The most powerful nations in the world share a commitment to finding a common financial language and reporting standards that will encourage cross-border investment and drive healthy competition between international companies.
The body tasked with setting the international standards, the International Accounting Standards Board, has a difficult task ahead, while the individual standard-setters for the various participant countries must chart their own course on transitioning from existing standards to these new international financial reporting standards, or IFRS.
While the shift from U.S. GAAP to IFRS has not yet been mandated, the Securities and Exchange Commission has recommended a very tentative timeframe for transition. The 10,000 or so U.S. companies with securities listed with the SEC are faced with a potential roadmap that sees large, accelerated filers being required to file 2014 financial statements under IFRS, rather than GAAP, with non-accelerated filers to follow in 2015.
That seems like a long time off - except that for many companies, comparative financial statements for 2012 and 2013 will also be due at the same time. This means that many companies have only a single fiscal year left in which to assess their current financial systems and determine their readiness to make the transition. As in all cases, an ounce of prevention will be worth a pound of cure, especially when it comes to the logistical and technological considerations of making the transition from U.S. GAAP to IFRS.
Many organizations are making the transition now, rather than waiting for the SEC directive to come down. The transition will take longer than many anticipate, so getting financial systems prepared is a wise move.
The question, then, becomes how.
MANAGING CHANGE
There are a number of questions that organizations can ask themselves to determine their systems' readiness for a different set of reporting standards - questions that will determine how agile their systems are when it comes to accessing and then slicing and dicing data in ways that until now these systems have never had to do. These questions relate to several key areas, and all lead toward answering the big question of whether current financial systems are able to handle the reporting requirements of IFRS.
What additional information will be required?
How will this information be applied and calculated?
How will this information be reported?
On a more granular level, the following questions will get you started in your assessment.
1. System complexity:
The number of GAAP regimes with which the organization must comply;
The number of general ledger apps;
IT policy - homogenous or best of breed?
How a change in reporting requirements for IFRS would impact reporting - change data capture from entities? Change in consolidation engine only? Change in reporting only?
2. How IFRS change is made and where:
Where are corporate-wide changes reflected in the accounts of individual reporting entities? At the entity level? At the corporate level only? As an adjustment in the corporate journal?
Where do IFRS adjustments appear? As a separate shadow IFRS entry? A separate dimension? A new chart-of-account line? Those that haven't yet made the shift need to plan for where these adjustments will appear.
Will IFRS changes be easily reflected in automatic data collection? Whether the finance team or the IT team makes changes contributes significantly to the time required to process changes.
3. Reporting:
How difficult is it to reflect changes to the chart-of-accounts structure in operational, statutory and audit reports? Is IT or the finance team responsible for the changes, or are they automatically reflected in reports?
What about changes in the chart-of-accounts structure in reports produced via linked spreadsheets? Are rewrites and tests of the spreadsheets required? Are macros employed to absorb the changes?
4. Responsibility: At the highest level, an organization must ask itself these questions:
Who - finance or IT - is able to make changes to information needs, processes and reporting?
Are outside consultants required or is expert IT knowledge essential to accessing the information needed to be IFRS-compliant?
FINANCE VS. IT
While IFRS has been top of mind for U.S. chief financial officers for some time, studies show that not enough attention is being paid to the technological ramifications of the shift and, worse still, that many existing systems are unable to provide easy access to, and reporting from, different locations than under GAAP.
In a December 2009 report, "IFRS Perspectives: An Executive Survey," international accounting firm PricewaterhouseCoopers wrote, "Technology is a key enabler in the transition to IFRS. Forward-looking companies are taking steps now to gain an understanding of how well their existing systems can support IFRS compliance and what changes are needed."
On its Web site, PwC's warnings are clear: "We cannot stress enough the importance of an appropriate level of awareness and preparedness. In our experiences with IFRS conversions elsewhere in the world, many companies failed to adequately plan and were therefore forced to conduct last-minute transitions, which increased conversion costs and left opportunities on the table. Through adequate advance planning, U.S. companies can avoid those risks."
LESSONS FROM EUROPE
In Europe, where the transition has already taken place, some organizations made the critical mistake of underestimating how much time would be needed, and that hiring outside consultants could help make up for lost time. U.S. organizations have an opportunity to learn from those mistakes and plan ahead to avoid them.
As we've learned in Europe, at its most basic, the more agile a system's data access and reporting functions, the more readily it will deal with the transition. If access to information and reporting changes requires significant IT resources, the process can be protracted and expensive. In the ideal scenario, the business user is empowered to access the information required to report either in GAAP or IFRS, with little to no IT intervention.
IF YOU CAN'T HANDLE IT ...
Once you've asked yourself the questions above as a starting point, some of you may be grimacing at the state of your system in the face of the coming changes. Those organizations with rigid systems, where access to the data required for IFRS reporting is difficult or inaccessible altogether, face another challenge - how to best select a replacement system that will enable them to meet IFRS requirements.
When evaluating the structure of a potential replacement system, consideration must be given to four key areas: system structure, data capture, reporting and analytics, and supplier characteristics.
System structure will dictate how you handle an IFRS adjustment - outside of the general ledger system, on a new chart-of-account line, in a separate dimension, or in a separate entity for IFRS. Any of these is acceptable, but your system must be capable of delivering any or all of these options as required.
Data capture implies that no matter the structural method or combinations of methods employed, the data-capture mechanism should reflect changes made to the chart of accounts, dimension or entity, quickly and with no intervention.
Operational, financial management and audit reports should change automatically in response to changes in the chart-of-account structure. In a multi-GAAP environment, systems must be able to present local GAAP, IFRS adjustments and IFRS final position on the same page; delivery of such a report should require just a limited amount of design work and not require IT intervention.
Finally, seek a vendor that has experience in implementing IFRS, a track record of embracing change, and a financial system that is responsive to your ever-changing needs.
