IFRS (International Financial Reporting Standards) will be adopted by the U.S. over the next few years. The timing varies based on company size and other factors. However, no matter when a company chooses to or is required to make the transition, there are technology aspects that should be addressed sooner rather than later.

Today most U.S. companies follow a set of accounting rules and guidelines collectively referred to as U.S. GAAP. IFRS is a similar collection of rules and guidelines, but one that is used more widely across the world, particularly in Europe. Eventually, moving to this more global standard should simplify things as they relate to the financial processes and systems at many of the large multinationals that today have to handle multiple local reporting requirements. Other companies will benefit as well since international investors will be better able to understand their financials and compare them on a like basis with other potential investments around the world. In addition, for some companies (currently estimated to be about one-third), these new accounting rules will actually result in an improved bottom line compared to the same data presented according to U.S. GAAP rules.

How technology will help or hinder this transition is a function of where your company is today as it relates to business performance management (BPM) and, more specifically, the financial consolidation and reporting processes within financial performance management. There are essentially four approaches companies have taken when it comes to legal and management financial reporting. First, there are companies using a homegrown system with many of the accounting rules hardcoded by IT into the programmed solution. Then, there are those that rely almost entirely on spreadsheets to meet their financial reporting requirements. A third group is taking advantage of packaged BPM solutions to address their needs in this area, but not on a standard platform company-wide. Different divisions may use different products, and corporate may have yet another solution it uses to pull it all together. Lastly, and probably in the minority, are those companies that have adopted a single packaged BPM financial consolidation and reporting system across the entire organization. Although there has been tremendous growth in the implementation of business performance management over the last several years, the focus has been on budgeting/planning and performance dashboards, not necessarily integrated with a financial consolidation system.

Now let’s take a look at the types of system changes the new rules will require. Next month, we’ll delve into some of the rules in detail, but for now, we’ll look at the changes in aggregate. How difficult it will be to make these changes is a function of which of the four camps described previously your company falls into. In some areas, more detail will be required. This translates into being able to easily add more accounts or sub-accounts to the chart of accounts that will then roll into the total. In addition, if you already have a very large chart of accounts, some of these additions could cause you to hit up against account limits. Some line items will need to be reclassified. That is, they’ll need to be moved out of their current placement on reports as well as totals and subtotals and moved to a new area. Multidimensional views of significant data will be required under IFRS. Your system will most likely need OLAP or OLAP-like capabilities to handle this. Certain rules may require you to set up additional entities in your organizational hierarchy to facilitate the consolidation process. How some line items are calculated will differ from U.S. GAAP, and you will need to go in and modify the underlying calculation logic in the system to handle this. Perhaps the most challenging aspect for some companies will be the requirement to produce and reconcile results under both IFRS and U.S. GAAP over a predetermined period of time. How you handle this is a function of your technology solution. Next month, we’ll examine what we believe to be the ideal approach to this challenge.

As you’ve probably come to realize by now, the companies that will have it the easiest are those with an enterprise-wide BPM system. For them, adding accounts, entities and revising calculations is a relatively simple matter that they only have to do in one place. Most BPM systems also contain a multidimensional analysis capability. Other companies may have to make changes to multiple systems or mountains of spreadsheets. This means more work, and more opportunity for errors. That’s still better than the group with homegrown systems that probably needs to make changes to the underlying code (unless almost everything was designed to be table-driven). If the system is many years old, it could also be a challenge to track down the original programmers and related documentation.

There is some similarity here to the “Year 2000 fix” in that many systems will need to be changed by a certain date to accommodate these new requirements. There are two important differences though that could make this a more widespread challenge. While some programmers may have had the foresight to code their systems so that they were able to handle Year 2000 without requiring any changes, there are no systems in the U.S. today coded to support IFRS without some changes. All financial systems will need to be modified. Now, for some, the changes may only be in some configuration and logic tables and the creation of new reports. For others, the work required could be more extensive. The other difference is that I believe the move to IFRS will drive significant purchases of new software, more so than Y2K did. Having to focus significant attention and resources on the accounting and process challenges being brought on by the move to IFRS, more companies will look to move to a unified BPM solution to at least streamline that aspect of the transition.

Next month, we will look at some of the specific requirements of IFRS and the potential challenges and solutions.

Recent articles by Craig Schiff

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