The projected move to International Financial Reporting Standards (IFRS) for financial reporting in the United States has sparked considerable discussion about the potential impact on the external financial statements of U.S. companies. No less important, however, is the impact IFRS is likely to have on companies' internal budgeting, forecasting, internal management, and performance reporting procedures. The need to align internal calculations with IFRS-derived external results will likely drive a number of changes to the manner in which many companies manage their financial data — changes that can involve everything from the technology that captures it to the governance over its interpretation and use.

Fortunately, the same strategy some companies are considering to consolidate and streamline their external IFRS reporting processes — setting up an IFRS “center of excellence” — can also be instrumental in enabling IFRS-based internal financial management and reporting. Here's how an IFRS center of excellence can not only help transition internal reporting and financial management processes to an IFRS-based environment, but also help manage those processes on an ongoing basis.

Financial Management in an IFRS-based World

Many companies will likely switch to IFRS-based budgeting, forecasting, and internal financial reporting processes at the same time as or soon after they adopt IFRS for external reporting. The reason is simple. The closer a company's internal rules are to mandated external reporting standards, the easier it can be to align internal calculations and reports with the results the marketplace actually sees.

However, switching to an IFRS-based internal financial management environment is likely to require substantial change. At a minimum, companies will need to understand how the differences between IFRS and their current internal standards will affect key performance indicators (KPIs), performance metrics, and other calculations important in their internal reporting and financial management processes. Some or all of these indicators and metrics may need to be revised if the outcomes under IFRS differ from the outcomes under the company's current standards.

Many companies will also need to modify their internal reporting systems to accommodate the changes IFRS may drive in their external financial reporting systems. For instance, some companies may wish to make changes to the chart of accounts to accommodate external reporting under IFRS. Under IFRS, for example, previous inventory write-downs can be reversed, but not under U.S. GAAP. Adding subaccounts to track IFRS-specific entries could aid in report preparation, especially during interim dual-reporting periods.

Companies may also need to revise source systems and local reporting databases to collect any additional data that may be necessary for new disclosure requirements. One IFRS requirement that could drive such changes, for example, is the requirement that research and development (R&D) costs — treated in aggregate under U.S. GAAP — be separated into a research portion, which is expensed, and a development portion, which may be capitalized. To accommodate this requirement, companies may need to adjust everything from time and expense reporting systems (to enable R&D staff to categorize their time appropriately) to the data warehouse and applications that house and manage the information and the associated flow-through of costs.

Perhaps most importantly, companies will need to achieve ongoing consistency between their internal financial calculations and their externally reported results. Paradoxically, the adoption of IFRS for statutory reporting may make this more challenging than is currently the case. Because IFRS is more principles-based and less rules-based than most GAAP, it may leave considerable room for individual variation in how a particular standard is applied. For example, under U.S. GAAP, the determination of whether a lease is a capital lease or an operating lease follows very specific criteria. However, for lease classification, IFRS provides factors to consider and focuses on the substance of the transaction as opposed to providing specific criteria. The greater the number of people or groups making such decisions, the less consistency a company can expect in how IFRS standards are applied across the enterprise, not only in the external and internal financial reports themselves, but in the way the two are reconciled.

Enter the IFRS Center of Excellence

Given the nature and extent of these challenges, many companies may need deep IFRS subject-matter knowledge to effectively translate their financial management processes to an IFRS-based environment. That's exactly where an IFRS center of excellence can help.

In its most basic form, an IFRS center of excellence is a shared-services organization that performs IFRS-based external reporting activities on behalf of multiple IFRS-using jurisdictions across the enterprise. As with any shared-services organization, one compelling reason to establish an IFRS center of excellence can be to reduce costs by consolidating, standardizing, and automating location-agnostic processes and tasks. In addition to its potential cost-reduction benefits, an IFRS center of excellence would likely improve the comparability of financial reports from different subsidiaries, as the same group of people — rather than potentially dozens of local finance organizations — would be responsible for applying IFRS interpretations to each subsidiary's financial data.

An IFRS center of excellence can add much more value to a company's financial management and reporting efforts than simply efficient IFRS report preparation, however. Consider that the staff of an IFRS center of excellence would, by definition, be highly knowledgeable about IFRS. The center of excellence would also need to monitor changes to IFRS standards and proposals on an ongoing basis. Because of its depth of subject-matter knowledge, a properly staffed and empowered IFRS center of excellence could serve as the “brains” of a company's IFRS-related activities — a resource that would not likely be available if each local subsidiary prepared its own IFRS reports.

Viewed as such a resource, an IFRS center of excellence may be a worthwhile investment even for companies that don't yet have enough IFRS reporting activities for a center of excellence to drive cost reductions. Unlike its potential cost-reduction value, an IFRS center of excellence's knowledge management and governance value depends less on a company's size than on its degree of decentralization, the diversity and/or complexity of its operating models, and the number of countries in which it operates. The less integrated, more diverse, and more complex a company, the more it stands to gain from an IFRS center of excellence's ability to coordinate and guide the company's IFRS activities, both during the transition to IFRS and thereafter.