Welcome to the IFRS User Community on the SAP Community Network. We hope this becomes a place where community members share their financial, technology and business perspectives as IFRS evolves. This is the first of many regular blogs that Deloitte will contribute here on the crucial topic of International Financial Reporting Standards. In this blog: Technology and IFRS – The Big Payoff. IFRS isn’t just something for the accountants to worry about. It requires a much bigger shift in technology than you might think.
Deloitte is committed to providing the latest information and insights to the SAP IFRS Community. We will post materials and resources on IFRS exploring the many aspects of this issue.
For many U.S. companies, an early transition to IFRS has appeal. Simplified financial reporting, reduced operating costs, greater transparency and comparability for investors, and improved access to capital are just a few of its benefits. Equally important, some companies see their competitors already embracing IFRS. Find out why momentum toward IFRS adoption has been steadily building, even before the accounting standards are required in “Buckle Up – On The Road to IFRS“.
Technology and IFRS: The big payoff
The global migration to International Financial Reporting Standards (IFRS) is one of the biggest changes to hit the accounting landscape in years. But IFRS isn’t just something for the accountants to worry about. It requires a much bigger shift in technology than you might think. If you’re not getting ready now, you could be in for a lot of headaches and late nights down the road. Many chief financial officers (CFOs) view IFRS as a collection of technical accounting changes. Many also assume that it’s easy to implement these changes with existing technology – just gather the accountants in a room, hammer out the differences between U.S. Generally Accepted Accounting Principles (GAAP) and IFRS, and let the tech guys make a few adjustments. Or so the thinking goes.
But moving to IFRS requires a lot more than tweaking a few spreadsheet formulas. For one thing, existing transactional systems don’t always capture the data needed for the new accounting treatment under IFRS. Take revenue recognition. Technology companies often sell hardware and software in a single bundle. Under IFRS, this pricing should be unbundled. This requires that a series of decisions be made that require both technology and finance professionals to be involved.
Research and development is another case in point. Under GAAP, companies can expense software development costs. Under IFRS, research can be expensed while development is often capitalized. This requires changing the way costs are captured and classified.
Prepare to get your hands dirty
Changes like these may seem trivial, but often aren’t for the technology involved. For companies with a lot of legacy systems, changes in transaction accounts usually flow straight through middleware to account ledgers. Making changes can be a nightmare because the data flows are complex and have developed over years. And changes can require scarce or disappearing skills. You may think that the major software vendors have solutions ready. That they have developed these solutions over years of dealing with multinational environments. So, you may be saying, “Great; we can just buy the software. Problem solved.”
Not so fast. These solutions tend to be based on the latest versions of Enterprise Resource Planning (ERP) software. So if you aren’t running the latest version, you may want to upgrade first – a project that can take up to nine months – before you can start to tackle IFRS. And, if IFRS becomes a requirement, you may find you have a lot less time than you need for implementation. That scenario doesn’t apply to the United States just yet, but it has happened elsewhere.
One company was in the midst of a three-year global ERP rollout when Chilean regulators announced that IFRS would be required in six months. The company had to shift all of its ERP resources to get Latin America up to speed. A similar situation happened with a big manufacturing company in Eastern Europe.
Lesson: If you have any reason to believe that you might need IFRS reporting in a particular country, get the finance people talking to the tech people. Now. The good news is that getting some experience with the process in a smaller country or region can be invaluable when it comes to implementing IFRS on a larger scale. Pick a country where you have to move fast – where there is a clear deadline looming – and focus your team on that country. Then move your implementation process to the next country in line.
Thinking about technology early in the process is critical to achieving standardization, efficiency and, most important, sustainability in using IFRS. The first step simply is to consider the impact IFRS will have on the entire organization – not just the accountants. Make sure you bring in functions like human resources and procurement that may need to supply new categories of information. This may seem like a lot of effort for something that isn’t 100 percent certain in the United States yet. But the move to IFRS is inevitable. And one way or another, these conversations should happen. When CFOs reach out to other teams for input and perspective, the lightbulb should come on.
Going for the big payoff
CFOs also have a choice to make: View IFRS as a chore, or view it as an opportunity to streamline and enhance business practices. For example, IFRS can be a great reason to start thinking about shared services. Instead of keeping country accounting at the local level, you could ultimately consolidate it in one place to deal with the new global standards. Finally, as accounting treatments and reporting values change, organizations also need to marry planning, budgeting and forecasting process to reporting. If you don’t create tight links with your systems, the planning process won’t be aligned with reporting. That could cause some nasty surprises later. IFRS offers a big opportunity here to transform your organization’s processes, technology and governance in addition to its financial reporting practices. The CFO is in an ideal position to lead the effort.
This blog was excerpted from “Breathing Lessons, Issue 22” Copyright © 2009 Deloitte LLP. All rights reserved.