Executive Summary
Facts
Marshall Industries was founded in 1998 and is one of the world’s largest coal producers, representing
roughly 12% of the Farrlandic coal supply. They operate seven mines in two of the three low sulfur coal
producing regions of Farrlandia. They are trying to determine the risks and rewards of the two adoption
dates of IFRS (International Financial Reporting Standards).
Marshall Industries is a forward looking company who likes to be up to date and has a great staff. Their
staff is experienced in GAAP and not IFRS. Farrlandia has just adopted IFRS from GAAP.
Marshall Industries will have to convert from GAAP to IFRS but they also have the option to voluntarily
adopt it early by January 1, 2014 or wait until mandatory adoption on January 1, 2016. There is a grace
period if the Company decides to adopt early. They are granted limited liability protecting them from fees
and fines and certain limited investor suits.
Problem
Determine whether Marshall Industries should adopt IFRS early to make use of the grace period or wait
until mandatory adoption in order to delay investment expenditures. Identify the two or three key ongoing
differences between GAAP and IFRS and the implications the migration to IFRS will have on the
Company’s system, people, and business. Additionally, identify two key elections or exceptions under
IFRS-1.
Unknowns
The amount Marshall Industries is willing to spend to be ready by the grace period. The exact costs of
training employees, converting the IT department, the effect of business processes etc. to IFRS. The
productivity lost because of diverting focus from doing their job to the learning of IFRS.
Assumptions
Marshall Industries is willing to adopt early if it is feasible. The staff is competent enough to balance
between learning how to make the transition from GAAP to IFRS while focusing on their actual job.
Solutions
Marshall Industries should wait to adopt IFRS until the mandatory date of January 1, 2016. Prior to that
date, on January 1, 2015, the Company will begin preparing a quarterly reconciliation of its US GAAP
balance sheet to an IFRS balance sheet in order to prepare for the transition.
Reasons
By waiting two more years, Marshall Industries will have more time to train its employees and convert its
IT systems. There will need to be a considerable amount of time budgeted to train employees and
implement new IT systems. We estimate about 18-24 months should be given to fully implement the new
IT systems. By waiting, underestimating time allowed for employee training and IT implementation will
not be a potential problem for the Company. In January 2015, the staff will have to run both GAAP and
IFRS financials each quarter, but only report one (GAAP) until the mandatory adoption date. Voluntarily
adopting IFRS will only allow 4 months to prepare employees for running both GAAP and IFRS
financials. Additionally, waiting will give the Company more time to communicate to investors and rest
of firm of the transition to IFRS. This will help reduce confusion between investors in regards to changes
in market price and stated income. When waiting until the mandatory adoption date, the Company will
also have more time to capitalize and amortize its costs associated with IT implementation, helping
reduce large up-front costs.
Implications
System- There will need to be significant changes to the Company’s accounting system with the transition
to IFRS. We will need to analyze which of our IT system will need to be modified to support the new
IFRS accounting processes. The system will need to change certain calculations and measurements due to
the changes that will come about with the adoption of IFRS. If we are able to centralize and streamline
our processes, the conversion process will be easier and more cost efficient. Costs will also include
training for current employees in accounting department in IFRS methods. The EY team is prepared to
assist with this training to help minimize the Company’s costs if they were to use an outside resource.
People- Company has 2900 employees. Most of the employees will be relatively unaffected. The
accountants will have to put in the time and work necessary to understand and be ready for the IFRS
adopt in 2016. If they are not ready, many more employees may be affected by their poor decision making
and preparation. The upper management needs to be encouraging and coaching with the staff.
Additionally, the company may either need to consult or hire more IT personnel in order to implement the
necessary changes to the company’s IT system in preparation for the transition.
Business- The company’s operations should remain relatively unchanged. The company will still mine
coal as usual and the business processes will not need to change with the implementation of IFRS. The
things about the business that will change is how the company reports their financial information to the
FEC and to investors as a whole. The stock prices will be affected when investors hear of the company’s
plan to want until the mandatory adoption date. We believe that investor’s will react positively to the
news of the delayed adoption, however. Additionally, the company may experience large up-front costs
since there will be a need to train staff and convert IT systems to IFRS but, as the Farrlandia Ministry of
Finance pointed out, the long term business implications of the IFRS conversion should be largely
beneficial.
Key Differences and Exemptions
Ultimately, GAAP is a rules based accounting standard and IFRS is a principles based accounting
standard. There are many principle differences (over 200) but we have identified two key ongoing
differences between the two standards. One of the key differences is how depreciation of PP&E is treated.
Under GAAP, significant part depreciation is allowed but not currently applied by the Company. Under
IFRS, significant part depreciation is required. This will likely require the company to revamp IT systems
to include this change, redo useful lives of asset components, and depreciate assets into significant parts.
Additionally, straight-line depreciation is the only method allowed under IFRS so you will have to change
how preparation plants and loadouts are currently depreciated.
Another key ongoing difference that will affect the Company is how inventory is accounted for. Currently
under GAAP inventory is valued at the lower of cost or market. Under IFRS, inventory is valued at the
lower of cost or net realizable value, not market. This could affect the balance sheet value of inventory,
which is a significant portion of current assets. Additionally, under GAAP a reversal of inventory writedowns is strictly prohibited but is allowed under IFRS.
Additionally, while goodwill and measurement of pension liabilities are important exemptions and
exceptions under IFRS-1, the two most important items are ARO and PP&E.
Normally under IFRS, an item of PP&E is initially recorded at cost, if cost is reliably measureable.
However, IFRS-1 allows first-time adopters the choice of how to value their PP&E at the date of
transition. The company may elect to treat the fair value of PP&E as the deemed cost for IFRS.
Additionally, IFRS-1 also offers an exemption that allows the use of a previous valuation of an item of
PP&E at or before the transition date as the deemed cost for IFRS. If they choose to use a previous
valuation they must depreciate the item of PP&E from that measurement date forward. Making the choice
about whether or not to use this exemption is important because PP&E accounts nearly half of the
Company’s total assets at $1.48 billion.
Another key exemption relates to the treatment of changes in cost estimates or discount rates associated
with AROs are different between GAAP and IFRS. Under GAAP, a liability is not re-measured for
changes in the risk-free rate. IFRS requires the discount rate used to estimate the liability to be based on
current discount rates at each balance sheet date. Subsequently, using the current discount rate based at
each balance sheet date can considerably change the timing and amount of AROs. The exemption offered
through IFRS-1 allows a first time adopter to measure the ARO and related depreciation effects at the
date of transition to IFRS, rather than recalculating the effect of changes in the risk-free rates throughout
the life of the obligation. Recalculating the effect of changes in risk-free rates throughout the life of the
AROs would require substantial time and resources so the exemption might be a good idea. AROs are one
of the company’s largest liabilities at over $300 million.
This exemption is likely to provide a practical way for the company to determine the amount at which to
record such assets and liabilities in its opening IFRS balance sheet.