EPM solutions can achieve IFRS and GAAP compliance, and improve business performance

Another aspect of an EPM system is to provide the flexibility to capture and report global accounting information for the enterprise, and meet the unique local reporting requirements, and General Accepted Accounting Principles (GAAP), of each country’s regulatory agencies. A major shift in accounting standards is underway as the leading world economies attempt to standardize on a single global accounting standard called the International Financial Reporting Standard (IFRS).

The European Union (EU) was first to adopt IFRS back in 2005, and today over 9000 publicly listed European companies have conformed to IFRS. Canadian companies are next, required to report under IFRS by 2011, with large US corporations to follow by 2014. The global adoption of this standard will provide a commonly accepted accounting methodology, enabling more accurate comparisons between global companies, and reducing the need to maintain numerous reporting standards for various stock exchanges and regulatory agencies alike.

One of the main reasons for the adoption of IFRS in the US is for improved transparency. Today, most US companies report under US GAAP, a rules-based accounting standard, which is different than IFRS’s principle’s-based standard. Some feel the problem with a rules-based system is that companies can meet the required reporting rules and still misrepresent their true financial condition. In addition, by attempting to address as many contingencies as possible, US GAAP rules have become complex and lengthy, not only increasing the reporting burden, but confusing the results. Too many different rules and contingencies can become arbitrary, unwittingly opaque, enabling companies to structure transactions in a more favorable light, and misrepresent the reality, a la Enron Corporation.

Differences between the US GAAP and IFRS are often minor, such as the form of inventory and cost of goods sold evaluation. US GAAP permits last-in-first-out (LIFO), but IFRS mandates a first-in-first-out (FIFO) accounting standard. As subtle as these differences may be, they can have a more significant impact on financial results. Also, the US Securities and Exchange Commission (SEC) has been increasing scrutiny against companies, such as Xerox and Gateway, for improper revenue recognition, another area susceptible to misrepresentation under US GAAP.

Nevertheless, the worldwide adoption of IFRS changes the playing field, and therefore it’s critical for EPM systems to not only provide IFRS and GAAP compliance, but more importantly, reveal the differences between the two reporting standards to alter financial strategies accordingly. An EPM system needs to be scalable and flexible enough to accommodate these changes, help you understand the strategic impact of these changes, and facilitate a change in course as a result.

Consider the game of basketball, which is now played all over the world today. But the rules of the game differ based on the league, whether it’s the NBA, NCAA or International play. Even though rule variations may be minor, they could alter your strategy. For example, the 3-point line in NBA ball is farthest from the hoop, and thus a lower percentage shot when compared to International or NCAA play. Perhaps you will want to attempt fewer 3 point shots in the NBA as a result? Zone defense is illegal in the NBA, but perfectly acceptable in NCAA. In NCAA, the shot clock is 35 seconds vs. 24 seconds for the NBA and International leagues. Will these variations change how you approach the game? Undoubtedly the answer is yes, and it’s critical for an EPM solution to accommodate all the rules, show the resulting differences, and facilitate strategic adjustments as needed.

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