The Advisors' Blog

– Fred Whittlesey, Buck Consultants

With all the talk about the imminent, though protracted, adoption by the US of International Financial Reporting Standards (IFRS) I would think that everyone had at least heard the acronym by now. Maybe my client sample is an aberration but I’m surprised at the “huh?” response by many Directors and C-Level executives. Let’s all say it together: “iff – riss.”

There is of course plenty of time until we have to worry about IFRS conversion and any impact on executive compensation, with an SEC “roadmap” that may stretch from 2011 to 2014 or beyond. Or is there? The answer is “no, there’s not.” In this memo I recently wrote, you can learn some of the technical details about this issue.

Why does this matter? Because the rapidly increasing prevalence of equity awards with performance features means that the deemed performance against goals set years in advance has a direct impact on executive compensation levels. To the extent there is an accounting rule change mid-cycle and the plan documentation has not provided for appropriate adjustments, payment windfalls or shortfalls may occur and there may be accounting and tax (Section 162(m)) ramifications of any effort to “fix” the problem.

This may occur not only if a company converts to IFRS reporting standards but if the company has a peer-referenced performance goal and itself remains on U.S. GAAP throughout the performance period, but one or more of its peer group companies converts to IFRS during the period.

Although the required adoption of IFRS standards by U.S. companies would appear to be several years away, the increasing acceptance of such standards means that those involved in developing a company’s compensation plans — from the Compensation Director to the VP of HR to the CFO and the Board of Directors’ Compensation Committee — must become knowledgeable about how changes to financial reporting will affect these plans. Given that IFRS standards are currently mandated or permitted in all but a few countries, all companies need to assess the potential impact on their executive compensation plans.

Thanks to Andy Mandel, my colleague at Buck Consultants, for his co-authorship of our article. [Note from Broc: During the upcoming NASPP Conference, there is an excellent panel entitled “IFRS and You: How International Accounting Rules Impact Your Stock Plans” on October 22nd.]