Changes to information systems may be made at different levels in an organization’s financial reporting process—for example, at the group level or at the company level. To determine the appropriate level, management must consider various factors affecting the reporting and roll up of financial information.

Option-1: Group Level

Individual entities prepare financial reporting based on local GAAP. This financial reporting is converted to IFRS during the group consolidation process.

IFRS - Integration - Group Level

Organization Suitability

• Individual entities in certain countries do not have to report separately.
• Only a few simple adjustments are required and are made at the top level during the consolidation.
• Information to make conversion adjustments is readily available.

Option-1: Unit Level

Individual entities prepare financial reporting based on local GAAP and then convert that information to IFRS before sending the reporting to the group level for consolidation.

IFRS - Integration - Unit Level

Organization Suitability

• Individual entities in each country are required to report separately.
• Group structures are complex.
• Consolidated entities are numerous.
• All required source data is readily available.

IFRS Process Flow

Lets look at each of these in a simple manner.

Measure as per IFRS:

IFRS - Measurement of Difference

Recognition / De-recognition of certain financial entries:

Finally Re-classification under IFRS:

IFRS - Reclassification

This this not intended to be an exhaustive list but more to represent the kind of changes that will be required to be made.

Traditional Architecture and financial reporting

Let’s consider the traditional architecture of financial reporting and the complexities that stand in the way of IFRS Implementation.

GL - Traditional Architecture

The traditional architecture revolves around sub-ledgers, ledger and extraction of reports. This architecture and more so, from IFRS perspective, creates the following hurdles.

• Difficulty in integrating structural changes  (e.g. new acquisition, business unit, product, etc.)
• User confusion on where to go for final financial information
• Large/complex Chart-of-Accounts
• Inconsistent definitions and concatenated fields
• Large amount of redundancy between financial systems (e.g. sub-ledger, ledger, CPM, etc.)
• Data latency challenges
• High number and complexity of data extracts and loads between Financial systems
• Onerous maintenance requirements
• Elongated process cycle times (Close to Report, Analyze to React, Planning & Budgeting)

Architecture for IFRS Implementation and complex financial reporting:

To address complexities, including IFRS, companies will have to look for a modular approach to how financial information is stored and processed. Companies will have to put in place a process oriented architecture to address financial data aggregation, in order to enable complex reporting in a seamless manner.

GL-New Architecture

What is the basis of this architecture and what does it provide?

• Move from “Complex GL” to “Thin GL” with streamlined CoA
• Leverage Performance Management Applications to bring together GL, Sub Ledger and Project details.
• Ad-hoc and User defined reporting with more analytical / reporting power
• Streamlined process with increased flexibility and control

Here is a summary of implications reported in Europe:

For an organization moving to IFRS convergence, impact can be summed up in the following areas:

In the coming posts, lets look at (1) Challenges to adoption from an IT perspective (2) Impact on Financial Consolidation process and (3) Options available to companies

IFRS comprises of “a single set of high-quality, global accounting standards that require transparent and comparable information in general-purpose financial statements”.

IFRS is applicable for all corporate entities that are publicly accountable. For entities that publish general purpose financial statements and are not publicly accountable, separate framework has been issued as IFRS for SME’s . SME’s in this context is not based on that size but based entirely on whether they have public accountability or not.

What does IFRS consist of?

IFRS Financial Statements comprises of the following:

1. Statement of Financial Position (Balance Sheet)
2. Comprehensive Income Statement
3. Statement of changes in Equity
4. Cash Flow Statement
5. Explanatory Notes including accounting policies

What are the underlying assumptions of IFRS statement?

The underlying assumptions are

• The statements (except Cash Flow) are to be prepared under accrual basis and
• On a going concern basis

What are the drivers for IFRS Convergence?

The goal of the IASC (International Accounting Standards Committee) Foundation and the IASB (International Accounting Standards Board) is to develop, in the public interest, a single set of high-quality global accounting standards.

IFRS Applicability:

More than 100 countries have already adopted IFRS. Currently IASB is involved in closing the gaps between US GAAP and IFRS paving way for an early adoption by USA. India has committed for adoption from April 2011 with a list of Phase-1 companies.

Packaged Applications are typically used by finance teams to structure and automate the monthly or quarterly aggregation of historical results and include best-practice methodology. But with growing complexity, financial consolidation is becoming more of financial management these days. Primary requirements are Accelerated Reporting Cycles and Reduced Cost of Compliance. Specifically,

At a need level:

At a compliance level:

Simple Consolidation Architecture:

Critical Success Factors

For a successful financial management implementation, bear in mind the following factors:

• Segregated and dedicated internal resources together with management commitment is critical to on time and on budget delivery (Governance model, Steering Committee)
• Data Conversion/Integration is more complex and time-intensive than all assumptions
• Data Integration and Reports Development is very time consuming, but can successfully be done offshore for significant cost reduction
• Network, connectivity and performance testing needs to be done well in advance of rollout; (over-utilized networks require upgrades and can take several months)
• Initial and ongoing server and software tuning and optimization is required
• Don’t underestimate project management role and resources

The first list  of companies include

• SENSEX Companies
• Nifty Companies
• Companies that have raised debt > $ 50 million abroad
• Insurance Companies
• Mutual Funds
• Commercial Banks
• Companies that are publicly accountable with an aggregate borrowing > Rs 1000 crores
• Indian companies of foreign companies that have implemented IFRS at the parent company that do not fall under any of above
• companies outside these categories with capital of over $50 million abroad

What does IFRS implementation involve?

IFRS convergence will entail a change in the accounting process and consequently, significant change in the IT, ERP and Management Information System.

Spreadsheet:

Except, may be, the large companies, all other companies must have toyed with Spreadsheet in some form or the other for financial consolidation.

Except for its omni present status and ease of use, Spreadsheet is more an individual tool and not standing up to enterprise requirements.

General Ledger:

Most ERP’s provide advanced features i.e. ,multiple books, ledgers, translation etc to manage consolidation within the General Ledger itself. Companies with multiple entities, typically, set up a dummy consolidation entity, export data from other ledgers and initiate the consolidation process. Adjustment entries are made based on the calculation done outside.

General Ledger based financial consolidation is more suited where all the entities are on the same General Ledger and use a common accounting structure. And it does offer a fairly simple process where suited.

Custom Solutions & Data warehouse:

It is not uncommon to find custom data warehouse based solutions for financial consolidation. Financial and other data is loaded into relational / multi dimensional data storage systems for analysis. Custom codes for calculations and allocations are written and applied.

These solutions are likely to be present in industries with higher regulatory compliances i.e., insurance and banking and unless inherited as a legacy system, will be too complex for common use.

Packaged Applications:

Packaged applications have evolved over a period of time to provide most common solutions on a cookie cutter mode. Today, they integrate with any and any number of systems through ETL’s.  They can form the backbone for a Performance Management suite. And being specialized solutions, they are supported for changing global requirements i.e., SOx compliance, IFRS reporting etc.

Quick comparison of tools and solutions:

———————————-

1. Collection of data from multiple sources incl manual entry
2. Consolidation Process control with documentation/audit trail
3. Actual consolidation of financial data incl adjustment entries, inter co eliminations & multi currency translation
4. And finally, Reporting, Analysis and Modeling

On a horizontal plane, it starts with

-> Local Consolidation (Forecast and actual results) – moving to

–> Regional Consolidation (Review, Approve, Adjust and Consolidate) – and finally to

—> Central Consolidation (Final adjustments, Publish and Management Reporting)

These vertical and horizontal steps are involved irrespective of the process followed by an enterprise. Unless addressed in a structured manner, financial consolidation process will result in one or more of the the following pain points.

• Long period-end closing cycles
• Errors in financial data collection
• Financial restatements
• Rising audit fees

More so when a company has to grapple with inconsistent account structure, multiple source systems and changing disclosure requirements

Consolidation Approaches

In the consolidation process, depending on the maturity & need, companies use one of the following methods.

Spreadsheet: The most commonly used and especially with macros. The process is driven more by individuals and suffers from multiple drawbacks including lack of audit trails.

General Ledgers: Most of the matured ERP’s offer multiple sets of books within GL to do basic consolidation. While this approach is workable for limited use, it fails due to limited reporting ability, inadequate consolidation capability and inability to integrate with other systems.

Data warehouses and Custom Solutions: Moving up in the maturity ladder, custom solutions scale up to meet many of the requirements. These solutions have evolved more an a custom “Build” and end up addressing specific requirements of the customer.

Packaged Applications: Packaged Applications like Oracle’s Hyperion, SAP’s Business Objects have created financial specific applications to meet complex and sophisticated consolidation needs. Typically, these packaged solutions carry the ability to integrate with multiple source systems, provide complete audit capabilities, address multiple master data and structured to meet multiple financial standards reporting.

Lets look at each of these in little more detail to understand their draw backs.

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The genesis of financial consolidation lies with Management and Statutory Reporting primarily. Management Reporting tends to be more analytical and unlike the structure in which the transactions are recorded. And Statutory Reporting which leans heavily on transparency & disclosure and dictated by bodies & standards like FASB, IFRS / IAB etc. In addition, industries like Banking, Insurance, Utilities tend to have special accounting and reporting requirements. From a pure transactional nature too, financial consolidation is required to eliminate inter-co transactions.

Typical financial consolidation in any industry is directed towards,

• Consolidated Financial Statements and Intercompany Eliminations (ARB51/IAS27)
• Consolidation of Majority-Owned Subsidiaries (FAS94/IAS27)
• Foreign Currency Transactions and Translations (FAS 8/FAS52/IAS21)
• Statement of Cash Flows  (FAS95/IAS7)
• Disclosures about Segments of An Enterprise (FAS131/IAS14)
• Calculation of Goodwill / Minority Interest
• Elimination of Share Capital and Investments in Subsidiary
• Currency translation etc

As enterprises evolve in maturity, financial consolidation becomes a fulcrum for many management processes. A sound financial consolidation process enables a company to leverage the following

Planning and Budgeting: A detailed and robust consolidation provide the foundation for short term and long term operation and financial budgeting. It provides the necessary insights to base the plan and the inputs to decompose a budget. A good financial consolidation throws not only financial data but also statistical and analytical information.

Performance Review: Management cycle of Plan, Performance, Review and Correct is dependent on financial information to do the review and take corrective action. A sophisticated consolidation data not only reflects the variance to plan but provides an insight into the problem

Key Performance Management: As companies move towards linking corporate performance with individual’s responsibilities, consolidated financial data becomes a force for measuring and improving the enterprise performance.