The cost of the transition to International Financial Reporting Standards was significant for many companies, but generally around the same amount they had budgeted or less than they expected, according to a new study.
The study, by Financial Executives International Canada, found that most companies were able to manage the costs, with 62 percent of the companies polled saying their transition budget was under $500,000. In addition, 72 percent of Canadian companies said it costs the same to prepare interim financial reports under IFRS as under Canadian GAAP.
The survey found that 76 percent of the survey respondents said the planning costs for the IFRS transition were about the same as they had budgeted for originally. Other costs ultimately turned out to be about the same or less than budgeted for in most categories, such as training, contract changes and having financial results audited.
IFRS formally took effect in Canada on Jan. 1, 2011. In the U.S., the Securities and Exchange Commission has not yet decided whether to allow U.S. companies to prepare and submit their financial statements in accordance with IFRS, although hundreds of foreign companies file their financials in IFRS with the SEC. The U.S. Financial Accounting Standards Board and the International Accounting Standards Board have been continuing their efforts to converge U.S. GAAP with IFRS for over a decade, and one of their major convergence projects, on revenue recognitions standards, is expected to be released this summer.
The survey was part of a study, “The cost of IFRS transition in Canada,” conducted by the Canadian Financial Executives Research Foundation, the research arm of FEI Canada. “I think one of the key things that stood out in the study was the varied experiences Canadian companies had when it came to the transition, which depended on a company’s size and nature of their business,” said FEI Canada president and chief executive Michael Conway in a statement. “Smaller companies saw the transition to IFRS as generally straightforward, with larger organizations managing the transition through early planning and devoting considerable resources to the task. It was also interesting to learn how companies managed their costs. Several of the study’s participants noted that the devil was in the details. They did a line-by-line comparison of IFRS to Canadian GAAP to find the differences and prioritize the work they had to do. I think this exemplifies what a huge undertaking transitioning to IFRS was for Canada and companies should be commended for how they managed the process.”
For some of the companies, the key cost drivers were identifying more issues than anticipated and resolving differing interpretations of IFRS. Some companies managed their costs by hiring employees who were well versed in IFRS, often from experience implementing IFRS abroad. Nearly all of the survey respondents said the transition required little to no changes in their contracts, and thus led to minimal renegotiation costs. Three-quarters of the poll respondents said they did not have to make significant changes to their IT infrastructure as systems were more flexible than had been thought.
One survey respondent, a midsize company in the transportation and warehousing sector, reported that the transition was not that onerous. “It presented very little impact to the company,” the respondent noted. “Most changes made perfect sense.”
The actual costs incurred by survey respondents to prepare their first set of financial statements varied according to their revenues. For smaller companies with revenues of less than CDN $99 million (or USD $95.3 million), the average total cost was $154,800 (or USD $149,024). Transition costs in the category ranged from CDN $10,000 (USD $9,626), spent by a municipal organization with revenues of about $6 million, to CDN $506,000 (USD $487,000), spent by a private company with revenues of less than $49 million. Costs as a percentage of revenues were 0.17 percent for the lowest spending company and no greater than 1 percent of revenue for the highest spender in the category.
For midsize companies with revenues of CDN $100 million (USD $96.2 million) to CDN $999 million USD ($962 million), the average total cost of the IFRS transition was $512,800. The lowest cost was CDN $75,000 (USD $72,000) spent by a municipally-operated not-for-profit organization with revenues of about $148 million. The highest cost in the category was CDN $2,611,300 (USD $2,513,310), spent by a public utility with revenue of about $990 million. Costs as a percentage of revenues were 0.05 percent for the lowest spender and 0.26 percent for the highest.
For larger companies with revenues of CDN $1 billion or more (USD $962 million), the average total cost was CDN $4,041,177 (USD $3,889,281). The lowest spent by a large company was CDN $80,000 (USD $77,000), by a financial services company with revenues of about $1.28 billion.
The highest cost in the category was CDN $25.5 million USD $24.5 million), reported as being spent primarily on internal resources supporting the transition to IFRS, by a financial services company with revenues of $30 billion. Costs as a percentage of revenues were 0.006 percent for the lowest spender and 0.08 percent for the highest spender in the category.
Staff time was the largest transition expense item in all categories. Costs for larger-sized companies were mostly consumed by internal staff, an average of 60 percent of actual costs. Larger companies had higher internal costs, since they had and were able to utilize more internal resources. Smaller and midsize companies spent a higher proportion on external IFRS technical expertise than the largest companies.
The study combines the data gathered through an online survey conducted in January 2013, from 105 financial executives whose organizations had adopted IFRS. The data was combined with insights gathered at a roundtable held in Toronto on Feb. 21, 2013. The roundtable featured 14 preparers of financial statements, representing a cross-section of industries. Financial support for the project was provided by the IFRS Foundation and Canada’s Accounting Standards Oversight Council.