Case Study: Laying the Groundwork for IFRS

United Technologies IFRS Financial Reporting Manager
Sees Both Positives and Negatives in IFRS Coming to the United States

Since the United Technologies Corp. (UTC) is an SEC registrant, its reporting entities around the world send their results to corporate on a U.S. GAAP basis for consolidation based upon the UTC Financial Manual.  Local management prepares the statutory reporting in the standards they need to use for their country.

"We operate in so many countries, any other way would be too unwieldy," explains Matthew Birney, manager in UTC's financial reporting department responsible for International Financial Reporting Standards.

UTC, with sales of almost $59 billion in 2008, does business in about 180 countries, manufacturing everything from heating and air conditioning, aerospace systems, elevators and escalators, to aircraft engines, helicopters, and fire and security systems.  Its business units include aerospace companies Pratt & Whitney, Sikorsky and Hamilton Sundstrand, and building systems companies Carrier, Otis, and UTC Fire & Security.  About 64% of UTC's revenues come from outside the United States.

 While the company's individual reporting entities around the world are responsible for both meeting their local statutory reporting requirements and reporting to their corporate parent in U.S. GAAP, Birney nevertheless has his hands full laying the groundwork for what he assumes is inevitable – the acceptance by the SEC of IFRS for public companies.  He and his team of three other CPAs are responsible for developing the corporation's IFRS conversion and implementation plan, establishing IFRS policy, and disseminating IFRS guidance to the company's far-flung entities around the world.

Some Positives

Birney, who prior to joining UTC worked at KPMG LLP auditing companies in the aerospace and government defense contracting industries, foresees a number of advantages once IFRS is adopted in the United States.  "One of the biggest positives is that with a large number of countries having already moved to IFRS, there are already a lot of experts around the world," he says.  "Moving to IFRS will open up for us a large pool of accountants and other talented people."   Birney also expects that IFRS adoption in the United States will make available new capital markets to companies like UTC "once everyone is using a single set of standards."

In addition to streamlining SEC reporting, Birney believes that another potential benefit could be more cross-border acquisitions.  "Right now the first step in a merger or acquisition is to convert the financial results to U.S. GAAP," he explains.  "For that you really need to look inside the company to get more details than what they publish in their financial statements."

Not So Fast

But Birney isn't so certain that everyone using IFRS will automatically mean comparing apples to apples.  "Since IFRS leaves a lot of room for preparers to use their judgment in the way they report financial results, there is some possibility that companies within the same industry might interpret the standards differently," he explains.  "It depends on what your needs are.   Comparing the basic facts of two companies in the same industry might be easier, but going beyond that first layer will take some expertise.  It's also true that if you're the type of investor who wants to comb through the details, you will like IFRS because disclosure requirements under IFRS are significant."

Birney also warns that various legal and financial documents that reference U.S. GAAP might have to be reviewed, and possibly be rewritten.  "UTC has no current debt covenants.  But some companies might have to take a careful look at that," he says.

"Another big challenge," Birney continues, "is that up to this point, the SEC is going at this on its own, without a lot of working with other government agencies.  In order for IFRS to make practical sense for U.S. filers, agencies such as the IRS, the Bureau of Economic Analysis, and government contracting regulatory bodies must also be in a position to accept IFRS financial statements."

Jury Still Out on Cost Savings

Birney says that the jury is still out as to whether IFRS will prove to be a net cost savings for large companies.  On the one hand, he expects significant savings once compliance is made easier by having a single set of standards.  "But the other side of the coin is that with principles-based accounting, you will really have to back up your positions," he explains.  "We will likely have to increase our accounting resources to document and support our reporting.  More judgment means increased disclosures.  We're expecting the length of footnotes to increase by 100-150%."

Birney notes that in its roadmap, the SEC predicted that converting to IFRS, including training employees and process and system changes, would cost one-eighth of one percent of revenues.  "That might be short," he says.

Looking Forward to Certainty

Most of all, Birney says he is looking forward to the SEC making a final decision about adopting IFRS in the U.S., "particularly given the high degree of uncertainty in recent weeks" as the new administration sets its own priorities.  "We're hoping to get a definite roadmap," he says.  "Otherwise it's a little difficult to plan."

"On a related topic," Birney volunteers, "something that could obviate everything is the possible change in the presentation of financial statements.  The changes being discussed have the potential to better align the presentations of results, but also to turn the financial statements on their head.  We'll just have to wait and see."  Earlier this year the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) published for public comment a Discussion Paper on financial statement presentation, with the objective of improving the information in financial statements.

In the meantime, to ensure consistency of accounting within UTC's reporting entities, Birney's team has prepared what they call the UTC Financial Manual, which provides US-GAAP financial reporting guidance and IFRS reporting considerations to the corporation's reporting entities around the world.   They have also carefully reviewed UTC's U.S. GAAP financial results and prepared a comprehensive document detailing the information that will be required in order to convert the entire corporation to IFRS.

"We found that we will have to significantly increase the volume of disclosures," says Birney.  "But we also found we are already collecting a lot of that information, which was somewhat comforting."