Financial Results

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• Technology for Compliance, January 2005
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Of all the compliance legislation now facing organisations in the UK, perhaps the stealthiest has been the International Financial Reporting Standards (IFRS). The standards were first drawn up approximately 10 years ago, and it was five years ago that the European Commission said that it wanted all EU-listed companies to be using IFRS by 2005. Yet despite the media attention paid to Sarbanes-Oxley, the Freedom of Information Act, Basel II, et al, IFRS-compliance has passed by almost unnoticed in the UK.

Perhaps the biggest reason for this is the perception there is very little to worry about. IFRS embodies an Anglo-American approach to accounting and is concerned primarily with where items appear on balance sheets and things that need to be included in financial reports. For companies in the UK, even those immediately affected by the legislation, the idea that IFRS-compliance requires little more than moving a few items around in a spreadsheet has lulled many into believing that their compliance projects need only be low-priority at best. A survey of leading UK companies conducted in early 2004 revealed that as few as 2% has instigated an IFRS-compliancy investigation. Yet for many companies, that could be disastrous thinking.

“The UK has been ahead of the curve in good, solid accounting practices for many years,” says Andy Bailey, vice president of marketing for EMEA at CommerceQuest. “The general consensus is IFRS will have less effect than on some of our European colleagues, but generally a very significant effect. Even though there’s not been much hype, it will be more significant and have more impact than Y2K.”

While IFRS does indeed mainly concern the presentation of accounts, it emphasises transparency to a far greater extent than existing accounts standards and so requires organisations to provide more, potentially different information than they have been so far.

“Before, people made projections like, ‘We’ll be profitable,’” says John Sinclair, director of PeopleSoft product marketing, financial management and enterprise performance management in the EMEA region. “Now we have a situation where we’ll see much more forecasting at all business levels for every business unit.”

This focus on business units may firstly require companies to think about how they are organised. “If a company is now worth the discounted cashflow of its assets, what is that cashflow?” asks Sinclair. “How do I segment? What are the cash-generating units? You could have to re-evaluate the organisation.”

So the first step for any company that is looking to move to IFRS compliance, either because it is required to by regulations or because it has chosen to, is to set up a committee to investigate how the company is affected by the new rules and their requirements. The company can then evaluate what extra data it might need and see if there is any data it has to produce that it has not produced before.

That done, the company needs to take the big step: harmonising its processes and the data. And to do that, it needs to understand what processes it already has in place. “That can be a significant eye-opener,” says CommerceQuest’s Andy Bailey. “We workshop with them, process modelling, resource modelling and using simulation tools to see what the processes are that they actually believe they’re doing right now. Then once it’s in a software model with all the cost implications put in, you can start simulating changes in the model. You need to understand what you’re doing first or else you’re trying to tweak things when you don’t know what you’re tweaking.”

Many companies will find that existing processes have to be modified and new processes put in place. These changes and additions need to be reflected in the IT infrastructure. ERP connections to group accounting systems will need to be re-coded at least and might well make up the bulk of the compliance budget. Deloitte Consulting business intelligence principal Gary Simon says that data entry is a typically area that will require major changes, because of the way different expenses are defined. “This will feed through to changes that will have to be fed through group reporting systems. A lot of companies will have to review the way contractual transactions have been classified,” he says.

Custom applications that reflect existing accounting standards will naturally have to be re-coded to take account of any discrepancies with IFRS. Potentially new coding will be needed to produce any additional information required. Legacy applications might have to be switched to more modern applications. And packaged applications could require an update.

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