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.

Handling IFRS disclosures also posed new problems. Before the new information was released into the marketplace, Brougham had to make the investor relations department aware of the new disclosures and to explain what they meant to the business.

What’s more, she had to underscore that the move to IFRS was focused on just one unit of the organization and weren’t applicable to the whole investment bank. A “significant of amount of time” was spent training and communicating changes to the company’s investor-relations staff, as well as to other departments.

Passing off the whole conversion job to Morgan Stanley’s accounting consultant, Ernst & Young, was tempting, noted Brougham. However, while it would have been “very easy to pass the work to someone else, we wouldn’t have kept the conversion [know-how] within the organization.”

The bank farmed out preparation work for the independent audit to E&Y. The firm helped Morgan Stanley’s accounting staff better understand IFRS reporting related to such items as share-based payments, pensions, and other thorny transactions.

Meanwhile, to maintain consistency, Morgan Stanley created a common financial reporting framework across all subsidiaries. To do that, the company designated London as a center of excellence in IFRS reporting and ran any rule interpretations or other questions through that branch, where accountants compared practices against the benchmark accounting frameworks.

Brougham stressed that differences between IFRS and local GAAPs will continue to exist, especially in situations in which local tax rules and laws don’t allow IFRS reporting. Indeed, as the European Union “gets caught up in political struggles,” Brougham expects, her team will have to deal with regional variations of IFRS that will differ from the practices sanctioned by the London unit.

Further, the completion of the IFRS conversion doesn’t mean it’s “business as usual,” at the London unit, noted Brougham, who rolled out the new reports in August of 2007. “It takes a long time to imbed [IFRS] throughout the organization,” she said, “but it helps to take one chunk at a time.”

She does not advocate the unit-by-unit approach over a wholesale shift to IFRS, she said. What’s important, insisted Brougham, is that “you should not make the decision in the weeds when you need to be looking at a global [corporate] perspective.”

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