Tuesday, June 17, 2008

IFRS: Is there a devil in your contracts?

One of the areas everyone is saying that you must consider is the effect of the conversion to IFRS on contracts.

My first reaction to this point is that I believe that every company should already have existing controls in place to deal with changes that would have occurred in individual accounting policies under National GAAP. Would it not be part of contract administration already?

Even though this may be the situation there is no escaping the fact that the change to IFRS is certainly potentially more material than any change in accounting policy that you have experienced before (unless of course you went through another IFRS conversion).

When thinking of contracts my immediate thoughts go to debt covenants. Nobody wants to trigger an immediate requirement to repay debt. However, the problem is more pervasive. There are hidden devils everywhere and in places that you may not have thought about.

In the FASB Forum yesterday (see yesterday’s entry) some other potential problems were identified.

What about profit sharing arrangements that refer to a percentage of income under GAAP? Sharing of income under joint ventures – perhaps the participants are in multiple jurisdictions? Employment arrangements that pay employees a percentage of income (not necessarily confined to “executives”), long term royalty arrangements … etc…. The list continues.

Special kinds of devils could reside in contracts that specify the use of GAAP at a certain date such as the inception of the contract. This is referred to as “frozen” GAAP by one of the presenters at the FASB session. This could be a nightmare to keep the old records under the “old” GAAP simply to comply with a contract.

Do you have other examples?

Time is running out to open the lines of renegotiation. There are many matters to consider.

The devil is in the non-accounting details indeed.

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