The Big Change to International Financial Reporting Standards

Posted on November 2, 2010 by admin



As recently as 2008, the Financial Accounting Standards Board (FASB) edited the standards provided in the Generally Accepted Accounting Principles (GAAP). GAAP is what businesses currently use to in order to prepare financial statements for public, private, not-for-profit, and government organizations. However, businesses are now preparing for a monumental change. They will be required to switch from GAAP to International Financial Reporting Standards (IFRS).

IFRS are standards that are used internationally. In December 2007, the US Securities and Exchange (SEC) made the decision to have all companies make the shift to IFRS to unify businesses under one list of standards in order to reduce the differences of financial statements. The SEC, under control of former chairman Christopher Cox, set preliminary dates stating that all publicly traded companies will need to start converting as early as 2014 and the process should be completed no later than 2016. The switch will require a lot of work, and will not be simple for businesses to accomplish. It is expected that each company will take approximately two years to complete the transformation.

The SEC stated that foreign companies are allowed to apply IFRS immediately without making a settlement to US GAAP. There are, however, many companies that already use IFRS, meaning many businesses need to change sooner, such as US firms with offices overseas and foreign owned US businesses. Making the switch quickly is a key step to avoid companies using two different standards for a long period of time.

Dwayne Cook, partner and practice leader for the Mid Atlantic area at Tatum LLC, points out the ways companies will be affected by stating “companies will have to change the way they record and report financial data because IFRS and US GAAP rules differ regarding revenue recognition, compensation, fixed assets and inventory for example” (Pratt 2). The most significant difference between IFRS and GAAP is that IFRS provides much less detail. In comparison IFRS consists of 2,500 pages, while GAAP has 17,000. Currently across the globe, over one hundred companies are already using IFRS and one hundred and fifty are expected to be by 2011.

There are many benefits that come along with the switch to IFRS. The transformation will make the process of financial reporting more comprehensive. Companies who have global operations or use foreign reporting will be able to use streamline reporting and can reduce related costs by creating a common reporting system that will generate consistency in statutory reporting. “Mr. Jamil Khatri, Executive Director and Head, Accounting Advisory Services, KPMG (one of the largest professional services firms in the world), said that the new guidelines would clear the air over issues like what should be on the timeline for calculating eligibility criteria for converging to the new standard, applicability of the norm” (Fresh guidelines 2). These companies could also build up regional financial centers, reposition finance resources in regard to where they would be needed and integrate training and development efforts.

Other companies that take part in the conversion will be able to compare financial reporting with international competitors. IFRS will enable many businesses to access foreign capital markets and investments. The standards for IFRS are much more flexible because they are principle-based, and will help rid the system of inconsistencies between businesses, meaning there will be less confusion in comparing financial results. It will aid in making it easier to perform cross-border acquisitions, ventures, and spin-offs. Those countries that have not been able to keep up with the evolution of financial reporting, such as Canada, will be able to make this transition to level out the playing field. Marion Kirsh, a chief accountant, reports “the use of IFRS is also expected to result in more volatility of companies’ reported financial results, as the new standards will enable companies to use more estimates an fair value reporting” (Harman 1). Those businesses that adopt IFRS early, before the SEC makes it a requirement, will be cutting edge in comparison to the others. These businesses will gain experience before their competitors do.

Along with the benefits that follow the conversion of IFRS comes many challenges as well. Companies are going to have to apply the financial knowledge they already have with completely new policies. This will be a large change for the ways that many accounting personnel think. They have been trained to operate in a completely different way and now are put in an environment where not only more application exists, but industry guidance as well. Each organization will most likely need to add financial personnel to their teams who are more familiar with reporting IFRS.

Another concern is that companies will have to upgrade their information technology (IT) to adhere with the changing systems. There are many things that they will have to renegotiate due to the switch to IFRS, such as current business contracts, and debt agreements. These organizations will also have to be sure to budget one-time costs that are associated with the conversion, such as auditing and external adviser costs. Finally, throughout all the changes, they should be aware to seek to manage stakeholder expectations, such as budgeting and planning. “As companies and investors adapt to the new standards over time, however, Kirsh expects the challenges to subside” (Harman 1).

The steps needed to make the switch to IFRS will affect many branches of companies. Specifically, it will have large effects on internal system and controls, financing and contractual agreements, operations and internal and external communications. The larger the company, the longer the process of switching from GAAP to IFRS will take, meaning strong management will be needed in order to have success during the transition. Nevertheless, the most important step during this process is to perform an in-depth assessment of the impact the conversion could potentially have on the finance and people in the business. According to KPMG, “the goal to create a detailed plan for completing the conversion; such an assessment would encompass the following:

? Gap Analysis – accounting and disclosure
? Initial adoption alternatives – IFRS 1
? Financial statement assessment -quantifying differences and directional impact
? Availability of information
? Process and controls requirements
? IT systems changes
? Existing resource capabilities
? External audit impact
? Training requirement
? Competitor assessment
? Foreign subsidiaries and planned acquisitions
? Evaluation of contractual agreements
? Investor and analyst communications
? Summary of conversion benefits
? Project team and work plan (IFRS in the US 3)

If all the important steps above are taken, the company is on its way to a successful conversion process. The average projected time for each company to complete the transformation is about two years. It is important that each business comes up with a conversion plan in advance before they begin any of the process. During the conversion, all other changes should be synchronized together. In the first phases, the global approach and policies should be laid out. During the second phase, the international business should begin to be converted by sending local teams to global basis of the company. Participation by the personnel is an important key to the success of the business while making the large change. After the financial reporting and IT have been converted, a team should get together and develop a way to communicate and explain the changes that were made. The effort will require highly experienced personnel who are well educated on the issues and hold strong problem-solving qualities.

In order for companies to operate globally in conjunction with other companies easily, there must be a universal method of accounting procedures. The switch that the SEC has made necessary from GAAP to IFRS will benefit businesses worldwide. It may seem to be more of a burden to many companies, rather than an important shift in the operations at first. However, most will find that once the switch has been made, the universal methods make a lot of conversion that was necessary in the past unnecessary. Although it may take a while to come up with the right IFRS system, once it has all been said and done, accountants will no longer have to worry about discrepancies between various accounting methods. The shift that will be occurring in the next few years, although business related, is just another way in which our world is coming closer to a unified society.

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Canadian Franchisee Loans and Business Funding – 4 Secrets To Financing A Franchise

Posted on October 31, 2010 by admin



The inside edge. You want it, we have it! Have we got some tips and secrets to share for you.

We’re talking about financing your franchise – the successful completion of your entrepreneurial dream in Canada. As a franchisee you want to be aware of your options in loans and funding programs that are geared specifically to financing a start up business in the booming franchise industry.

We’re going to discuss 4 key elements of a proven formula for franchise success. What are they? Simply speaking its ensuring you have a business plan that accurately resembles the financial aspects of your business. Number two is the types of emphasis that is put on your own personal background and credit history. Number 3 is the knowledge of franchise financing options in Canada, and number 4, (often # 1 in your mind probably) the amount of personal funds you have to commit or invest to get your business going and your franchisee funding approved.

Let’s dig in! OPM. What is it? It’s stands for other peoples money and its critical you understand that a franchise is composed of two elements with respect to your financing plan – debt (what your borrow) and equity (what you put in). Our key point here is simply that while there is no proper mix of what works for the combination of those two elements. No franchise is financed with 100% borrowed funds – conversely you don’t want to ‘ pay cash ‘ for your business and risk all, or a lot of everything you own (house, savings, etc) for a start up business such as a franchise.

We will also share with you that some of the very specialized franchisee loan program in Canada typically require a 30 – 40% owner equity, or down payment. That can be achieved in several different ways.

Should you tap into your retirement plans to fund your franchise? That’s not our call, but if you have capital outside your savings we would not recommend collapsing RRSP’s, or taking out home mortgages, etc for the purpose of financing and funding your franchise.

Clients often ask how their personal credit history affects their ability to get franchise financing. In general we can say it’s a key point in the whole approval process. Many Canadians aren’t aware that the entire credit history system in Canada is based on a simple score. You should have a score of at least 650 to be successful in traditional franchise finance. So check your score in advance. And by the way, higher is better!

The business plan is a key element of your whole package. Many clients don’t have experience or financial acumen to prepare a proper plan. Not a problem as you can seek a Canadian business financing advisor, or accountant, etc to prepare your plan. A good basic plan comes at a very reasonable cost.

The business plan is your ‘ total picture ‘of your franchise. Basic elements are yourself, your background and business or industry experience, info on your franchise, and some basic financial projections. Naturally the better recognized and successful your brand the more attractive your perceived chances of success are.

As a franchisee what loans and funding is available in Canada. As unbelievable as it may seem the government of Canada, via Industry Canada, is one of the largest players in your franchise success. A program called the BIL / CSBF program is hugely popular and finances mot franchises fewer than 350k in Canada. We strongly recommend you seek out and investigate this program, it’s probably the key to 95% our client’s success in financing a franchise with funding that comes with great rates, terms and structures and limited guarantees. Bottom line, check it out!

So there you have it, 4 key elements, and secrets if you will, to franchisee financing success. Summarized… a solid business plan, some good business or industry experience coupled with a reasonable personal credit history, a down payment that is aligned to your overall financing needs and personal situation, and, last but not least, knowledge of programs such as the BIL which are geared toward franchise finance success.

So now you know!

P.S. Good luck in your entrepreneurial dream, and going it alone is never good, so seek the services of a experienced, credible and trusted Canadian business financing advisor.

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Business Management – Be Aware Of Fear And-Greed

Posted on October 31, 2010 by admin



This is probably such a day as many others. Business as usual. Nothing wrong, no alerts, you loose some, you win some. You go with the flow and let your profits grow…. Do not think that this jargon is for investment managers only; business management and investment management is not that different.

When you are in the business arena you know that you have to follow the market. You watch the competition, you check the trends and you respond to other incidents that you are involved in. Until that special moment.

It starts with rumors, than it’s the talk of the town. And then it appears; a new trend. Nearly invisible at first, a big monster a few moments later. Then people will ask you; what are we going to do?

From the investment market we know that the market behavior is powered by fear and greed. When the oil price is rising, we fear that it will not lower again, when the US dollar is under pressure it will never go up (a European worry) and if the stock market plunges it will not recover for years.
Closer to the truth is that any movement will have its counterpart. The question is timing. When you are familiar with investments you probably know that you should not try to time the market. Yet does this mean that you should always go with the flow? You cannot (always) stop the flow. But you could try to make a few changes especially when you feel that something is wrong.

Take the following heading of a recent article: “bankers enter car-insurance market in order to provide a global service” (a free translation of the Spanish heading in the business paper ‘Expansion’). Why do all of a sudden a group of bankers enter into this service, where we know that car-insurance, is not really profitable? Especially bankers that are carrying a portfolio of possible investments should know that the choice for this option excludes some other one. The first few banks will envision an opportunity and respond with greed to new earnings, where a few others fear to be left behind and join the team – after all.

This is only one (recent) example of fear and greed, but there are examples to be found on a daily basis. Besides the example of the old versus new economy just check in your organization where you hear about the following arguments:
“If we don’t follow we will be left behind (you can hear the child say ‘me too’) or “if we take this step we are the first and the profits will follow forever.”

If you are aware however of the fact that each person and company is unique you can benefit from this by selecting those investments or decisions where they fit with your (personal) or organizational profile. If you can trust on the success that your company harvested in the past, you should be confident to continue the same line for the future.
If you want to outperform with your team, you should stay alert for the fear and greed around you.

? 2005 Hans Bool / Astor White

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