Changes in filing requirements and accounting standards will drive conversion to international financial reporting standards (IFRS) in an organization, but the process of conversion will impact general business information technology systems, according to an analysis published by KPMG, International Financial Reporting Standards: The information systems impacts of IFRS. Every system within an organization that uses financial information will be affected by conversion to IFRS, according to the KPMG report.
The report focuses on and identifies specific information technology (IT) challenges that most companies will encounter beyond the changes in accounting, and concludes that IT costs of conversion are likely to be significant. It says further that there is a shortage of IT professionals with "the ability to interpret and translate the IFRS requirements into IT changes and solve the technical issues involved in the conversion."
Decisions made early in the conversion project life cycle can prevent unnecessary costs resulting from duplication of efforts at a later stage. IT costs are likely to arise from:
- The modification or reconfiguration of new systems
- Vendor maintenance and ongoing support
- Employment of additional resources
- Project management
- Training needs, and
- Implementing both a short-term solution to meet tight deadlines and a more robust long-term solution at a later stage to address the same problem.
A detailed timeline in the analysis projects a four-year transition period for U.S. companies for conversion from U.S. GAAP to IFRS. The initial assessment phase, which KPMG divides into two parts - program and management - will last approximately one year. Program planners will assess accounting, tax and reporting impacts; identify the accounting and disclosure differences and local tax and regulatory requirements; and design and implement templates for data gathering. Potential information "gaps" that could occur during the conversion present major risk factors and must be identified at this stage. Also required at this point is the involvement of IT professionals and individuals who can identify new IT system needs.
Managing the business consequences and impacts on issues such as contractual terms, risk management and treasury, are among the management challenges present in the assessment phase, along with people and change – identifying managers and establishing accountability and developing training programs.
Example of IFRS Accounting Impact on IT
Fixed assets is one example of an IFRS accounting topic that will have a major impact on information systems. Under current U.S. GAAP, when a company purchases a new building, it capitalizes the cost of a building and depreciates it over the life of the building. Under IFRS the company allocates total costs to applicable asset components: building, roof, fixtures, etc., and then capitalizes the components and depreciates the over their useful lives which may differ.
To account for fixed assets under IFRS the IT system would need to
- Track and allocate real estate costs
- Modify or replace fixed assets system to support different depreciable life categories
- Evaluate post-acquisition costs for capitalization or expense.
The technical implications of these changes could involve new data requirements, interface and mapping changes, changes to reporting packs, changes to the chart of accounts, changes to reporting tools, and modifications to account for documentation and archiving.
Some organizations may choose to develop spreadsheet models external to the core systems to manage the conversion on a temporary basis and to save money.
Build, Implement and Rollout Phase
It is essential that the IT organization be involved in every aspect of the second phase of conversion - the build, implement and rollout phase, KPMG says. During this phase, which would typically last two years, the IT organization should confirm its understanding of the new data requirements and configure or build applications systems to meet those requirements. Changes to information will include changes to data, applications technology, controls, and related business processes.
Leadership must consider how new applications and changes to applications affect the control environment overall. All users should be appropriately trained prior to rollout on the new accounting policies as well as the effects those policies have in the IT infrastructure.
At some stage, a cutover will be required from the local general ledger to the IFRS general ledger. This will require the organization to map the changes to link the sources to the IFRS general ledger without the need for IFRS adjustments. Cutover usually takes place in stages, the report says, but the timing will after the nature and volume of adjustments. The might take a year.
Tax and Regulatory Considerations
It will be necessary to involve tax professional in every stage of IFRS conversion planning because, "for U.S. companies, tax systems, processes and controls have been primarily designed to deliver information to meet the financial statement reporting requirements of U.S. GAAP." Companies may need to modify systems and controls in order to collect information relevant to tax reporting.
Other considerations will include compliance with Sarbanes-Oxley; and Basel II, an evolving regulation addressing the capital adequacy of international banks; and industry-based regulations.
Role of External Auditors
Last but not least, the KPMG analysis says, management will need to integrate the internal and external auditors into the planning and implementation of the conversion to IFRS. Many accounting processes and information systems responsible for financial reporting and the preparation of financial statements will change, in turn affecting the organization's governance structure and internal control over financial reporting.