From GAAP to Global Accounting in Seven Months

Pushed by a business imperative to switch to IFRS, a Morgan Stanley unit finds the devil in the non-accounting details.

If American companies end up being required to use international financial reporting standards, getting the accounting right will be just one of their problems. “The conversion to IFRS is not an accounting policy project,” said Morgan Stanley’s Alexandra Brougham at an industry conference on Tuesday. Although such a switch would be driven by accounting, its impact would be much broader, she said, noting that changing from generally accepted accounting standards to a global system ensnares information technology, business analysis, and other areas.

Brougham, a managing director responsible for the investment bank’s European accounting standards and control group, knows whereof she speaks. Last year, Morgan Stanley’s London-based broker/dealer unit — which comprises 100 different subsidiaries and represents more than 50 percent of the company’s broker/dealer activities — announced plans to issue a new structured-finance product.

That launch, however, called for a shift from U.K. GAAP to the global standards. Speaking at Ernst & Young’s 2008 IFRS Conference, in New York, she said that a nuance in U.K. law required the investment bank to file its financial results using IFRS before it pushed out the product globally. Forced to act quickly by a business imperative, Brougham had the unit reporting results using IFRS within seven months.

The transition, however, was not problem-free. To launch the conversion, for instance, Morgan Stanley hired an outside consultant to head up the project. The consultant required buy-in and input not only from the accounting and finance functions, but also from the legal, tax, risk, and investor relations departments, as well as the audit committee and international and local external audit firms.

But the contractor didn’t work out, forcing the bank to look for an in-house expert. In that case, it turned out to be the company’s so-called Basel project manager, noted Brougham.

The manager proved to have the skills needed to move the unit to IFRS. That is, he knew how to implement external guidelines or rules within an organization as large as Morgan Stanley; was able to manage information across several corporate areas; kept a global perspective while tending to unit-specific concerns; and “knew that [conversion projects] are not done with the push of a button,” noted Brougham.

Once the new project manager was in place, Brougham and her team faced what she called “retrospective implementation” problems. To become IFRS compliant, the company needed to report three years of prior results under the new standards. That required working with the information technology department to create IFRS frameworks and then populate them with historical information.

Much of the older data concerned disclosures about sensitivity analyses in the company’s risk systems, as well as information to support derecognition of assets and liabilities, particularly related to disclosures under IAS 39 — the international accounting rule pertaining to recognition and measurement of financial instruments.

The bank hired a software consulting firm to create a custom framework that pulled general ledger information into the IFRS frameworks, according to Brougham. Income statement presentation was also reworked after realigning account balances and using templates for entities reporting under IFRS.

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