Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Ready for IFRS?
International reporting standards are coming for U.S. public companies.
Schemes project onto its agenda. The board tentatively decided that the scope of the project will address accounting for all tradable emission rights and obligations, and for activities to receive tradable rights in the future. Accounting commentary and literature increasingly address IFRS issues, so conversion likely will lend additional guidance in this area.
Investor-owned U.S. power and utility companies are regulated by the SEC as well as other entities, such as the Federal Energy Regulatory Commission (FERC) and local agencies of the states in which they operate. The accounting rules of FERC and other regulatory agencies heavily have influenced the accounting policies guiding U.S. utilities. To date, IFRS makes no allowance for other regulators, and this is not likely to be covered by the continuing SEC roundtable and other planning discussions.
At this point, FERC isn’t expected to change its Uniform System of Accounts simply because of a proposed U.S. conversion to IFRS. Even if a change eventually would be forthcoming, it wouldn’t happen until after U.S. issuers convert to IFRS.
For most industries, IFRS ultimately might enable companies to streamline reporting processes and reduce the cost of compliance. However, for U.S. power and utility companies, if the concepts of Statement No. 71 are not adopted or embraced by IFRS rule makers, accounting practices mandated by FERC and other regulatory bodies might result in the requirement to maintain a separate set of financial records, similar to the process for current statutory reporting in certain international jurisdictions. The need to generate the required accounting information could have significant implications for a company’s information-technology system. As a result, these companies would need to continue evaluating accounting for industry-specific issues and how it affects their IFRS planning.
In any case, momentum is building for U.S. adoption of IFRS, and conversion no longer appears to be a matter of “if,” but more a matter of “when” and “how.” For companies that report in multiple jurisdictions, the adoption of a single global set of accounting standards can be a benefit in terms of process standardization and related efficiency gains. Multiple approaches to financial reporting continue to be inefficient and troublesome, and many affected companies strongly support the SEC’s continued efforts in the U.S. transition to IFRS.
The question that power and utility executives and directors need to tackle—sooner, rather than later—is how they can maximize the opportunities presented by IFRS and effectively and efficiently deal with any challenges as a result of the conversion. The straightforward answer is to start planning now, dedicate the appropriate management focus and create a project team across all aspects of the company—including the financial accounting and reporting, tax and IT departments—to assess the effort and work toward transition activities. Also, it’s never too early to begin educating analysts and investors on how a conversion to IFRS might impact the company’s financial results.
Now is the time to begin planning for conversion from GAAP to IFRS. The resources needed and the impact on the organization will be far-reaching. But with proper strategic planning, benefits can be substantial.