During the global financial crisis of 2007-2008, everyone was crying out for regulatory change, and now today we have four major accounting standard changes in play at once, with 2018 seeing some of the highest levels of regulatory-driven CFO activity in 20 years.
The four significant accounting changes that chief financial officers are battling with have created a perfect storm. Despite the initial pain, there may be a silver lining for those forward-looking CFOs who use regulatory change as the catalyst to modernise their financial systems.
New accounting standards around leasing (ASC 842/IFRS 16), insurance contracts (ASC 942/IFRS 17), revenue recognition (ASC 606/IFRS 15) and financial instruments (CECL/IFRS 9) are pushing CFOs to the limit and are affecting everything from customer contract structures to pricing, product design, tax and reporting.
To put just one new piece of accounting regulation – the new leasing standard -- under a microscope, one global telecoms provider estimated that they had more than 7 million leases that their finance team would need to evaluate individually. This example, albeit extreme, shines a light on the intricacies and complexities of regulatory change, and helps illustrate the significant time, resources and cost it takes for CFOs and their finance teams to implement and address the individual regulations.
Despite the scale and complexity of regulatory change, many companies have found opportunities in the middle of these challenges. As early as 2014, a global telecommunications company knew that significant systems changes would be required to adjust revenue recognition accounting processes affecting contracts with over 70 million customers.
Instead of just solving the issue of compliance, their visionary CFO saw the broader need for informational insights that would enable the company to continue competing. Due to this approach, the work and cost involved in compliance has enabled the finance team to deliver strategic value across the company.
Similarly, in 2016, with an eye towards the impending IFRS 17 regulation, a global insurer wanted to create a finance environment that would enhance automation and control over all aspects of the finance process – including data sourcing, accounting and reporting. They made the point, “If we don’t take the chance to use IFRS 17 to fix our finance systems architecture now, when will we get another chance?” The result was a streamlined systems architecture that is enabling their growth and will make their transition to the new standard easier.
Making significant changes to financial capabilities may seem like a huge leap for CFOs deciding on how to implement one piece of regulation. However, if they approach the regulation as a catalyst for change and can make the business case for future value, it becomes a much easier leap to take.
Mary Trussell, global insurance change lead at Big Four firm KPMG, observed, “We see smart CFOs saying, ‘If this [regulation] is becoming a reality, we can use it to our advantage as a lever for change to do the things we have always wanted to do but have never had the time or money to achieve – like investment in automation and digitization.’”
One large technology company did just this, using accounting software not only to achieve ASC 606 compliance but also to accelerate the time to financial close, facilitate a transformation to a cloud-based business model and expand their line of products and services. The chief accounting officer admitted that he now sleeps better at night, with a faster financial close, complete confidence in reporting integrity, and reduced financial risk.
These examples support what our teams are witnessing on the ground and the conversations that I am having with CFOs globally. First companies must recognize that regulatory compliance is much more than a simple policy adjustment, and it requires CFOs and their teams to make significant changes to their processes and systems. Second, there are many CFOs who want to use this opportunity to transform their finance function, to become a better business partner and to drive value for their organization.
At a recent forum we hosted, a table of CFOs initially lamented the millions of dollars it would take to comply with new regulations, but by end of the breakfast, a leader in the room summed up the shared opportunity. saying, “The hope is that in the years to come, we will be able to almost fully outsource the mundane reporting duties to machines and focus on transforming [finance] data into the forward‑looking, decision‑relevant information.”
We urge CFOs to take a bold step and use the opportunity of regulatory change to ensure their finance systems architecture can deliver the faster, relevant and integrated financial analysis that is critical for modern decision-making.