Case Study: Acquisition Results in Accelerated Adoption of IFRS
IFRS.com | November 2008
In October 2007 Steve Irwin, the Financial Director of Bradman Lake Inc., a $50 million manufacturer and installer of packaging machinery based in Charlotte, North Carolina, received a call from his boss, company president Gary Pickett. Several months earlier it had become clear that Bradman Lake was for sale, but now it was official. The purchaser was Langley Holdings plc, an international engineering group headquartered in the United Kingdom.
"We had known for quite some time we were going to be acquired by someone, but it wasn't apparent it would be a foreign company until about the first of October," Irwin recalls. But Irwin, a CPA since 1980, wasn't too worried, despite the end of the year fast approaching. He was assured that his local auditing firm in Charlotte would be able to report on Bradman Lake's results the way it always had, using Generally Accepted Accounting Principles (GAAP).
A few weeks later, however, Langley dropped the bombshell. Irwin had 30 days to report the year's results using not U.S. GAAP, but International Financial Reporting Standards (IFRS) so that the company's new parent could easily integrate its new subsidiary's financials into its own.
"Neither I nor our accounting firm had any experience with IFRS," says Irwin. "The only thing I had heard was that they were similar to GAAP except for some of the disclosures."
The first thing Irwin did was change accounting firms. Not only did he need someone versed in IFRS, but Langley had a requirement that all CPA firms working for any subsidiary anywhere in the world must be a member of Nexia International, a worldwide network of independent auditors. In North Carolina, that meant LarsonAllen LLP.
"My first thought was that the differences between U.S. GAAP and IFRS would be no big deal," remembers Irwin. "But the time frame was alarming, and soon the deadline seemed crushing. We had less than a month to close the books, and I quickly learned that there really were a few significant differences. The hardest part was the realization that ‘you don't know what you don't know.'"
Irwin says that the CPAs at LarsonAllen were tremendously helpful, but still, for him there was a steep learning curve. He tried to find seminars on IFRS to attend, but couldn't find one that began immediately. "I realized I'd have to act like I was back in school again and start reading," he says. Browsing amazon.com, he found the thousand-plus page paperback, Interpretation and Application of International Accounting and Financial Reporting Standards published by Wiley Press. He ordered it for overnight delivery and "started turning the pages."
Irwin explains that some differences were superficial, yet still demanded careful study. Bradman Lake's balance sheet, for example, would have to be formatted differently. Instead of current and long term assets being listed together, IFRS as used by the new parent company began with noncurrent plus current assets, minus liabilities.
Other differences were more substantive. Irwin explains that as a design and engineering company, Bradman Lake used percentage-of-completion accounting, but the method employed to measure progress toward completion differed from the method employed by the company's new owner. Unlike detailed guidance under U.S. GAAP, it was difficult to find implementation guidance under IFRS, and it took more time to document and support the new system. The changes applied to about 30 projects, so the process took longer than initially expected.
Irwin says another difference is that under U.S. GAAP, companies are required to expense project development costs, while under IFRS they can be capitalized, or recorded as an asset. "In a situation where we spend a considerable amount on engineering and on materials developing a new product, this difference could have a significant effect on our earnings," he explains.
Irwin says that he is now more knowledgeable about the differences between IFRS and U.S. GAAP. "Adoption of IFRS for Bradman Lake had a positive effect on earnings in the year of adoption," he explains. "But as a CPA who grew up with U.S. GAAP, I'm a little concerned that because of the lack of detailed guidance, users of IFRS-based financial information might be unaware of the differences in the application of IFRS and GAAP, which can be significant."
International Financial Reporting Standards are being used worldwide in nearly 100 countries. Bradman Lake is an example that shows that IFRS is a reality for some U.S. businesses today. As IFRS continues to gather momentum around the world, knowledge of IFRS will be increasingly important for U.S. CPAs, not just those who work with large publicly listed companies.