IFRS Implication on IT 3

Editor's Notes

• #2: In this presentation, I’ll be talking about the IFRS implication on IT with a focus on the planning and design phases.
• #3: The key to a successful conversion is to start the project early for various reasons:First, a typical IFRS conversion takes about 2-3 years to plan and implement, and companies will need an extra year prior to the conversion deadline in order to get the comparative numbers ready for IFRS reportingSecond, the IT component is expensive and represents about 50-70% of the overall project cost. So, you would want to avoid cost overrun and duplicate efforts due to a lack of planningThird, the major reason for the conversion failure at the European countries was due to an underestimate of the IT impact. A lot of the companies thought it was just an accounting issue and did not start planning for the IT component early enough. As a result, they have to use a lot of manual adjustments and spreadsheet accounting to covert the GAAP numbers to IFRS numbers, which resulted in a lot of errors and control breakdowns. Therefore, it is critical to plan early for the conversion and allow sufficient for a thorough analysis of the IT aspect of the project.
• #4: Now, getting into the planning phase..The first thing a company should do is to establish an IT steering committee and project plan to raise awareness of the IFRS impact on IT.It is also important for management to instill a sense of urgency for the project because tone at the top is crucialAlso, the board of directions and audit committee should also be actively involved at each stage
• #5: Another key is to put together a project management teamThe experience was that there was a short supply of IT staff with competent technical IFRS knowledge, so you would want to consider your staff requirements early. And ensurecommunication and knowledge transfer between the IT and accounting departmentAlso,internal auditors should be involved in assessing the project risk, disclosure standards, internal controls over financial reporting (known as ICFR), as well as designing change management procedures to ensure the accuracy of changes.
• #6: The next step is to understand the accounting changes under IFRS in order to translate these changes into system specificationIn general, the IT systems must be able to track more information because IFRS requires more detailed disclosures. New data fields are also needed to accommodate changes in accounting policies. For example, because IFRS does not allow completed contract method, companies would need to calculate the % of completion, and so the system will need to track information that are not currently captured, such as cost incurred to date and overall budget for the job. Now, companies also have to amend the key inputs intointernal reporting systems because they are often performed on a similar basis as external reporting. Some examples would be systems used for budgeting and forecasting and performance managementIn addition to new data requirements, companies also need to reconfigure their systems to calculate or process data on a different basis. For example, because IFRS allows borrowing cost directly attributable to qualifying assets to be capitalized, the systems will need to separate these costs from general borrowing costs.
• #7: Here are some more significant accounting changes that will impact the IT systems. We have already talked about the revenue recognition. Regarding PP&E, the calculation of cost base is different because it includes site restoration and dismantling costs. Also, significant components of a fixed asset need to be recorded and depreciated separately. These accounting changes will require an additional measurement area within the accounting systemAs for investment properties, the additional option of fair value (FV) model under IFRS brings two challenges for parallel reporting. First, local standard usually measure at amortized cost and treat the land and building as separate components. However, IFRS encourage the FV model and measure the property as one unit. These accounting differences require a separate approach in the ERP system. Also, the PPE accounts needs reconfiguration to separate out the investment properties for disclosure purpose.
• #8: After understanding the accounting differences, we will need access the current system capabilities and compare them with what is required under IFRSBasically, the IT platform can be broken down into 5 dimensions:First, upstreatm system includes financial sub-ledgers or transactional systems such as AP, AR and inventoryThen we have the GL, data warehouse for reporting, and downstream reporting systemsThe last dimension that is not shown in the diagram is the overall IT infrastructure
• #9: So as I mentioned, the accounting differences will trigger the need for new input data and reconfiguration for the systems. One example would be the asset management module in the ERP systemIt needs to be modified for changes in PP&E accounting, including asset classification, cost basis and valuation processes, configuration and tracking of asset components, as well as calculation for component depreciation. Now, if the system cannot handle an additional depreciation area, the alternative method is to duplicate all fixed assets master records that have measurement differences as show in figure (b)
• #10: Another example would be the Inventory and Purchases module-in addition to prohibiting LIFO, IFRS requires inventory to be valued at lower of cost and net realizable value. So, the module must be able to accommodate the new data inputs and calculations that reflect the use of NRV in lieu of market value. However, the modification may not be significant because NRV is determined on similar basis as market value most of the timeRegarding asset Valuation, companies often use specialized software outside of the main ERP system to perform asset valuations for impairment testing. Since IFRS allows reversal of impairments losses. And defines a new term, “cash-generating unit”, for goodwill allocation and impairment rules, the software needs to be updated to accommodate the changes.
• #11: Moving onto the GL… Because of the reconfiguration and new data fields in the source systems, we need to modify the Chart of Accounts, such as creating new accounts and deleting accounts no longer in use.We also need to analyze the reconciliation process between the sub-ledgers and GL such that any configuration or data changes at the source level will be reflected in the GL. Also, the differences in accounting treatments will also requirechanges in calculation engines for revenue recognition and expense allocation methods. In relation to the downstream reporting systems, we need to change the existing mapping tables to facilitate the generation of financial statements.Also, in order to align the internal and external reporting systems, for any mapping changes from source systems to the GL, we should also prompt an update of mappings to the management reporting systems. Lastly,multinational companies may need to maintain multiple ledgers comply with different reporting requirements.For example, the different basis for segment reporting under the IFRS and GAAP may require an additional category in the GL, or a secondary segment to be defined within the reporting system.
• #12: Nest, the reporting data warehouse, - Because of the more extensive disclosure requirements under IFRS, we need to standardize financial data in current data models. Also, data governance functions may need to be created or modified to reflect new data definitions. Despite the new data requirements, companies need continuous access to old financial data prepared under GAAP for comparative, benchmarking and decision making processes. Therefore, the current data warehouse needs to be assessed for its ability to store and retrieve mass amount of old data.
• #13: For downstream reporting systems, we need to revise the external reporting templateThe reporting changes will also have an impact on the consolidation system in generating financial reports. Specifically, the current extraction processes should be enhanced to capture any missing data needed for consolidation because IFRS may require a different number and type of entities to be included in the group consolidated financial statements. Transformations should also be adjusted to accommodate the calculation changes under IFRS.
• #14: For the last dimension or the IT infrastructure, We need to consider additional memory requirements because of the increase demand for data retrieval and system storage, and the increased volume of transactions. This is important for timely reporting-In addition to internal systems, companies may need to change its existing Electronic Data Interchange (EDI) or web interfaces to third party IT systems in order to account for new data requirements in dealing with customers and suppliers. If companies have outsourced such process, they will have to communicate with the business partners regarding the IFRS requirements.
• #15: - After assessing the system requirements, the next step is to design a blueprint for systems and processes changesThere are basically three options to adopt for system conversion.The first option is to simply make manual adjustments or journal entries at the end of the reporting period to convert the GAAP numbers into IFRS.This method is cost-effective for smaller companies but islabour-intensive and error-prone. Therefore, it should only serve as a short-term solution for companies that have straightforward accounting policies and minimal accounting changes under IFRS. -A better option is to make modification to the existing systems. One way to do this is the common account approach, where accounts with same accounting treatment are distinguished from those that are unique under the two sets of standards. Then, transactions are posted according to which standard it applies to, or to the common account. -Another way is to use theduplicate ledger approach as shown in the diagram, where all accounts are put in the same GL but separate ledgers are created for IFRS and GAAP. The effect is that while all transactions are merged in the same GL, they are tracked separately by posting in the separate ledgers depending on which set of standards they apply to. The last option is to implement a whole new financial reporting system. This is the most expensive approach but most of the time, the second approach would be sufficient to handle the accounting changes because IFRS and the local standards are largely converged.
• #16: Another concern with the conversion is how to account for parallel reporting. Again, there are 3 ways to do this.- The easiest way is make manual adjustments only at the consolidation level so that each subsidiary can still report under local standards without having to modify their existing systems The second method is to have each subsidiary convert their GAAP-based statements to IFRS before the data is extracted for group consolidation. This method is preferred for international company where individual subsidiaries operate under different jurisdictions However, these two approaches are not sustainable. From the European experience, using top side solutions will result in the finance group feeling all the pain. Therefore, a better approach is to push down the conversion to the source level at each subsidiary. This is the most sustainable option out of the 3 and is recommended especially when companies face complex transactions at the source level.
• #17: Now proceeding to the implementation phase, - It is important to test all proposed changes and perform a parallel run of the processes and controls prior to full implementation. It is also crucial to involve end users in the testing and keep them informed of the system development in regularmeetings and training sessionsAlso, we need to monitor the ICFR to ensure compliance with internal controls standards
• #18: At the basic level, we need to review the general computer controls environment.Due to changes in the way the systems process transactions, we need to change the business process controls and automated transaction controls accordingly. Also, because of the new data requirements under IFRS, we need to have sufficient controls in place to verify the accuracy and reliability of the additional data collected. Also,Since reporting data is pulled from multiple sources such as ERP applications, GL Chart of Accounts, spreadsheets and external application interfaces, controls must be put in place to review the spreadsheets and other end-user applications, as well as to ensure that these applications integrate with the core financial reporting system. Another thing with the internal controls is that there will be more extensive documentation required to reflect the increased use of judgment under IFRS, such as identifying asset components and examining the substance of a lease for its classification as either a finance or operating lease.
• #19: Overall, the critical factor for a successful IFRS conversion project is to accurately identify the required changes to the IT systems and make the necessary modification to the current systemsInternal controls should also be updated to ensure the quality and reliability of information, and to avoid material weaknesses in the ICFR when transitional to IFRSIt is also important to continuously monitor and test the changes made to the systems. -Also, to ensure a smooth and efficient conversion, we need a project management team to oversee the conversion at each stage of the project. Lastly, the most critical thing for a successful conversion is to act early!This concludes the presentation. Thank you for listening.