Companies making the transition to International Financial Reporting Standards (IFRS) should regard the new standards as an opportunity and a challenge, says PeopleSoft Africa`s national solutions consulting manager, Dave Macdonald. With the right technology, they can effectively meet all their accounting and reporting needs at every level.
Although standardisation in accounting has been on the horizon for a long time, Enron and other financial scandals gave an added sense of urgency to the European Union`s efforts to implement new accounting practices.
As of 31 December 2005, compliance with IFRS will be mandatory for some 7 000 companies or groups of companies in 15 European countries. With a few exceptions, every company quoted on the financial markets or planning to issue bonds on the markets will have to adopt IFRS. This has implications for local companies seeking to tap into the European market and, as with Sarbanes-Oxley, these companies will have to ensure they stay in line with IFRS compliance codes.
IFRS represents both an opportunity and a challenge. There is no doubt that it will result in improved processes, financial control and transparency.
However, implementation of some of the IFRS standards will also demand significant effort. For example, financial instruments will no longer be evaluated at historical cost but will instead use amortised cost or fair value methods. Also, all derivatives must now be accounted into the balance sheet. These are big changes.
It is also important to note that IFRS will not replace the reporting needs of local subsidiaries, for example, when dealing with tax authorities. Dual accounting is thus likely to be required, certainly at the parent company level, and possibly at the local level as well.
In addition to introducing significant changes in accounting practices, IFRS is time-critical. Although full compliance is not required until year-end 2005, the need for a two-year comparison means that transactions should ideally be booked in IFRS from the beginning of 2004. The alternative, a retrospective manual conversion, is likely to be cumbersome and time-consuming for many companies. Given that planning and preparation will also be involved, the conclusion is inescapable - anyone moving to IFRS needs to act now.
Anticipating the impact of change
Broadly speaking, IFRS means that companies will need to report more frequently and more quickly on a larger amount of financial information. In practice, the work required to achieve compliance will vary enormously from one company to another depending on the nature of the business and on current accounting practices. For example, companies that comply with US Generally Accepted Accounting Principles (GAAP) are already fairly close to IFRS.
Those preparing for IFRS will need to think about business processes, change management and information systems. Accounting and financial reporting systems will obviously play a central role in moving to the new standards, and the first question many companies will ask themselves is: Will my financial system support IFRS?
Where major changes are required, companies with legacy financial systems may well find that these systems will not support compliance with some of the new standards. For example, the asset management system may lack the ability to depreciate intangibles. Several of the new IFRS standards relating to financial instruments and impairment of assets are likely to pose significant technical challenges. Modification or replacement of systems may therefore be necessary, and in some instances, replacement may be the most cost-effective option even if an alternative is available. To evaluate the impact of the changes and decide on a course of action, it is vital that companies run a full analysis in collaboration with their statutory auditors or other accounting professionals.
Achieving IFRS compliance
In the broader context, technology should be regarded as an enabler for IFRS. Internet technology can speed up the process of collecting and reporting data for the purpose of creating consolidated financial statements. Portal technology supports the need for transparency by communicating financial information quickly and effectively to internal and external audiences. XBRL, an XML-based messaging language dedicated to financial information, can be used for disclosure purposes or for importing competitive information in real time. Some quoted American companies already do this, and XBRL appears poised to develop into a future standard for digital reporting.
Moreover, some financial systems are already IFRS-compatible. In addition to supporting specific IFRS standards, these systems offer specific features that will ease the transition. These include multiple GAAP support, which enables several accounting standards to co-exist.
Additional flexibility is provided through offering more than one approach to multiple accounting. The ideal is a financial system that supports a decentralised architecture for local accounting, but at the same time, offers global consolidation functionality so that detailed ledgers can be centralised to produce consolidated accounts. The system should also offer a variety of global features to support the maintenance of data relating to several different countries within the same database, as well as appropriate analytic applications to help companies deal with more complex IFRS requirements.
Such features, taken together, can help companies meet their financial reporting needs at different levels in the most effective way, whether they choose to migrate to a new, fully integrated suite or leverage existing system investments. However, the time to act is now. Using such systems, which are designed to support IFRS, forward-thinking companies already comply with the new standards.
Organisations like these understand the competitive advantage that comes from greater financial control and transparency. Companies that have not yet taken action towards meeting the 2005 IFRS deadline must act quickly to analyse their requirements, or risk being left behind.
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