IFRS: Are you ready?

Converting to International Financial Reporting Standards (IFRS) is not simply about swapping one set of accounting rules with another. Its a major change management project that can affect all aspects of your business, including IT. Is your IT group ready for this?

We believe that converting to IFRS could be one of the most important initiatives an entity undertakes over the next few years, and IT will play a substantial role in this. It is advisable not to underestimate the time & effort the conversion process will require, or the inherent potential risks involved. A well-planned process is critical for converting successfully while controlling costs, maintaining reporting integrity, and avoiding potential financial restatements or other surprises.

The adoption of IFRS requires changes in the recognition, measurement and disclosure of many items in the financial statements. Both financial and business systems need to deliver the information required for compliance with IFRS. Accordingly, IT systems will need to be modified so that the financial data produced conform to IFRS. It is important to note that such changes are not restricted to IT modules relating to general ledger entries or sub-ledger entries, but also affect applications such as asset management systems, financial instruments and payroll systems. Our experience with global IFRS conversions has shown that there are four main drivers that determine the scale of an IT project.

Requirements
The main driver for system and IT-related changes is how the new financial standards are to be applied. The impact will be influenced by the existing financial reporting processes and the industry in which an entity operates. For example, the new reporting requirements regarding property, plant and equipment will likely be far more difficult to implement if an entity operates in a capital-intensive industry. Similarly, an entity with significant assets/liabilities, requiring the use of fair values, would need to specifically focus on the computation of fair values. When an active market does not exist for the measurement of fair value, the entity will have to use other more complex valuation techniques. In such an event, IT systems need to be able to capture the data required for such valuations.

An entitys finance team needs to work closely with its IT team to understand the system related impact of IFRS requirements. Conducting a diagnostic impact assessment at the beginning of a project will help to identify the differences between existing accounting policies and practices and those required under IFRS. We recommend that the IT department takes part in this assessment to identify affected systems and required modifications early in the process. This will also help organizations to effectively implement changes to best suit their infrastructure and systems.

System changes from IFRS are generally classified into three main types:

Data changes: IFRS can create additional data requirements. Fixed assets must be broken down by significant components, which may require the creation of new asset types and definitions of the useful life of each asset. Separate master data can be maintained to track useful lives, depreciation rates and amounts, which require extensive data conversion and mapping of historical data.

System configuration changes: IFRS may change existing system configurations and routines. For example, determination of the percentage of completion of construction contracts. Under the Indian GAAP, the practice is to include land cost as part of the construction cost. However, under IFRS, land is treated as a separate element and not included as a part of the construction cost for the purpose of determining percentage completion.

Reporting changes: IFRS differences will have an impact on reporting tools and reports. For example, the manner in which revenue is determined under IFRS for multiple element contracts and contracts involving deferred payments may be substantially different from the existing practice in India. This difference will have a substantial impact on reports related to revenue.

Though IFRS is applicable from April 1, 2011, comparable data will be required for 2010-11. In other words, for the period 2010-11, the system will have to support dual reporting, ie, Indian GAAP for statutory reporting and IFRS for keeping comparable data ready. Perhaps the most significant impact may be determining how the systems will support the dual reporting requirement for the given period.

This may require an entity to maintain two parallel charts of accounts. We believe that some systemssuch as new releases of enterprise resource planning (ERP) packagesmay provide dual reporting functionality. In other cases, the entities may undertake the application upgrades or the implementation of new applications or modules to handle dual reporting through their IT systems. Alternatively, the information may need to be handled outside the IT systems. This can be done manually or by using short term solutions in the initial period. Which approach is the best would be determined by the scale of changes required by IFRS and the extent of IT automation, resource and cost considerations. However, the EU IFRS conversion experience suggests that short term or offline solutions are not necessarily the best way of handling the IFRS conversion.

IT Organization Structure
Our experience with IFRS conversion shows us that the structure of an IT function may have a significant impact on the resources required to implement IFRS. To cite an example, if an entity has a centralized IT function, a focused IT IFRS project team can probably make the required system or IT process changes from a single location. However, if the IT function is decentralized across multiple locations and business units, the number of affected people, systems, business units and processes could be significant. IT personnels would also need some training to understand IFRS requirements and their impact on IT systems.

Existing IT System Plans
IFRS can have a direct impact on an entitys system plans, particularly on financial system implementations or upgrades. If an entity has other large system projects on the horizon, it would be better to identify interdependencies within the IFRS project and manage resources appropriately.

If an entity is implementing or upgrading financial systems in parallel with the IFRS project, the finance team may have to make assumptions regarding functional system requirements during the design phase of the upgrade or implementation. Close co-ordination between the finance, IT and the systems implementation teams is critical. We recommend that the IFRS project team has a representative from the systems implementation team.

Application Architecture
The general rule of thumb is simpler the application architecture, easier would be the implementation. Typically, conversion in a single ERP environment is relatively straightforward. Our experience shows that the complexity and efforts increase greatly if an entity has multiple ERPs or customized applications supporting the financial processes.

Conclusion
From an IT perspective, IFRS conversion can be complex and difficult to cope with. Each entity would need to develop a tailor-made approach based on the specific circumstances. The following are a few suggestions, based on our practical exposure in this area:

Internal controls: Work involved in ensuring that the numbers reported by the IT systems are correct should not be underestimated, particularly when change to IFRS involves significant change in the recognition or measurement of transactions. This highlights the importance of internal controls and performing objective evaluations of systems changes. Another area for further review are the controls surrounding the collection of the additional data that need to be gathered for greater disclosure requirements under IFRS.

Plan early: The impact of IFRS conversion on processes, controls, and financial and management reporting may be significant, requiring system changes. Do not delay. Collaborate as soon as possible with vendors, affected industry peers and stakeholders across all functional units.

Assess alternative IFRS solutions: Many applications, such as larger ERP solutions, offer different methods for meeting IFRS requirements. It would be useful to understand the costs and benefits of each potential approach before making a final decision.

Entities are advised to start evaluating the impact of IFRS conversion on their system without further delay.

Dolphy Dsouza