Archive for January, 2012

How IFRS Impacts Real Estate Industry

IFRS, which stands for International Financial Reporting Standards, is a set of accounting principles that has gained worldwide acceptance. It is published by the London-based International Accounting Standards Board (IASB), and is more focused on objectives and principles and less reliant on detailed rules than U.S. GAAP standards.

The SEC is scheduled to vote whether to adopt the 2500-page IFRS over the 25000-page GAAP for U.S. issuers. It is becoming evident for U.S.-based companies that adopting IFRS would be beneficial in an increasingly globalized world, where many countries have already adopted or is in the process of adopting IFRS. As companies think through the issues around IFRS, it would be beneficial to understand how IFRS would impact the role of Accounting Information Systems in a company. Here, I just want to briefly talk about the impact in the real estate industry from a strategic level and an execution level. Since real estate industry is global and competitive, it is vital for real estate executives to pay more attention to IFRS.

Strategic level: (a) IT infrastructure (ERP system, Data Warehouse): As many real estate companies expand rapidly, the accounting information system in these companies becomes harder to understand.  Many companies currently operate a mix of legacy accounting and ERP system, which leads to many errors in adjustments. Moving to IFRS provides a chance to streamline and integrate these separate systems. According to various needs of companies, major ERP transformation project may be designed in order to fully integrate IFRS into its systems and processes.

(b) Control environment as a result of IFRS: Earlier adoption of IFRS could be influenced to support the strategy of the company. As a global industry, real estate companies have many global operations and want to expand their international influence.  A carefully designed adoption process of IFRS will improve the possibility of identifying its value, which may show itself to public in some forms, such as reducing costs, standardized reports, and enhanced controls over foreign sub branches.

Execution level: (a) capturing of data/information: With the rapid expansion of real estate industry, the needs for IT are extensive at the same time. From leasing data to depreciation schedules to tax recordkeeping to recording the fair value of investment properties, there’s plenty of information for real estate companies to keep track of. The single consolidated system is no longer competent for the complicated situations. The real estate companies have launched  planning or engaged in major IT initiatives by integrating separate systems into comprehensive ones to better capture data needed in the transactions. The benefits of efficiency, productivity and compliance are potentially significant to companies within the real estate industry. During this integration process, the factor and impact of IFRS must be taken into consideration. This process should not only take into account of the present needs, but must be able to handle any future needs. As we all know, reporting under IFRS will be become  inevitable. If IFRS conversion is not considered during the upgrade process at the very beginning, it may cost a lot of time and money to compensate in the future. Also, a change in accounting standards will probably require modifications to the financial reporting systems in order to accommodate information not currently required under GAAP. It may also be necessary to revise some IT systems related to business processes, especially those that are relied on accumulated data that are  entered into the financial accounting systems.

(b) Storage of data/information: Data drives many business decisions in today’s enterprise, and finding ways to better manage that data and use it to accelerate business growth is a key challenge for many real estate companies. Real estate industry is concerned with conquering the data storage challenges. Under IFRS reporting, various data storages can be separated, and reporting can support multiple analyses at any time for any date. To some extent, this simplifies the way that companies manage their data storage. Some ERP system, such as Oracle, combines industry-leading performance and efficiency with a rich series of integrated data services and storage management software that is included at no extra cost. Never before has storage been so flexible, so powerful, while also helping to reduce operating costs, making it the perfect storage platform for mission-critical deployments in the modernized datacenter.

Also, during the early period of conversion from GAAP to IFRS , companies still have to generate IFRS-compliant comparative financial statements, which mean that companies may need to run two parallel financial statements during the year of the conversion. Therefore, these companies must consider the following questions, such as whether the system can handle parallel processing, does the company have data storage and memory capacity to keep all the financial information required, does the financial department have the capacity to enter data into two system, does the financial department have access to the level of data required to run financial statements using various accounting standards. Thinking about these challenges, companies need new technologies to overcome shortcomings.

(c)Pervasive and application level controls: Pervasive controls protect an organization’s resources, ensure that business processes operate as planned, assist in the achievement of an organization’s objectives, and ensure effective IT operations.

Changing to IFRS may probably influence the hiring, training, compensation practices and policies of the real estate industry. First, the company may want to add a personnel inventory to the IFRS work plan to have a clear idea of the number of financial staffs who are currently familiar with IFRS. To train the other staff with the knowledge and usage of IFRS, the HR department must first recruit someone knowing these kinds of information. Second, as is known to all, real estate companies usually pay their sales representatives commissions based on sales or rental revenue. But revenue recognition rules are different between IFRS and GAAP, which means that sales or rental revenues under GAAP might be treated in another way under IFRS. Furthermore, some other compensation in real estate industry may be based on net asset value, which is also handled in a different way between IFRS and GAAP. Finally, many real estate companies calculate bonuses for top executives based on profits. In many conditions, using IFRS for reporting may change the amounts. The HR department may also need to revise the executive compensation plan.

Many companies outside US have already adopted IFRS, and there is more and more evidence showing that US companies will also use IFRS instead of the current GAAP standards. If most of the companies over the world accept IFRS, it becomes easier for company to compare with each other, thereby achieving the goal of global integration.

 

Xiao Zhou
Accountant
China Direct Industries, Inc
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441
Phone: 954-363-7333
Email: info@cdii.net

CDII Official Website: cdii.net

Facebook: https://www.facebook.com/CDII.ChinaDirectIndustriesInc

 

 

Conducting International Research

Perhaps the most difficult aspect of conducting international business is getting legal questions answered.  Every nation has its own set of laws, loop-holes and governmental agencies which closely scrutinize and capitalize on the business activities within the respective countries.  Furthermore, the cultural and governmental differences make it extremely difficult to obtain a correct answer from research alone.  However, with the right tools, one could save a substantial amount of time and money by conducting preliminary research before contacting outside counsel.

Before the type of law is narrowed in scope and breadth, to assist in researching, you will need to understand the structure of the government you are dealing with.  Is it a Civil law country?  A Common law country?  Perhaps mixed?  This information will help you decide, (1) where to find the information and, (2) what law is binding in the specific international jurisdiction.  It is important to note however, that certain jurisdictions’ courts are very inequitable, and often times unconscionable with their rulings and or decisions.  Therefore, specific research on the jurisdictions’ courts should also be addressed with a particular eye on the country’s economic, social and political landscape.  This can be completed by researching specific case law and court rules on the jurisdictions webpage or jurisdiction specific database software.  Despite the fact that the website may be in another language, there are tools today which can translate the source code of the website.  This effectively allows the internet user to see the webpage in its original form fully translated.  This can be conducted automatically with an internet browser such as Google Chrome.  Case law and Code research are extremely beneficial in a common law based, or case law based judicial system.

After conducting the initial governmental research, a logical next step is to determine what type of law you are dealing with.  There are different types of international law.  The first type is Public international law which governs interactions between states, between states and international bodies and between international bodies themselves. This law derives from international agreements, customary law, judicial decisions and academic writings.  Private international law deals with relations between individuals over state boundaries and it is regulated by treaties or domestic lawMost contracts and recognition of judgments are governed by this type of law.  Corporate attorneys engaging in international transactions should be very familiar with this type of law as it pertains to the validity of contracts and principals of comity, or international reciprocity.  Supranational law encompasses regional agreements (like the EU) where the laws of nation states may be invalidated if they conflict with the laws put forth in the agreements.  Foreign law is also very important as it contains laws such as constitutions, statutes, regulations, and court decisions.  It does not have effect outside the nation, however; some foreign law may regulate foreign entities.  Foreign law is also very important when dealing with international trade because, when doing business in a foreign county, one is governed by the law of the land.  This will give you a fundamental and comprehensive starting point in finding the answer to your legal question.

After this information is obtained, you must consult the sources that are most applicable to your specific legal issue and specific type of law.  Similar to legal research in American jurisdictions, the best place to start is a secondary source.  A secondary source is a compilation of various legal issues and laws, which help guide you to the correct sources and law. Generally a secondary source enables you to locate primary sources posted elsewhere.  Primary sources are the original source of law, the law you want to use when analyzing a specific legal question. A great source, often found via the internet at a relatively low cost is the Foreign Law Guide: Current Sources of Codes and Basic Legislation in Jurisdictions of the world, T Reynolds & Flores.  “This site is [designed] for the practitioner, scholar, and researcher and provides essential information on primary and secondary sources of foreign law—what it is, where to find it, and how to use it. It contains information on more than 170 jurisdictions from major nations to crown colonies, semi-independent states and [supranational] regional organizations. The work is comprehensive in content and global in scope and contains exhaustive links within the work to many URLs on the world level.”[1]  Furthermore, this source provides various language translations of most entries on the site.  The cost is $2,075 dollars per year.  Other sources readily available are Globalex, http://www.nyulawglobal.org/globalex/index.html.  This website has various countries guides which are available, in addition to guides on international and comparative legal research topics which encompass public, private, foreign and supranational law.  Most information on this site is available for free. Another research website is FLARE: Foreign Law Research Guide, http://ials.sas.ac.uk/library/guides/research_guides.htm#flare. This website is a collaboration between the major libraries collecting law in the United Kingdom and various other jurisdictions.  Lastly, perhaps the most beneficial source is LLRX Comparative and Foreign Law Resources Center, http://www.llrx.com/category/1050.  This site includes research guides and directly or indirectly links you to various other legal resources such as the following large databases, (1) World Legal Information Institute, http://www.worldlii.org, (2) The Law Library of Congress,http://www.loc.gov/law/help/guide.php and (3) The Law Library of Congress, Global Legal Information Network, http://www.glin.gov/search.action. It is substantially likely that secondary sources will lead you to the right set of laws, most often found via the World Wide Web.  In developing countries it may be more difficult; however, there are alternatives to finding out the applicable information.

Today current technology is increasing at astronomical rates.  This technology allows a user to contact any location across the world with an internet access at relatively low costs.  Generally contacting another country requires diverse linguistics but often times individuals working within the governments speak English.  In addition, the information can be translated instantaneously if sent electronically though Skype or translation programs.  Contacting local municipalities or local companies who specialize in the legal issues which you are seeking may be extremely beneficial especially in developing countries where the information is not readily available on the internet.  If you cannot get in touch with appropriate persons or you feel the information lacks legal credibility, the next best step is to contact local counsel to assist in the matter.

There is no substitute for being on the ground in the region you are conducting business.  Speaking with locals and establishing connections in the specific jurisdiction enables you to communicate face-to-face with local municipalities to learn the law from the source.  However, with evolving technology there are other alternatives which can save you time and money which can be the life blood of a new or existing international business. Of prime importance, however, is keeping a keen eye on the countries’ political, social and economic differences in relation to your legal question.

Brett Schater
CDII Trading, Inc.
Third Year Law Student
Member of Law Review
Legal Clerk with CDII Trading Inc.
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441
Website: www.cdiitrading.com

[1]  http://www.foreignlawguide.com/visitors.htmAlphabetical List of Countries and Jurisdictions available: