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Posts Tagged ‘gaap’

Performance Metrics In The Absence of Standards…

August 20th, 2013 Comments off

One of the things I enjoy so much about my position and working within Finance is that there is no “average” workday and each day brings a new challenge and opportunity to drive the operational and financial performance of the company. One of the challenges I enjoy is developing a level of performance reporting to help the executive team measure the business and make the necessary decisions. What this does not mean is merely distributing the standard financial or accounting metrics that are spit out of the system on a daily or a weekly basis. There is simply no value added if that were the case.
What I am referring to is really rolling up the sleeves and measuring what makes the company tick and understanding its pulse. In the case of a start-up you can virtually throw the majority of the standard metrics out the window until you start assembling enough data to actually provide some relevance to figures. In the early stages it’s too easy to take a number out of context and start making assumptions about whether it’s good or bad. The one thing to keep in mind though is that once you start moving outside the standard working capital ratios, you have to be very mindful that not all measurements are created equal. While there are standards in place for revenue recognition, as well as the key spends that need to be rolled into your cost of goods sold, or the treatment of R&D spending, there are other elements where it’s a coin toss between classifying them in your cost of goods or rolling them into your operating expenses.
I came across this during my time with DC Shoes where I started to compile a benchmark study on gross margin performance with other companies in our space. Partly to show our corporate parents how well we were actually performing in contrast to their constant criticisms, but also to see what the performance trends were over the prior few years. The revenue part came together quite easily, but as I started to dig into the gross margin portion of the equation it appeared that there was a significant variance in performance within my peer group. As I started to review the cost elements that were being included it became quite clear that it was not an apples-apples comparison. Additionally, while there may have been some transparency in the elements that were being included, there were no figures cited that allowed for adjustments and the viewing of equitable figures.
In the absence of reasonable comparisons I turned the mirror inward to review our own results over the last 3-4 years and found that was also a challenge as well. I had inherited a collection of financial results that had been modified on a somewhat regular basis….either at the directive of corporate, or at the decision of prior management teams to include/exclude certain costs. Trying to have a clear story about our own performance was equally difficult. This situation makes it extremely challenging to communicate a company’s progress to the Executive team in a clear message, not to mention, it basically condones the constant change of reporting standards that makes reporting, accountability, and planning a huge challenge.
While having GAAP or IFRS standards for every calculation on the income statement or KPI scoreboard is not the answer, the Executive team shares a responsibility to have consistency in the reporting that is produced and understanding the business well enough that an internal set of reporting standards can be deployed and used to measure performance. It doesn’t do anyone any good in the end to have a continual string of asterisks noting changes in your reporting. The only thing that will drive improved performance is accountability supported by accurate and consistent reporting.
Thanks for reading…
Jeffrey Ishmael

When Skillsets & Application Separate. How Do You Qualify Those That Need to Quantify?

February 9th, 2010 Comments off

            Over the last 2-years+ I have come across some very talented Finance folks who have been forced to the employment sidelines as a result of mergers, corporate bankruptcy, or in most cases, downsizing at their respective companies. I have also had a chance to interview some of these same candidates and have come across what appeared to be some very good and talented individuals….at least on paper. However, in a number of cases, I have seen a drastic divergence between the skillset that is shown on a resume and the application of those skills in an everyday environment. The more I talk with companies about the hiring of Finance talent, the more I see a challenge for companies to really look beyond a resume and qualify those who need to quantify.

            A good example is the candidate that has come from an Audit background, has large company experience ($1 billion+) and is on the job hunt. You receive dozens of resumes and all seem to be very well qualified at first review:

·         CPA

·         Good company history & tenure

·         Summaries about efficiencies & controls.

·         Recommended by a trusted recruiter

·         Interviews well with the team

            So you finally make your choice and extend an offer to the Controller behind door #1. Great, that opening is now filled and you can check the box. Wrong. This is where there is often a divergence between the skillsets that are presented by a candidate and the actual application in an everyday environment, as well as their ability to effectively function with the rest of the staff. Have you just hired the candidate that you really wanted, a partner, collaborator, and someone that will help drive value for the company, or a candidate that will just create busy work and consume the time & resources of those around them? So what am I really talking about at this point….?

·         Is your new hire someone that would be inclined to zero in on a expense report form when there is no issue with the travel spend?

·         Is your new hire someone that wants to keep information silo’d and on a need to know basis because it’s “not your function”.

·         Is your new hire someone that wants to put in controls and processes that are only effective in a large company environment with larger staff?

·         Does your candidate understand the differences between working in a large company environment vs. a micro-cap or small privately held?

·         Does your candidate really have the ability to work effectively with others when the daily regiment really does mean “being in the trenches everyday”?

            This is where I tend to believe that many financial professionals, while accomplished and credentialed, really do not have a handle on the dynamic between their knowledge base and it’s application in the environment that they are potentially hiring into. That most candidates have not put forward the proper effort to not only run a diagnostic on the company, but one on themselves to truly understand their skillset and what they can offer a prospective employer. There is also the difficulty posed to the prospective employer when they need to qualify those who quantify. Show in the interview that you can deliver value, as you’ll be expected to do daily….

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Moss-Adams: IFRS webinar on SME’s(Part2)

September 4th, 2009 Comments off

            Yesterday I covered the opening segment on my coverage of the Moss-Adams webinar on IFRS for SME’s. As a quick review, the overall definition of an SME, or Small Medium Enterprise is one that publishes financial statements for external customers, has no “Public Accountability” or fiduciary responsibility, and is a private entity. As the classification currently stands, there is no threshold on the level of revenues for the company; only that it is private in organizational structure. While some of the basic elements of general IFRS were covered, I’ll itemize some of the points that were covered on the call yesterday.

§  GAAP is a Rules-based set of guidelines whereas IFRS is a Principles-based structure.

§  LIFO is allowed under GAAP whereas it IS NOT allowed under IFRS.

§  GAAP calls for inventory valuations that are the lower of cost/market versus a lower of cost or Net Realizable Value under IFRS.

§  Unlike GAAP which DOES NOT allow for the amortization of goodwill, IFRS DOES ALLOW for this, along with the inclusion of a 1-step impairment test.

§  Unlike GAAP which does not allow for the reversal of impairments, IFRS DOES ALLOW for a reversal, except for in the case of goodwill.

§  Under GAAP, R&D expenses are capitalized if obtained through an acquisition and expensed if they are internally developed.

            With respect to the first rollout of IFRS for SME’s in the U.S., there would be a complete review after the first 2-year window to address any errors, omissions, or provide further clarity for specific topics. After the first 2-year review, this process would then happen every 3-years.  Also during the webinar there were a number of questions that were posed to the participants. As I mentioned in my posting yesterday, there were 245 participants on the webinar. Below are the questions & responses.

Do you believe your organization would benefit from IFRS for SME’s?
Yes 14%      
No 14%      
Not Sure 34%      
N/A MA employee 36%      
           
Do you believe your company will adopt within the following timeframes?
Immediately 0%      
1-3 years 19%      
3-5 years 34%      
Never 8%      
N/A MA employee 37%      
           
How much do you know about IFRS for SME’s?
Nothing 18%      
Very Little 50%      
Significant 6%      
N/A MA employee   24%      

            As I’ve mentioned in previous posts, I still have my doubts as to how aggressively this will really be rolled out in the U.S. and if the U.S. will allow GAAP to be so easily discarded in favor of such a new set of standards, regardless if they are being applied globally. We shall see….

Thanks for reading . . . . 

Jeffrey Ishmael

IFRS – White Knight or Dark Horse?

August 13th, 2009 Comments off

            With our recent travails in the financial markets, there’s a large number of folks who are starting to point their fingers in the direction of IFRS with claims that this new reporting structure could very well be a solution to all that has happened. Really? Let’s be clear in that IFRS is merely another measurement platform and a basis of financial reporting for a group of nations that are within direct proximity to each that never had a common financial reporting platform.  First, let me qualify my background in addressing this topic in a bit more detail and tabling my opinion on the topic. I spent 4-years working with a France-based manufacturing company and coordinated the North American effort for the company’s IFRS implementation in 2005.  I worked closely with our global finance group in Grenoble, attended numerous coordination meetings in Grenoble, worked with Moss-Adams and Mazars in those efforts, and produced all parallel GAAP/IFRS reporting.  We were working under a very definitive timeline for our company, which was operating under the time mandate of the European Union for implementation.

            Let’s throw a little more history in the mix. The evolution of U.S. accounting standards has been a gradual, almost 7-decade process since the first auditing standards were implemented in 1939. Without going into exhaustive detail, U.S. standards evolved over the next 7-decades to bring us to the point we’re at now. Many of the new standards implemented over the last decade have been a reaction to crises that have been encountered in the open markets. These standards have included the massive Sarbanes-Oxley regulation, Revenue Recognition standards, Reg FD on the disclosure of corporate information, and the list goes on. Let’s keep in mind that full European implementation of IFRS only happened in the last handful of years. While the planning window was longer, it has been in effect for less than 5-years. It was a necessary set of reporting standards that was previously absent for a large number of nations, each with their own stock exchange, and no common set of standards for the average investor to refer to.

            Back to an IFRS versus GAAP consideration. The evolution of the U.S. system has been in reaction to continual developments and introductions of new financial tools introduced into the market, an increasing complexity in the types of companies conducting business over the decades, and the increasing need to maintain integrity within the U.S. financial markets, as well as protect private investors. The U.S. is an absolute rule-based system whereas IFRS is more principals based.  IFRS allows a much higher degree of discretion in applying the IFRS standards.  While I haven’t directly addressed why this is not our white knight for solving the financial reporting issues in the U.S., it’s an intro for the next post I will write.

            In my next posting I’m going to address IAS 36 and the latitude that is given to a company for the reversal of a previously recognized impairment of a tangible asset. Think about the potential dilemma this creates for an investor when they’re trying to compare companies, determine the quality of earnings, yet companies have the ability to write down…and then subsequently, increase the value of an asset. We’ll look at an example where a company can alter their income levels through the revaluation of assets.  I’m certainly not implying that our own U.S.-based system is problem free and doesn’t allow for some level of indiscretion in reporting, but it still appears laughable that we’re going to abandon a system that has been developed over a handful of decades in favor of one that is newly introduced for a group of nations where no standards previously existed.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

IFRS conversions . . . Planning your jump.

September 3rd, 2008 Comments off

Now that the SEC has just moved the U.S. one step closer towards IFRS conversion, have you really started considering the staffing needs that it will take to develop your new reporting platforms? Likely the biggest issue at this point is the available guidance on making the actual conversion. Approximate statistics reflect approximately 25,000 pages of GAAP/FASB related documentation while there is only 1/10th of that currently available for IFRS. Not to mention the small amount of knowledge resources that are available to assist corporations in this effort. This is an area that will see huge growth in the coming years. Keep in mind, with this being a summarization of info, that this is not intended to be a detailed oultine of all that should be considered.

In consideration to the conversion, there are 38 key areas (IAS and IFRS) that have been documented in the form of released statements covering their respective areas. While our conversion was a very time-consuming effort, we had a very good reporting foundation to work from and had already transitioned to a new reporting software that would accommodate our IFRS initiatives. Previous to our conversion, we had implemented Hyperion HFM for all our reporting and consolidation needs. It should be noted that not all software platforms are currently capable of supporting IFRS reporting needs. We also had to start bridging the gaps of what we were not reporting in North America, which would be required under IFRS. It was necessary to go through each of the standards and bridge the differences.

As you get down into the statements that have been released, they are as basic as IAS 1, which outlines the presentatation of financial statements. However, once you start moving into some of the other areas, the new reporting could be a bit more problematic. Under IAS 2, which relates to the reporting of inventories, there is no LIFO reporting allowed, whereas it is in the U.S.. Fortunately, this was not an issue, but for some it clearly will be. Not too mention the impact to the financial results when the change is made. For our company, IAS 18, which dealt with Revenue Recognition, was another key area. Unlike GAAP, where there is extensive guidance in this area, there is little with IFRS at the current time. For a company that dealt with large projects as well as deferred revenues related to Service contracts, this was an area we could not be loose in our applications. We defaulted to GAAP guidance in this area with the assumption that eventually IFRS would become more stringent, which still has not happened….

There will be further discussions on each one of the areas covered under IFRS and a summary of differing points between the two formats. Some of the more notable areas we’ll be looking at will be:
IAS 8 Changes in Accounting Methods
IAS 18 Revenue Recognition
IAS 14 Segment Reporting
IAS 36 Impairment
IFRS 3 Business Combinations
IFRS 5 Discontinued Operations

This is a large subject to tackle but it will be an interesting path.
Thanks for reading . . . .
Jeffrey Ishmael

Pending projects – September topics planned

August 29th, 2008 Comments off

Today is really turning into one of those days where it’s not quite coming together for a quality update and I’ve really tried to focus on Quality versus Quantity in my postings. Maybe it’s partly due to the looming holiday weekend & that its also been an incredibly busy week. Between a client project I’ve been working this week, as well as “meetings” with a number of other companies, recharging the batteries are key this weekend.

However, I have been thinking about all the topics I do want to address in the coming weeks. I’ve been trying to schedule more time to address these since I think they’ll be very interesting subjects to table. I really want to address points #2 and #3 since these have the potential to have far reaching implications in the conversion to IFRS. Some of what I had in mind:

1. Further breakdowns of the Sales & Operations Planning (S&OP) process and the development of a white paper on this topic.
2. Revenue recognition and the differences between IFRS and GAAP.
3. Fair Value reporting and the differences between IFRS and GAAP.
4. Overviews of the Budget/Forecast process as it relates to a traditional 4-quarter view versus the implementation of a rolling 5-quarter approach.
5. SEC reporting and the differing levels of transparency between companies in the same industry. (Not all 10-K’s are created equal….)

I also need to compile a few of my multiple updates into a single white paper, such as the Internal Audit thread. I’ve also created an account on SlideShare where I plan on posting some of my slide presentations. Looks like it’s going to be a busy month ahead…..

Thanks for reading . . . .

IFRS – potential rollout after 12/15/09

August 27th, 2008 Comments off

As expected, the SEC announced a preliminary overview of the roadmap that would be put into place for the transition of financial reporting to IFRS. Overall, the Commission expects that there will be a full transition by 2014, but that there will be further details released with respect to the milestones needed achieve the goal.

Specifics of the information released this morning outlined the ability of certain companies to be able to begin reporting under IFRS after December 15, 2009. Companies that are considered to be in the Top-20 for their industry will be allowed to begin reporting after this date. There are approximately 110 companies in 34 industries that would be able to begin reporting after this date. This is probably a bit quicker than some might have anticipated, since this is only 16-months out.

Although the milestones have yet to be released, the Commission has tentatively scheduled a review of these milestones in 2011 to gauge the progress and determine if they will open up the ability to report under IFRS to a larger population of companies. There are also proposals for companies to provide reconciliations between prior GAAP reporting and the revised reporting under IFRS. The proposal calls for a 3-year reconciliation. This should be more than just a proposal at this point but an absolute requirement for investors to see the “walk” between the two reporting structures.

Even for a later date of 2011, this is not a very large window for governing bodies and schools to organize appropriate curriculum to cover the topic. The Commission requested that the AICPA and States add questions to existing exams for IFRS. Rather than add questions to the exam it would seem that there should be the introduction of a new module (?) that would cover IFRS. I still have a hard time believing that we are potentially looking at a 100% conversion to IFRS with no carry forward of GAAP. Not with the energies that have been expended over the last decade on new regulations, and prosecution of those regulations.

Time will tell. Thanks for reading . . . .

SEC set to announce IFRS dates. . .

August 25th, 2008 Comments off

The SEC has announced that on Wednesday it will release the tentative target dates for U.S. companies to convert to IFRS. There has already been quite a bit of speculation regarding the potential dates that might be rolled out, which ranged from initial targets of 2011 to coincide with Canada, India, and Japan, to 2015 for adoption by small companies. This change will involve more than just a simple restructuring of reporting standards. It will also have a huge ripple effect through accounting/finance curriculum and professional training standards.
In the coming weeks I’ll also be posting commentaries outlining the differences between IFRS and GAAP on a variety of subjects, including Revenue Recognition, Fair Value, and others. Until then, I’m eagerly awaiting the news on target dates.

The text of the article is listed below:

The long-awaited deadline will come in the form of a roadmap that the SEC commissioners will consider whether to propose — and which would open up the conversion date to public scrutiny and debate.

The SEC also plans to consider proposing amendments to various rules and forms that would allow “a limited number of U.S. issuers” to prepare their financial statements using IFRS rather than GAAP earlier than the roadmap proposes, the commission announced on Friday.

For the past year — ever since the SEC began allowing foreign companies to submit their SEC-prepared filings without reconciling them with GAAP — companies, academics, and accounting firms have been waiting to hear when U.S. publicly traded companies would be given a similar allowance. In the meantime, the Big Four accounting firms have been telling their clients that an SEC mandate for IFRS use is inevitable.

In Europe, companies were given three years to change over their financial reporting systems from their home-country GAAP to IFRS — an enormous switch that was completed in 2005. The experience has given large multinationals domiciled in the U.S. fodder for persuading the SEC that the largest of U.S. registrants could make a similar conversion by 2011. In that year, Canadian, Indian, and Japanese companies are expected to begin using the global standards.

Accounting firms also have predicted that the year 2013 could be cited by the SEC as an IFRS-switchover date for large U.S. companies, with 2015 being the deadline for small companies to begin using IFRS. Earlier this summer, Conrad Hewitt, the SEC’s chief accountant, said the U.S. shouldn’t be left behind while the rest of the world makes the switch to IFRS within the next three years.

While IFRS has become the most popular accounting language worldwide, it’s looked at speculatively by accounting experts based in the United States. Some say it’s more principles based and than the more time-tested GAAP, which provides accountants with more guidance for each of its rules.

For the better part of this decade, the Financial Accounting Standards Board and the International Accounting Standards Board have working on harmonizing U.S. GAAP and IFRS. Accounting experts say the standards are not yet close enough to ignore the quality differences between the two and the need for U.S. accountants to be schooled in IFRS.

What resources will you need for an IFRS conversion?

July 31st, 2008 Comments off

When we went through our IFRS implementation in 2005, we did so under the mandated schedule within the European union.  Since our corporate headquarters were based in Grenoble, France, our North American operations became a necessary participant in this effort. Never did we believe at the time that IFRS might one day become the global standard with reporting and that GAAP might play second fiddle. In hindsight, I feel fortunate to be a part of that early effort and to have a strong perspective on the resources it took to implement these new reporting standards.

One of the larger challenges we faced was the need to put these new reporting efforts in place, maintain our current focus on the business, but keep our headcount static.  We were not being given the latitude to hire new position(s) to assist with the effort.  It was huge task. I certainly would not endorse this approach again. I had been through other new reporting implementations but this one topped them all.  There was also the need to coordinate our efforts with our staff in Grenoble and develop global reporting and consolidation templates that would be used by each entity. Although we were not publicly traded in the U.S., we still needed to go through the efforts of comparing our GAAP-based results with proforma results calculated under the pending IFRS guidelines. For our entity, there were numerous considerations to the treatment of our R&D expenses and how those would be capitalized, as well as the overall cost-structures for our product. It also necessitated a review of our tax structure along with corporate policies on royalty and dividend payments.

I cannot include the elements of our timeline and all the other aspects we needed to cover in a summary post, but it was extensive.  We had to review areas such as contracts and other agreements to see if a conversion might trigger any covenants. There was also the issue of implementing certain reporting aspects that were required under IFRS but which we were not currently reporting, which needed to be coordinated with our IT team. We needed to ensure that our North American staff was properly trained & understood what was driving the effort.  We worked with the auditors to plan future engagements and how the scope would change under IFRS.  The list goes on.  The schedule for the U.S. conversion has not been defined as of yet, but when you start considering the forward-looking notifications and proformas that public companies will need to compile, it’s a huge undertaking. Today, the earliest estimation that U.S. companies might begin reporting under an IFRS-based format is 2011.  We’re certainly in for a very interesting period of transition….

Thanks for reading . . . .