Financial Results
- Article 1 of 2
- Technology for Compliance, January 2005
The IFRS accounting standard will have far-reaching effects on information management processes and practices.
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.
Bigger systems from global vendors, such as SAP or PeopleSoft, are likely to face a far less steep upgrade path than those designed only for local accounting standards. “It’s very rare when a requirement comes up in accounting that hasn’t been done before somewhere else, maybe in Thailand or somewhere,” says PeopleSoft’s Sinclair. “When we build global systems, we get a very good articulation of what the basic process is and then externalise variables. Then when there’s a change – such as IFRS – you just change some parameters. You might have to feed in some additional information as well, but the work required will be nowhere near as big as with a local package.”
Nick Jarman, head of financial management solutions with Atos Consulting, says that even though making small changes to some of the infrastructure may be sufficient in many cases to achieve compliancy, this approach lacks a long-term view. “If you want to do the minimum to comply with standards, you can take that tactical approach. It will require a lot of manual change and some fairly straightforward changes to applications, and you won’t have a very automated solution. You’ll also get an increase in manual staff doing reconciliation and adjustment.” A more strategic approach is to take advantage of the opportunity IFRS presents to invest in underlying infrastructure and systems and go above the minimum required in IT change to meet IFRS and to create a more automated and controlled environment closer to best practice. “It may require moving into things like middleware, but you’ll have a better control environment, with lower costs. The accountants will spend less time doing manual work and can spend time looking at the numbers, seeing what they mean and making financial decisions based on them.”
Jarman’s advice is influenced in part by the volatility of IFRS over the last year. PeopleSoft’s Sinclair estimates that approximately 50% or more have changed in the past year. This has mainly been the result of political wrangling and in particular strong lobbying by French banks and German companies for which IFRS is far more of a shock than their UK counterparts. Most observers agree that the interpretation of the standards and potential “refinements” that might occur this year is likely to affect how companies interpret their accounting practices and in turn the following year’s reports. Any hard-coding of processes and data flows this year might well need rewriting again the following year.
So a more flexible infrastructure that can respond quickly to changes might well be a greater investment now that will make savings in the long run. “Whatever you do in IT systems,” says Jarman, “building something scalable and flexible is desirable. Any solution in place now has to address the fact that the business environment may change, as might the regulatory environment.”
IFRS presents both an opportunity and a challenge to companies. UK companies are fortunate that the work they will have to do to comply with IFRS is far less than most of their European counterparts’. Nevertheless, the work needed to be done is real. Strategic investment in an agile infrastructure will not only ensure compliancy with IFRS, it will ensure any further changes in standards or regulatory regime will be far easier to manage than if the minimum amount of work is done now.