US Software Companies Behind on IFRS

(MoneyWatch)  IFRS -- the international financial reporting standards that define accounting practices in most of the world -- had turned North America into a business island. What separated Canada and the United States from everyone else was GAAP: the two versions of Generally Accepted Accounting Principles that companies in those countries used in bookkeeping and financial reporting. But that's changing, which could mean trouble for many accounting-related software companies.

Canada has mandated a changeover by January 2001 and various forces in the U.S. have been pushing for IFRS acceptance here, as well. This should be a wake-up call to many American software companies, because if they don't pay attention soon, they might find fewer and fewer customers that can use their products.

Whether an application prints checks, manages stock in a warehouse, processes orders, or performs many other ordinary business functions, it must tie in to a company's accounting system. Over and above a batch of numbers, accounting is a shared understanding of what those figures mean. Change the basic rules -- like moving from GAAP to IFRS -- and you change how software has to handle the numbers. Here are just a few areas where IFRS forces significant changes in how numbers are calculated and interpreted:

• when revenue is recognized
• how to depreciate assets
• how to handle impairments -- both writing off value and, potentially, returning it to the books

The differences can be enormous. In fact, KPMG in Canada has a publication on how a change to IFRS would affect accounting for the software industry alone.

Aside from its own books, if a software company makes financially-related software under one set of standards, the application is unusable under a different set. What's happening in North America, one of the largest business-to-business markets in the world, is that as the standards change to IFRS, many software vendors will have to extensively modify their products, or risk having something no one will buy.

Are US software companies looking at this? For the most part, no, says Bruce Pounder, president of Leveraged Logic, which provides training on the subject to financial professionals:

I have not seen any evidence that software companies are being proactive. [ERP] companies [such as Oracle and SAP] have the solutions already to go. Other companies don't have the solutions at all. If you look at smaller accounting software providers targeting smaller to medium sized businesses, [they] are much less likely to be prepared for a shift to IFRS.

There is no changeover date for the U.S., and that market will be stable for some years. But as of 2011, Canada as a market is disappearing if a package supports only Canadian GAAP, and the SEC is interested in a U.S. move from US GAAP to IFRS. Now is the time for software companies to take a hard look at their products and, if they only offer GAAP, incorporate an IFRS capability, as well as tools to help their customers move between the two. Call it an investment in a future of continued sales.

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