Business Technology Innovation » IFRS

IFRS Implementation – Options on integration

Atul Mehta — Fri, 26 Mar 2010 18:31:15 +0000

One of the key aspects to IFRS adaption is determining the key changes to Information systems and identifying the appropriate level for consolidation system changes.

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 Implementation – Process Flow

Atul Mehta — Wed, 17 Mar 2010 07:44:16 +0000

Moving on in the IFRS reporting process, let’s take a brief look at the process flow. The logical starting point is the Statement as per Local GAAP and ending with Statement as per IFRS. The transformation in between would consist of Measurement, Recognition and Reclassification.

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:

Recognize

Derecognize

• Pension Liabilities

• Deferred tax assets and liabilities

• Finance lease assets and liabilities

• Provisions, only of legal or constructive

• Derivative financial instruments

• Acquired intangible assets

• Internal development cost

• Provision, if no legal obligation (eg. Certain restructuring liabilities)

• General reserve as liabilities

• Deferred tax assets, if not probable

• Treasury shares as assets

• Intangible assets, not meeting criteria

• Discounting of long term receivables / payables

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.

Recognize

Derecognize

• Pension Liabilities

• Deferred tax assets and liabilities

• Finance lease assets and liabilities

• Provisions, only of legal or constructive

• Derivative financial instruments

• Acquired intangible assets

• Internal development cost

• Provision, if no legal obligation (eg. Certain restructuring liabilities)

• General reserve as liabilities

• Deferred tax assets, if not probable

• Treasury shares as assets

• Intangible assets, not meeting criteria

• Discounting of long term receivables / payables

IFRS Implementation – Challenges to adoption

Atul Mehta — Tue, 09 Mar 2010 09:56:10 +0000

Considering the impact areas, IFRS convergence has considerable challenges. Especially for companies with multiple operations, multiple sites and multiple system. It is the internal complexities that companies have built over a period of time, that makes IFRS adoption difficult.

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

IFRS Implementation – Impact

Atul Mehta — Mon, 01 Mar 2010 10:26:38 +0000

IFRS Implementation will have wide ranging impact for an organization. Impact will be felt on business, technology and stake holders. Considerable preparation will be required internally in terms of gap analysis, guidelines, controls, training etc. Depending on the size, maturity and complexity of IT ecology, changes to transaction and analytical system could be significant. Finally, IFRS will have an impact (negatively or positively) on the way financial performance is reported.

Here is a summary of implications reported in Europe:

25% of survey respondents stated the IFRS adoption has changed the way their business was run (Institute of Chartered Accountants in England and Wales Study, October 2007)

32% reported higher profits under IFRS, 20% reported lower profits, 48% almost the same (Institute of Chartered Accountants in England and Wales Study, October 2007)

Daimler launched a four-year project for converting to IFRS that included crafting internal guidelines for applying IFRS, assessing how the new rules would affect its performance measures, and making changes to its technology systems….training over 3000 employees (Goodbye GAAP, CFO Magazine, April 2010)

“It could take a company 18 months to prepare its IT systems for IFRS…”(Can Your CIO Spell IFRS?, CFO Magazine, September 3, 2010)

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

Technical Accounting	Process and Statutory Reporting
• Overall approach to IFRS Implementation • First time adoption policy consideration • Ongoing policy considerations, including alternative approach to “principles”	• Internal controls and processes, including documentation and testing • Management and internal reporting packages • Global reporting packages • Statutory reporting, including “Opportunities: around IFRS adoption
Technology Infrastructure	Organizational and business issues
• General ledger and chart of account structure, including performance metrics • Global Consolidation • Sub-system issues related to configuration and data capture • Capability to manage multiple GAAP accounting during transition	• Treasury Management • Debt covenants and financing • Mergers and acquisitions • Management compensation • Product development • Management Information • Human Resources and training

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

Technical Accounting	Process and Statutory Reporting
• Overall approach to IFRS Implementation • First time adoption policy consideration • Ongoing policy considerations, including alternative approach to “principles”	• Internal controls and processes, including documentation and testing • Management and internal reporting packages • Global reporting packages • Statutory reporting, including “Opportunities: around IFRS adoption
Technology Infrastructure	Organizational and business issues
• General ledger and chart of account structure, including performance metrics • Global Consolidation • Sub-system issues related to configuration and data capture • Capability to manage multiple GAAP accounting during transition	• Treasury Management • Debt covenants and financing • Mergers and acquisitions • Management compensation • Product development • Management Information • Human Resources and training

IFRS Implementation – An Introduction

Atul Mehta — Wed, 24 Feb 2010 05:59:31 +0000

IFRS is perhaps the most important change to financial reporting effected on a global scale. IFRS or International Financial Reporting Standards are standards, interpretations and frameworks adopted by the International Accounting Standards Board (IASB).

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:

Statement of Financial Position (Balance Sheet)
Comprehensive Income Statement
Statement of changes in Equity
Cash Flow Statement
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.