For decades, global financial reporting was dominated by the U.S. GAAP. But beginning in 2001, a London-based organization known as the International Accounting Standards Board (IASB) began developing a new set of standards.

These new rules, the International Financial Reporting Standards (IFRS), feature a number of enviable attributes. Rather than being built up in a patchwork fashion over time, as the U.S. GAAP standards were, the IFRS represent a fresh start. The IASB had the option to adopt the best elements of existing practice but also the freedom to design more effective rules.

Another attractive attribute is that IFRS rules are broader and more principles-based than their U.S. GAAP counterparts. Offering limited interpretive guidance, the IFRS rules instead require preparers and auditors to look at, and report on, the genuine substance of each transaction. One example of this is the depreciation of asset components. While component depreciation is allowed under GAAP, it is not frequently used. IFRS requires that component depreciation be used for all assets that have differing patterns of benefit. A company that depreciates an entire aircraft under GAAP will now be required to depreciate the engines differently from the fuselage, as one example. This change in requirement will lead to changes in cash flow reporting and changes in calculation of profitability. While it may take time for the reporting practices of each company and each industry to coalesce into familiar and consistent frameworks, the principles-based approach carries the long-term promise of greater transparency.

Finally, U.S. companies that convert to IFRS will find value in numbers. Today, the world has two principal accounting and reporting standards. The need to understand, and possibly apply, both IFRS and U.S. GAAP rules represents added cost and complexity for issuers and investors alike. Certainly, a single global standard that is applicable to every industry and company, no matter where it is domiciled, will reduce businesses' need for multiple reporting systems and will promote more efficient investment decisions. The global movement to IFRS is a giant step toward global harmonization.

These benefits are desirable, but they are specific to companies' external financial reporting processes. The companies that gain the most from IFRS conversion will be those that move IFRS concepts deeper into their business performance management (BPM) processes — those that take the conversion as an opportunity to revisit their entire approach to managing performance.

The Performance Opportunity

First instincts have led some executives to think of IFRS as a set of accounting policy regulations that will impact nothing outside of external financial reporting. Managers who deal primarily in strategic planning, budgeting, forecasting, and other areas of business performance management could easily view the conversion to IFRS as an activity that they will deal in only if, and when, they are dragged into the transition. But these people should think again.

Financial reporting is the window through which capital markets view a business's performance. And this is where the opportunity within IFRS is unveiled. The move to IFRS will affect not only the accounting and reporting functions, but also investor relations and all other areas of the business that rely on accounting information — including tax, IT, HR, and legal.

In certain areas, such as tax planning and management, the changes will be both numerous and complex. Here companies will need to comb through the regulations in great detail to determine their impact.

However, in other areas the changes will be simple to implement and in some cases allow for more straightforward accounting or presentation. One example is that under IFRS, companies may have more flexibility around financial statement presentation methods. Another example is that IFRS rules require significantly more detail on property, plant, and equipment (PP&E) in the chart of accounts. Though many such changes in isolation may be relatively simple to implement, interdependencies and the overall number of changes will lead companies into a project of significant complexity and potential strategic consequence.

Additionally, as IFRS offers significantly less specific guidance on the details of implementing the new accounting rules, they place the onus on companies and their advisers and auditors to create practices that sufficiently capture the substance of transactions, consistent with the principles embodied within IFRS. Some executives thinking about the massive undertaking that IFRS conversion represents are beginning to realize that they can use the conversion as an opportunity to rethink the way their company analyzes and rewards business performance, to re-evaluate their performance management framework from the ground up. After all, an IFRS conversion necessarily shifts the lens through which the company's performance is evaluated.

Adoption of IFRS will be a monumental exercise for a company, regardless of how it proceeds. However, in the process of revisiting its BPM framework, an organization must consider the fundamental assumptions behind what drives its value. Exhibit 1 illustrates the Ernst & Young approach to business performance management. BPM best practices exist in an environment that reconciles fundamental business strategy with essential drivers, stakeholders, and enablers. Our model incorporates not only the internal views about organizational performance, but also the attitudes and expectations of groups such as investors and customers. It is also keenly aware of both the regulatory and competitive environment. For BPM to be effective, the organization must determine its true drivers of performance, translate those into specific metrics, and then establish appropriate performance targets and goals. It must compare initial goals with actual results, then evaluate what went well and what was off the mark. Performance targets will have to change with the adoption of IFRS because the company's method of measuring its financial achievement will change. This makes the period leading up to conversion a good time to re-evaluate the organization's vision, value drivers, and performance metrics, and then to incorporate such re-evaluation into a loop of continuous refinement and improvement.

As a business responds to the demands and opportunities of IFRS conversion, revisiting its fundamental BPM processes will likely prove worthwhile. The ultimate gauge of whether corporate performance is well-managed is the strength of its link between strategy and execution. If BPM is well-executed, the company realizes benefits as a result of having all its employees and managers on the same page.

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Impacts of IFRS on the BPM Framework

Many elements of the BPM ecosystem illustrated in exhibit 1 will be impacted as a result of IFRS conversions. Successful organizations will need to consider several questions as they rethink BPM post-IFRS:

1. • How will the capital markets view our “new” IFRS-centered performance? Do we still compare as favorably to our competitors as we did prior to the conversion?

2. • How will our target-setting processes change? Will there be new value drivers and metrics that we will need to use as a result of the change?

3. • How extensive are the changes going to be regarding our reporting environment? Does master data need to change? Are existing management reports still acceptable? How extensive will the remapping from statutory or legal reporting to management reporting be?

How a company answers these questions will necessarily impact all four realms in which its external performance is monitored: its regulatory environment, competitive environment, customer sentiment, and capital markets and investor sentiment.