As U.S. companies and other multinational prepare for the migration to the International Financial Reporting Standards (IFRS) in the next few years, now is the time to start looking at how this shift will impact all areas of business.
Does IFRS apply only to publicly traded companies that operate in and out of the United States?
IFRS applies to companies throughout the more than 100 countries that have already adopted IFRS. It can apply to both public and private companies.
Which groups need to be involved in the planning and implementation of IFRS?
All CFO/COO/CIO (chief financial officer, chief operating officer, chief information officer) organizations will need to be coordinated around IFRS. Depending on the differences you find in the assessment phase, you may also need to work with the sales and procurement organizations. In any case, IFRS conversion will require a large degree of coordination across the organization.
Is it possible to adopt IFRS without pushing the changes back to your systems?
Well, it is possible to adopt IFRS through spreadsheets and top-side journal entries, but we do not advise it. We saw a lot of this in the European companies that adopted IFRS, and it's clear now that many are paying the price for it. One difference between the U.S. and Europe is the Sarbanes requirement. If you don't look at pushing entries back to source systems, you could get into control issues relative to Sarbanes. It certainly would be a less cost-efficient approach in the long run, and you'd be giving up a lot of opportunities to achieve benefits from standardization and integration.
We will not know until 2011 whether the SEC (Securities and Exchange Commission) will mandate the use of IFRS for all U.S. issuers. How are we expected to make meaningful progress, and potentially incur significant costs, without knowing until 2011 whether the use will be mandated?
We think that the milestones that have been put forth in the proposed road map are easily achievable, and the mandatory dates put in place will be adopted. So we see greater risk in delaying and not thinking through the multitude of activities early to be ready for the adoption date.
Shouldn't companies conclude on the impact of systems only after they have evaluated accounting differences?
We suggest you look at the accounting differences first, but consider the systems implications shortly thereafter. There are many activities that can be completed at the same time as the accounting work, including a high-level assessment of the overall systems landscape. By starting systems activities up front, you can generate meaningful content for your overall road map.
Given the resource constraints, how should smaller public companies address the implementation needs economically and effectively?
All companies should implement IFRS in a way that makes sense for their organization. For smaller organizations, the assessment phase is crucial. During a thorough assessment phase, you can evaluate cost/benefit tradeoffs carefully. You might find that there are benefits even for you. For example, a small multinational may be able to in-source statutory reporting, thereby offsetting some of the implementation costs and reducing long-term costs.
Could you explain in greater detail the need for integration of applications? Are you referring to the ability of applications to interact with each other? How is it different than the existing integration?
Systems will need to pass IFRS-relevant data across landscapes. To the extent that a flexible middleware solution or ERP (Enterprise Resource Planning) exists, this should not change existing integration. To the extent that custom integration exists using bespoke tools, you may need to change the integration.
Could you give an example of what kind of GL design might be driven by the difference in accounting treatment between current standards and IFRS?
One clear example is the fixed assets rules, where IFRS requires assets to be split into their significant components. So where you have a "building" on the asset register today, you may have a "roof," "fixtures," and "structure" on the register tomorrow. This split may require additional detail in both the asset sub ledger and the general ledger (for additional depreciation and accumulated depreciation accounts).
Will this have any effect on how income tax returns are prepared, or will this necessitate another set of books?
IFRS can affect the preparation of income tax returns, particularly in countries that accept IFRS for statutory reporting purposes. In other countries, such as France, there may be a need to continue to report statutorily and in IFRS. For many companies, this may result in multiple sets of books. In your assessment, develop a matrix that shows where different standards are required and how you will meet those standards.
Are there any potential impacts to the many spreadsheets that are used outside of the core systems in support of the financial reporting process?
IFRS will impact existing spreadsheets. During the assessment phase, you should examine these spreadsheets at a high level to find the information requirements that they address. If not planned well, your transition to IFRS could actually cause a proliferation of spreadsheets throughout finance organizations and lower efficiencies.
From a SOX (Sarbanes-Oxley) 404 perspective, is a company back at square one? How much of the documentation effort will be impacted?
It is not "square one," yet the implementation of IFRS will require that any changes or new methods of generating financial information fit within the SOX controls framework. In some cases, you may need to reevaluate areas that you do not consider during the first implementation, such as development of contract terms and conditions.
If we are scheduled for an ERP GL/FI upgrade in 2009, should we postpone it?
You should make most decisions on major systems projects only after considering the IFRS impact. In the case of an upgrade to the ledger, it may make sense to proceed so that you can set the long-term foundation for IFRS and other accounting principles. The ultimate answer should be part of the assessment phase.
Do you see regulated utilities having two sets of books — one based on FERC (Federal Energy Regulatory Commission)/state regulations and another based on IFRS?
At least for the foreseeable future, regulated industries (e.g., utilities, insurance) will continue to have specific reporting requirements mandated by both state regulators and the SEC. With current technology, you can automate most of this reporting. In the assessment phase you should look at the high-level costs and benefits of this approach.
Can you provide more background on the difference between the account mapping and ledger methods? I haven't heard that distinction before.
Both methods are used when books must be maintained under more than one method of accounting. For our purposes, let's assume two sets of books — IFRS and U.S. GAAP (Generally Accepted Accounting Principles). In the account mapping method, we have to maintain three types of accounts: those that are relevant for U.S. GAAP and IFRS (shared), those that are relevant for IFRS only and those that are relevant for U.S. GAAP. To create financial statements in IFRS, we add the shared accounts and the IFRS basis accounts. To report in U.S. GAAP, we add the shared and U.S. GAAP accounts. The ledger method sets up a ledger for each method of accounting, keeping a distinct set of accounts (including equity) in each ledger
