Convergence of U.S. GAAP and IFRS will require standardization of accounting procedures globally for ERP and CMMS systems

With so much controversy surrounding financial reporting for public companies during the past decade or so, it’s no surprise that a new global standard for the preparation of financial statements is emerging. The International Financial Reporting Standards (IFRS) have been developed by the International Accounting Standards Board (IASB) in an attempt to give greater transparency to investors in public companies. As well, IFRS enables making an apples-to-apples comparison of companies, regardless of the geographic location of the parent or subsidiary companies. So far, more than 100 countries worldwide have opted into IFRS for domestically-listed companies, on a voluntary or mandatory basis. Canada and Mexico are committed to transition to IFRS in 2011 and 2012, respectively.

In the United States, the Securities and Exchange Commission (SEC) stated its support for global accounting standards, but the transition to IFRS will take time. Current estimates are that IFRS won’t be fully adopted in the United States until at least 2015. In the meantime, efforts are underway to converge IFRS with U.S. generally accepted accounting principles (GAAP). The U.S. GAAP is the current accounting standard in the United States, providing guidelines and procedures for handling various accounting situations and ultimately preparing financial statements. Convergence of U.S. GAAP and IFRS has been ongoing for several years, as regulatory bodies such as the IASB, SEC and the U.S.-based Financial Accounting Standards Board (FASB) look for common ground in developing meaningful accounting standards.

IFRS advantages and disadvantages

To many managers and shop-floor personnel from maintenance, operations, engineering and other departments, IFRS might be a low priority at the moment. But as convergence with U.S. GAAP and adoption of IFRS become more inevitable during the next few years, there might be some noteworthy changes coming your way, depending on your size, industry, level of business activity in other countries or public vs. private company status. It’s certainly worth knowing what IFRS is about and how it might influence your work.

The key advantage for businesses moving to IFRS is leveling the playing field with competitors from around the world. If the entire global supply chain for your industry adopts IFRS, it would facilitate worldwide comparisons. Additionally, it’ll be easier to make more meaningful comparisons of subsidiaries in China, India, Europe and other locations. No longer will it be possible to hide behind differences in accounting practices of a given country. Furthermore, information systems such as ERP and CMMS will require standard accounting procedures globally for public companies, or in some cases, for private companies doing business with public companies. This might prompt U.S. companies to revisit their current CMMS, to ensure compliance with IFRS or a convergent U.S. GAAP. Some asset managers in countries that have already gone through the transition to IFRS use this as a great excuse to upgrade or even replace their CMMS.

The key disadvantage of implementing IFRS is the significant time and cost associated with changing procedures and information systems, which might or might not have corresponding benefits other than compliance. For example, if you’re forced to upgrade your CMMS, and change the way you report the cost of maintaining fixed assets so as to comply with the new standards, you might not see any change on asset availability, performance, reliability or total cost of ownership. To see any benefit, it might be necessary to leverage IFRS compliance as an excuse for making additional changes to maintenance practices and the supporting CMMS. This strategy was deployed successfully in the late 1990s by some companies, all in the name of Y2K compliance.

Expected changes — U.S. GAAP vs. IFRS

Probably the most significant changes anticipated that can affect the maintenance department are those related to property, plant and equipment (PPE). Below is a summary of some of the expected changes, including the appropriate International Accounting Standards (IAS) reference numbers. On the surface, some of these proposed changes might appear light in terms of their effect on asset managers, but at the very least, they might require changes to how your CMMS accounts for and accumulates total cost of ownership.

Thus, ensuring the CMMS accurately tracks asset life cycle cost will be more critical, from initial cost to revaluation, if the asset or its major components appreciates or deteriorates unexpectedly, and disposal. As well, IFRS is concerned with how the condition of major components affects the life cycle costs and valuation of a given asset.

The fallout from the proposed changes is especially critical if your CMMS is integrated with your company’s fixed-asset accounting and finance modules. Some of the more significant changes, especially with resource-based and asset-intensive companies, will require greater rigor in data collection and reporting.

Initial cost of assets

IFRS excludes the following from the cost of the asset (IAS 16.19):

• Costs of opening a new facility
• Costs of introducing a new product or service (including costs of advertising and promotional activities)
• Costs of conducting business in a new location or with a new class of customer (including costs of staff training)
• Administration and other general overhead costs

IFRS requires income/expenses of insignificant operations — those not necessary in bringing the asset to the location and condition for it to be capable of operating in the manner intended by management — to be recognized directly into profit and loss, not built into the cost of the asset (IAS 16.21).

Revaluation of assets

• IFRS allows historical cost method and fair value revaluation.
• IFRS has optional revaluation for a given asset class equal to fair value at date of revaluation less subsequent accumulated depreciation and accumulated impairment losses — loss in net worth of asset caused by damage, obsolescence and unexpected deterioration (IAS 16.31).
• Fair value assessment must be done regularly and by a professional (IAS 16.32).

Depreciation

• IFRS defines depreciation as the difference between carrying value and residual value over its estimated useful life (IAS 16.6).
• A review is required annually and when expectations differ from previous estimates (IAS 16.51).

Components

• IFRS requires more explicit component accounting than U.S. GAAP, when component cost is significant compared to total cost (IAS 16.43), and if component depreciation rate or method differs from the rest of the asset.
• IFRS allows grouping of significant components where the same useful life and depreciation method is used (IAS 16.45).
• Components can be non-physical, such as major inspection or overhaul; planned maintenance and refits are amortized over the period between refits/maintenance at current market pricing, updated after each occurrence.

CMMS features that ease transition