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New Rules for Performance Management, Part 2

The Potential Technology Impact of IFRS

Published: October 22, 2008

This article, Part 2 of a three-part series, describes how and where a business performance management system can help address the new IFRS reporting requirements.

Last month in Part 1 of this three-part series on IFRS (International Financial Reporting Standards), we outlined the impact of this important transition at a fairly high level. Our analysis has concluded that a solid business performance management (BPM) system implemented company-wide could ease the transition to IFRS. This month we are going to delve into some of the details to help you better understand how and where BPM could help. If you already have a BPM system in place, these specifics should help you determine if your particular performance system is up to the task to migrate to address these new reporting requirements.

Multiple Reporting Formats

Let’s start with perhaps the most difficult transition requirement. For a period of time, companies will need to report in both U.S. GAAP and IFRS formats. Beyond the period that is required, some executives may still choose to continue this for their own comfort. What does this mean for your BPM system? Well, as previously discussed, IFRS will require some new detail accounts, reclassifications of existing accounts, consolidation of additional entities, different calculations, and alternate report formats and analysis. How can this be accomplished without running two systems in parallel?

One approach would be to create alternate roll-ups – one for IFRS and one for U.S. GAAP, each with its own top-level entity to store the consolidated results. Ideally, the base level data would be captured once with enough detail to support either accounting method. Then, during the consolidation and roll-up process, consolidation logic could be applied uniquely in each roll-up path. Data could be moved from one account to another when appropriate, calculations could be performed specific to the accounting method being rolled-up, detail could be left as is or summed up as required by the particular method and so on. Upon completion of this, you would have a Total Company-IFRS and Total Company-GAAP consolidated entity. You would be able to write reports formatted as required for each approach. Those reports would display data from the entity that corresponds to the accounting method of the report. One final step would be to create a reconciliation report that pulls data from both top level entities and highlights the variances. If both IFRS and GAAP reporting is required at lower levels in the hierarchy, you would be able to push this approach down and create, for example, a Region 1 – IFRS roll-up entity and Region 1 – GAAP roll-up entity.

An alternative would be simply to do these calculations, re-classifications, etc. in the report itself. In this approach, the data and logic of the system is left alone for the time being and new reports are written that manipulate the data to correspond to IFRS requirements. The issue here is one of performance and maintenance. If a line item that has to be re-calculated for IFRS appears in multiple reports, then that calculation will be done multiple times instead of once during the alternate roll-up approach. In addition, since it exists in multiple places if there is a modification, it has to be done in every report, not just in one set of consolidation logic.

Calculation Changes, Added Detail, Expanded Consolidations

A potentially simple change required by IFRS relates to the way the cost of inventory is determined. Under U.S. GAAP, companies can use LIFO (last in, first out) or FIFO (first in, first out) methodologies. Under IFRS, the LIFO approach is not permitted. Without getting any deeper into accounting details, the result of this is that if your company uses the LIFO approach, then you need to update the calculation. If you are using a custom-coded system or a collection of spreadsheets, then this simple change can become a not-so-simple task. If your BPM system has end-user modifiable calculation logic, then the business people in finance can change the logic themselves. If your system has logic that is written in a programming language vs. a more user-oriented method, perhaps IT or the product’s consultants will have to help with this.

The Property, Plant, and Equipment (PP&E) section of the chart of accounts will require more detail under IFRS. This is an area of the chart that is already fairly dense because for each component of PP&E today, we track details related to additions, reductions and related depreciation. What was a single PP&E category under U.S. GAAP will multiply under IFRS. For example, “buildings” is a single element of PP&E today. Under IFRS, it has to be broken out into its major components such as “elevators,” “heating systems,” and so on. Cost and depreciation will need to be tracked for both tax and financial reporting purposes. From a systems perspective, this creates added complexity and the need for expansion of the chart of accounts. If you are running up against account limits (more common in homegrown or older BPM systems), this could present a problem.

Some companies may need to consolidate in entities that are kept off the balance sheet today. Under IFRS, the requirement to consolidate an entity is based on the financial and operating control the parent company has. This will probably result in more companies having to be consolidated. This is an area where your BPM system can shine. Adding in a new consolidating entity should be a piece of cake.

Multidimensional Reporting and Analysis

IFRS will fully leverage the multidimensional capability found in most BPM systems today that have  OLAP or OLAP-like functionality. Segment reporting by product and by geography, for example, will be part of the requirements if the data is significant enough. In addition, the P&L and balance sheet will need to be viewed by category: operating, investing, financing. It’s not obvious to me how all of this could be reasonably accomplished without a multidimensional engine. Of course, you could always create a cumbersome matrix of sub-accounts and sub-entities to segment the data and a series of specialized reports to do the analysis. However, I think for most companies, the need to move to IFRS will be the final straw that gets them – at long last – to make the move to company-wide BPM.

Next month in the third and final installment of this IFRS impact series, we will examine specific features to look for when selecting a BPM financial consolidation and reporting solution.

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