If the people in the finance department look bad-tempered lately, don’t blame the global recession.
While most companies are focused on simply trying to generate revenue, many CFOs and their staffs are quietly preparing for a shift in the way they report financial information to regulators that could essentially duplicate many of the efforts they make today.
But the transition is expected to be so onerous that experts say it may amount to keeping two sets of books for at least a year. And when they say “books,” they really mean all the financial data stored in systems set up and supported by IT managers.
“The nature of financial reporting will change, and information requirements will change,” says Ramona Dzinkowski, executive director of the Canadian Financial Executives Research Foundation, the research organization of Financial Executives International Canada. “There’s going to be an increased focus on IT controls.”
Over the last few years, more than 100 countries, including those of the European Union, Australia and New Zealand, have adopted IFRS. Pressure on Canadian businesses to harmonize with U.S. GAAP and its higher compliance costs have declined. The U.S. standard setter, Financial Accounting Standards Board (FASB), is now working with the International Accounting Standards Board (IASB) to develop converged standards; the SEC has proposed to accept foreign issuer filings in accordance with IFRS without reconciliation to U.S. GAAP as of this year.
It’s not like all this work is going to be for nothing. Among other things, IFRS is supposed to make it easier for global corporations to get at capital, streamline mergers and acquisitions and make it easier to compare firms across borders and industries. But first you have to make the move.
Who’s affected by the changes, and how?
Publicly-traded Canadian companies had to disclose their transition plans last year, and it could affect the financial statements they file this year. Anyone submitting financial information to a regulator such as the Ontario Securities Commission will be making the change.
“Most of the larger Canadian clients have probably had IFRS projects in one shape or another for the last four to six months,” says Paul O’Donnell, IT advisory partner at Toronto-based Ernst & Young. “A lot of the industries that are capital-intensive, those in a regulated area like utilities, have had projects running longer.”
How far they’ve gotten with those projects, however, is another matter.
“There’s the looming deadline for 2011 and the need for comparative data for 2010,” says Margaret Neary, a vice-president with PricewaterhouseCoopers’ (PwC) Canadian IT advisory practice. “Right now, companies seem to be going forward with diagnostics and really looking at that. What I’m seeing in the market is that companies are going forward, looking to the diagnostic issues, where the effects could be in people, process and technology. I don’t see them really taking in that next level of planning.”
Mahmoud Safavi, senior manager at professional services firm KPMG’s Toronto office, says the impact assessments should identify which elements of financial reporting in an organization are automated today, and which are manual, for example. Much of this information would be processed in enterprise resource planning systems, but other elements of IT architecture could be affected, too.
“Any source system that feeds into the ERP is important, as is the billing system, which also covers the revenue information,” he says. “You’re looking for anything that would show a difference between Canadian GAAP and IFRS.” Don’t ignore simple spreadsheet files, either.
What are the most challenging aspects to the conversion from an IT perspective?
IFRS-based financial statements include information on acquisitions, joint ventures, receivables, property, inventory and many other areas. It’s not that these are far removed from Canadian GAAP, but the way they are interpreted and understood by systems and reporting tools may have to change.
“One of the big nuts is (the area on) property, plant and equipment (PP&E),” says Neary. “From a systems and accounting perspective, there may be more changes around the level of detail you need to provide. On the IT side, that trickles down to what kind of fixed asset module you’re using (or not using) in your ERP. What does it look like in SAP or Oracle?”
O’Donnell says firms that deal with a lot of capital assets — those in mining, utilities or telcos, for example — would be among those grappling with PP&E.
“You might be looking at the component level of significant assets,” he said. “It might be something within the second fixed asset sub-ledger. It could be different classes of assets.”
Safavi says some things will remain constant. Invoices, for example, won’t be treated much differently under IFRS. “It’s things like impairment, processes associated with capital leases or functional currencies,” he says.
“The major pain points in getting implementations started are R&D expenses, liabilities, and building and lead times,” Dzinkowski adds.
Are upgrades to existing applications and platforms inevitable?
Vendors, naturally, see this as an opportunity to add more functionality to their existing applications. Brian Cook, a financial services account executive with the McLean, Virginia-based business intelligence (BI) software company MicroStrategy, said his firm’s BI products will help users pinpoint any discrepancies between two sets of numbers in a financial statement.
“There may be a different definition of revenue between one and the other,” he says. “We can drill down and highlight which is the right formula — expense, process or whatever.”
If there’s a place to start considering an upgrade, Safavi says, it’s with consolidation systems and the reporting tools for BI products. “The newest version of any ERP or BI system will provide you the option of meeting the requirements of dual reporting,” he says.
Neary suggests IT managers should see this as a chance to get some budget dollars that might not be available otherwise. “My angst is those clients that look at it as an accounting exercise don’t see it as a transformational program, which it can be,” she says. “This is something you have to do anyway, so, while the hood is up, look at other process or system optimizations. The CFO can sell it as, ‘We need X number of dollars to do this now.’”
Dzinkowski notes that many smaller organizations may not have the resources to handle the IT aspects of IFRS conversion and therefore may turn to consultants or even external auditors. “They have no option,” he said. “The last thing they want to do is re-file their financial statements.”
Any lessons learned from