify whether information systems used need to be changed or updated: As mentioned in step 3, your systems might not be suitable anymore for your reporting needs under the new framework. If that’s the case, changing accounting systems can be a challenging task and consider performing shadow accounting for a while before fully relying on a new system. Perform lots of tests to ensure that systems are performing correctly.
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- Ensure staff and management are trained: Any new accounting policies adopted or systems updates need to be properly communicated to all parties involved and training provided. This ensures that the users are adequately equipped to proceed with the new framework instead of the old one.
- Implementation, financial reporting and audit after transition: Once all analysis and previous steps are completed, it’s time for the actual implementation. The first set of financial statements under the new accounting framework is always the most challenging so communication is key whether that’s internally or externally with the auditors. Be prepared to go through adjustments that might be needed as a result of errors, whether that’s from staff or new systems.
The above is not a perfect road map but it contains key steps in order to have a successful transition of standards. Those steps could actually be used for the transition of any framework and is not limited to US GAAP to IFRS. It could range from IFRS to US GAAP or any other local GAAP.
The Bottom Line: GAAP to IFRS
Changing the accounting framework is not something to be taken lightly and needs massive preparation and buy-in from not only management but employees affected by the change. To have a successful transition, ensure to have a proper action plan defined and be prepared for challenges since it’s not simply a question of changing accounting policies, it involves revising company processes, systems and will affect people across many departments.
