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

 

 

Advertisements
    • Xifan Yan
    • January 19th, 2012

    Great article, learned a lot!

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: