Amid the flood of new reporting and regulatory compliance requirements comes a new one from Europe: International Accounting Standards, or IAS, and the European Union has decreed that it has to be in place by 2005.
Accordingly, it`s come to be known as IAS 2005, and is just one more obligation executives and managers around the world have to confront, says Marc Scheepbouwer, CEO of Global Technology Business Intelligence (GBI). "After the crash of world markets, the lapses of corporate governance and the disappointment investors and regulators have experienced over the last three years, there has been a major backlash worldwide," says Scheepbouwer. "IAS 2005 is the latest manifestation of this."
IAS 2005 is designed to ensure consistent procedures, processes and structures across borders and boundaries, for all companies listed in Europe, including those with secondary listings, as some South African companies have. It follows on:
* The move to report in line with GAAP, or Generally Accepted Accounting Principles (as against the insidious pro forma method).
* The punitive measures passed into law in the US as embodied in the Sarbanes-Oxley Act.
* The new concept of the "triple bottom line", in terms of which companies must report not only their financial performance, but also their social and corporate responsibility and their sustainability.
"While these measures are visibly being enacted in other countries, indications are that similar initiatives are under way in SA," notes Scheepbouwer, "and it is only a matter of time before our listed companies will be forced to comply. For instance, the triple bottom line has already reached our shores."
IAS 2005 will have a significant impact on companies` balance sheets and earnings. It fundamentally changes the way in which success is measured and the information and records companies need to maintain.
At its core lies the concept of fair value of a company`s assets and liabilities: the value of assets is the availability of resources that generate future incoming cash flows; liabilities are future outgoing cash flows.
"There is huge disagreement in the market about the concept of fair value accounting," says Scheepbouwer, "especially from companies and market sectors exposed to volatility. These sectors will have to change the way in which they manage their business, but for now, fair value accounting will prevail and all must comply."
Compliance with these new requirements will be way beyond the capabilities of organisations which have not invested in the appropriate internal systems, warns Scheepbouwer: external reporting and compliance are most successful if they have their origins in management accounts.
For instance, a study conducted by the Dutch Ministry of Economic Affairs in 1999 showed that a change in external reporting is valuable only if it has a basis in internal reporting.
"Reporting is only one of the ways in which companies will be affected," notes Scheepbouwer. "Structured financial products, currently off-balance sheet, will have to be shown, as will the changes in value of share options granted to employees, and the recording of all financial assets and liabilities, with all changes in market value being shown in earnings."
Laying a solid, unquestionable foundation for financial reporting is key, Scheepbouwer stresses: one which will enable management to work off only one set of books and reports, irrespective of which international imperative needs to be supported at any time.
"This foundation is best laid with consolidated financial systems, which in turn pave the way for business performance management, or BPM," says Scheepbouwer. "For as long as external reporting is a separate, standalone activity, conducted for specific countries, regions and regulatory authorities, it will be a showstopper. If it is integrated into BPM, it becomes both an extension of business and a strategic enabler."
BPM is about the ability to drive strategic planning, budgeting and forecasting, query and analysis, reporting, monitoring and the balanced scorecard off one single version of corporate data.
"BPM is about compliance AND competitive advantage," concludes Scheepbouwer. "Companies which fail to invest in BPM today will not only fail compliance requirements, but also be at a competitive disadvantage."
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