Switching to International Financial Reporting Standards could prove to be a costly move for many companies IT departments, according to a new report by Ernst & Young.
The report, Inside IFRS: The Opportunity for IT, describes the unexpected complexity of converting to IFRS and the high expenses the change can entail. IFRS conversion requires fundamental change on multiple levels, can take up to several years, and affects virtually every function within an organization, said the report. It cites a survey by the Institute of Chartered Accountants in England and Wales, in which 75 percent of the respondents reported increased complexity around information technology issues.
The technological challenges are greater for companies with complex or inefficient business processes or IT environments. Companies with multiple enterprise resource planning or financial reporting systems and instances can be especially prone to trouble with implementing IFRS. The conversion effort may expand as IFRS system-related changes and parallel accounting are implemented across separate and dissimilar environments, the report warns.
The proposed SEC roadmap to IFRS envisions having companies make the transition by preparing a three-year comparison of their financials in accordance with both U.S. GAAP and IFRS, which only adds to the complexity. Some observers are worried that IFRS adoption could also lead to looser accounting practices and heighten the risk of corporate fraud (see Witness Tells Senate to Crack Down on Accountant Fraud).
To support parallel accounting, the Ernst & Young report notes that some companies may decide to maintain multiple ledgers during and after the transition to assist in complying with IFRS. Accounting differences will need to be accommodated in areas such as fixed and intangible assets. ERP modules such as asset management, inventory, projects and purchasing may require configuration modifications, for example in the area of property, plants and equipment. Inventory accounting will change too, as IFRS does not allow last-in-first-out accounting.
In preparing for IFRS conversion, the IT department will need to devote resources to data analysis to identify the affected data components and modify the data structures. However, the report notes that there may be opportunities for companies to combine IFRS adoption with other IT initiatives to minimize the cost and maximize the benefits of the change.
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