Explanation of Management Implications of IFRS

Changes in the GAAP that an organization uses for its financial reporting can impact how and when assets and liabilities are recorded. Sometimes they can cause dramatic shifts in the amount of profit or loss an organization reports. These changes can impact how the financial health of an organization is interpreted. For example, US GAAP requires that land assets be reported based on the cost to acquire them because there is no objective evidence of their current value. IFRS allows for revaluation of some nonfinancial assets to fair value. Imagine if a piece of land that was purchased for $1 million and recorded, for the last 100 years, on your balance sheet at $1 million was suddenly revalued on the balance sheet at $300 million. Key numbers on the balance sheet, such as total assets, could change dramatically overnight. Also, consider the reverse example. A building on an organizations balance sheet is revalued from $300 million to $100 million. Revaluation of assets for fair value does not necessarily involve increasing asset values. Such changes in the numbers could have many impacts. These changes would impact how outsiders view the organization. Numbers that analysts use as benchmarks for strong or weak financial performance would have to be reassessed. Contracts could be affected since contracts often call for certain financial statement relationships to be maintained. For example, when a bond is issued, often the borrower would be required to maintain a minimum amount of assets relative to their liabilities. But changing accounting reporting requirements could cause significant enough changes in reported assets and liabilities to change those relationships. In some cases, this could create default situations. Such contracts would likely need to be renegotiated before the adoption of the new standards. Compensation could also be affected. Many organizations provide some compensation based on the organizations profits. If the implementation of IFRS reporting rules results in different levels of profit being reported, it will impact compensation. All profit-sharing plans would need to be revisited and possibly revised. This provides just a small sampling of some of the extensive differences between the current US GAAP and IFRS and the implications of a potential shift from US GAAP to IFRS. It is suggested that readers Google US Adoption of IFRS to find the latest status of this potential transition.

1. Please list and explain several implications of IFRS on financial reporting by healthcare organizations.

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