IFRS Conversion

Who converts, and why

Listed groups are required to apply IFRS in their consolidated accounts. Far more common in practice, though, is the voluntary switch, and it almost always has a concrete trigger: an investor who needs IFRS figures for its own reporting; a credit agreement whose covenants are defined on IFRS; preparation for a sale to an international buyer; or a parent company that reports on a single group basis.

What IFRS 1 requires

First-time adoption is not a switch at a reporting date but a retrospective remeasurement. An IFRS opening balance sheet is prepared as at the beginning of the earliest comparative period presented – so for a conversion at 31 December, normally 1 January of the prior year. Everything has to be accounted for as if IFRS had always applied; IFRS 1 allows a limited number of exemptions and options, for instance for past business combinations or for measuring property, plant and equipment at fair value as deemed cost.

The differences that matter

• Revenue recognition under IFRS 15: the contract is split into performance obligations, recognised over time rather than at a point – for software and project businesses the single largest item.
• Leases under IFRS 16: right-of-use assets and lease liabilities come onto the balance sheet; total assets, EBITDA and gearing all move noticeably.
• Development costs: capitalisation is mandatory under IFRS where the criteria are met, an option under German GAAP.
• Goodwill: no scheduled amortisation, but an annual impairment test.
• Pension obligations: different measurement parameters, with some effects recognised directly in equity.
• Deferred taxes: recognised far more comprehensively than under German GAAP.

Effort and timetable

For a mid-sized company without prior experience, nine to eighteen months is realistic from project start to the first audited IFRS accounts. The sequence that works: analyse the differences against your own facts, decide the options, build the opening balance sheet, adapt the chart of accounts and systems, run parallel accounting for at least one financial year, then move the live reporting across.

What gets underestimated

The bottleneck is not the accounting but the data. IFRS 15 requires contract information that sits in no accounting system; IFRS 16 requires a complete register of every lease and rental agreement including extension options. Putting that inventory at the start rather than the end loses the least time.

On top of that, the notes become considerably longer, and the ratios in existing credit agreements shift – above all through IFRS 16. That effect belongs in a conversation with the lenders before the conversion, not after it. Where a system change is due at the same time, both belong in one plan.

Who runs the project

A conversion running nine to eighteen months comes on top of the day job and ends afterwards – the profile of a fixed-term appointment. Scope and process for such a mandate are set out under Interim CFO; for ongoing external financial leadership, see External CFO.