• 24 Mar 2010

Technology Will Solve 10 Challenges of IFRS - Start NOW!

  • Claire Crossman

A single global standard of accounting may become a reality sooner rather than later.  The SEC has become vocal about their renewed commitment to investigate how the convergence process from GAAP to IFRS could be achieved within a five year time frame.  The thought of changing accounting standards is a daunting concept especially for companies where resources are already overburdened.  Identifying and understand the challenges now will assist companies in developing a strategy that could minimize the disruption in the future.  In this article we are going to discuss how technology will solve 10 of the most common IFRS challenges – if you start now!

1. CHALLENGE: NOT KNOWING THE OPTIMUM TIME TO SWITCH TO IFRS STANDARDS. 

More than a year ago, the SEC created a roadmap with a plan for U.S. companies to move from generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS) -- allowing for financial data to become universally reported and a part of the global business world.  Due to several changes at the SEC and a declining U.S. economy, that roadmap was delayed and timing of the adoption became uncertain. However, according to the G20 Summit leaders, the need for reporting under IFRS is not going away.  And according to the Big 4, it is not too soon for companies to consider what resources will be needed to make the IFRS migration happen in their organizations.

2. CHALLENGE: REPORTING CONSIDERATIONS THAT GO BEYOND THE IFRS START DATE.  

While we can now assume that IFRS will become the U.S. financial standard by 2015 – give or take a year – many companies may not realize that when they produce their 2015 IFRS numbers, they will also have to report back a year or two prior under both GAAP and IFRS standards. Canadian adoption to IFRS is requiring financials to report one year prior to their official start date, as did European financials. Either way, this provides a two-year window for companies to prepare. Since processes move slowly, two years is not a lot of time.

3. CHALLENGE:  IFRS WILL REQUIRE CHANGES SIMILAR TO THOSE NECESSITATED BY SARBANES-OXLEY.

Process and control under SOX meant companies needed to change their mechanisms in order to be in compliance. They needed technology and human resources to segue way from an old standard to a new one. It was costly, abrupt, and required training and time.  However, because of the SOX experience and a continual move forward into a more transparent U.S. accounting system, companies are likely to be more nimble in adapting available technologies. Deloitte and SAP recently hosted a web cast discussion where they suggested that being more proactive on IFRS would make the process less costly.

4. CHALLENGE: THE COST OF NEW TECHNOLOGY.

The SEC estimates that for a medium to large size company to convert their ERP system to be IFRS compliant, it will cost about $34 million. If budget and resources allow, now may be a good time to invest in a built from scratch system, but companies should know that there is also a “middleware solution” available for under $100,000.  Middleware is less invasive than a complete overhaul.  It will allow users to layer GAAP to IFRS differences on top of the GAAP books and records and it will afford flexibility in adjusting numbers back and forth from old to new standards.  It will allow users to quantify the overall impact while allowing for sign-off and audit trail controls.

5. CHALLENGE. ANOTHER STANDARD MEANS MORE AUDITORS AND MORE SPENDING.  

The middleware solution can actually help keep auditor visits at bay. Every time auditors are called in, it can be costly. But if a company can begin to track GAAP to IFRS differences in a middleware solution, then the auditors can sign off on all the components at the same time.

6. CHALLENGE: TAX.

Middleware is flexible and can take users from one standard to another. Some middleware solutions can compute not only the book impact, but also the secondary tax impact. Look for a tool that allows data to move from financial statements to other systems, to allow for the secondary complex calculations such as tax -- because tax will have an impact on the ultimate bottom line impact of moving to a new standard.

7. CHALLENGE: SPREADSHEETS.

Some companies are planning to leave the ERP systems as they are and track and layer all differences in the standards using spreadsheets.  On the surface it may seem like the most cost effective option, but because changes can be made to spreadsheets without exact tracking, it is not an ideal method for a controlled process.  Additionally, these spreadsheets will need to be maintained for multiple years, and spreadsheet rollover can be complex and subject to user errors.

8. CHALLENGE:  EXCEPTIONS TO THE RULE.

IFRS is principle based where GAAP is rule based. In Germany local government reporting is wary of IFRS financials because the results were generated with too many subjective considerations. Unexpected exceptions in various jurisdictions are bound to arise, even though the general idea is the creation of one international standard. Investors, ultimately, need the comfort of knowing that the company’s financial results are generated under one accounting standard. Hypothetically, an investor could choose four publicly traded companies and each of the financial statements could have been prepared under a different standard. A truly global company will benefit from being extremely nimble so as to comply with any local reporting requirements.  

9. CHALLENGE: MULTINATIONAL STOCK EXCHANGE ISSUES.

If a company is a multi-national, there are different compliance issues on various stock exchanges. If the company is listed on the Japanese NIKKEI, the New York Stock Exchange or the London Exchange, they will need to make sure each of these exchanges will accept the standard.  Technology can be employed for compliant reporting to IFRS no matter what standard is being used.

10. CHALLENGE: USING IFRS TO MAKE YOUR COMPANY MORE SUCCESSFUL.

Companies that are proactive can show investors why a relationship with their enterprises(s) makes sense. We expect to see a trend in more US companies asking to be early IFRS adopters. The SEC previously announced, as part of the roadmap, that they would allow some companies to adopt early, with the largest companies in different industries leading the way.

Determining financial results under IFRS, rather than using traditional standards, can have a significant affect on results -- which can impact the size of incentive bonus packages and profit reporting.  If a middleware solution is used to quantify the impact on reported performance measures and profits, then the user is able to get a handle on the overall impact of adopting IFRS before investing in converting the ERP or deciding to be an early adopter.  

Being proactive will allow due diligences to be performed on the additional data that must be collected; whether systems are able to capture that data; or whether controls are adequate.  Finally, a middleware solution can help gauge how changes from a new standard of accounting can affect and impact a company in a general financial sense, as well as for unique items such as financial hedging and instruments, pensions and tax.

Bio:

Claire Crossman has more than 20 years of tax experience with a primary focus in tax accounting and reporting.  Currently, she is a senior manager of Product Management at the Tax & Accounting business of Thomson Reuters, supporting the ONESOURCE Taxstream Provision product suite.  Prior to joining TaxStream in 2005, Crossman was responsible for the tax reporting at NBC Universal and ASARCO, and she began her career at Ernst & Young in the Corporate Tax division’s Media & Entertainment group.