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New Rules for Performance Management, Part 3

The Potential Technology Impact of IFRS

Published: November 12, 2008

This article, the conclusion of a three-part series, examines specific features to look for when selecting a business performance management financial consolidation and reporting solution.

In Part 1 and Part 2 of this series, we discussed the coming accounting changes related to the International Financial Reporting Standards (IFRS) and their potential impact on business performance management (BPM) technology. It is clear that the companies that will be in the best position for a smooth transition to IFRS are those that have implemented a BPM financial consolidation system company-wide. Since there are still many companies that have not implemented that aspect of BPM, we will use this final article in the series to outline how to go about addressing this need.

There are two main challenges when looking at a financial consolidation system.

First, the knowledge regarding what is involved and what is required is scarce in most companies. Unlike budgeting, which typically involves many people throughout the company, financial consolidation is usually the focus of a small group of people in the finance department. While there may be many consumers of the reports that come out of the system, few people are aware of what went into getting to that point.

The other main challenge is that there are few vendors that truly understand, and therefore deliver, financial consolidation systems. Many vendors will claim to provide consolidation capabilities, but most simply mean that their systems can add things up. While this fits the description of consolidation found in a dictionary, it is not true financial consolidation by any means.

A financial consolidation system needs to be able to handle a number of specific tasks while it is “adding things up.” It needs to allow for the creation of consolidating journal entries. Separate from journal entries made at the transactional level, these entries relate specifically to adjustments that need to be made as part of the consolidation process. The system needs to be able to execute consolidation logic. These are calculations and allocations that can only be performed during consolidation and are critical in handling the move to IFRS. For example, depending on the consolidation path chosen, certain automatic reclassifications of the data may need to take place during this roll-up process.

Also, there are calculations that need to be performed on consolidated data only. If you did these calculations on base-level data and added up the calculated results, you would get the wrong answer. Most financial ratios fall into this category.

Currency conversion is an important consolidation capability. The system needs to be able to automatically translate base-level data from local currency to the currency used for management reporting. Usually it needs to create an additional base-level entity for each local currency unit to store the data in multiple currencies.

Intercompany eliminations are another complex area of consolidations. This is where companies eliminate transactions between their own business units.  The system needs to allow for this special type of data entry. Users need to be able to enter a company name along with an amount when entering intercompany transactions. The system then needs to be able to automatically match, or reconcile, this data. That is, if company A says they sold $100 worth of product to company B, company B needs to have entered an equivalent purchase amount related to company A. The consolidation system needs to validate that there are matching transactions, generate automatic eliminations (to remove both sides of the transaction from the totals), produce a matching report and highlight any mismatches. This becomes even more complex if the transacting entities have different local currencies.

Some other key capabilities include partial, date-related and alternate roll-ups.

Let’s say that your company owns 50% of another company. While that company may enter its full results into the system, during consolidation you only want to pick up 50% of that data. This capability can also be used if you have a cost center whose expenses need to be shared amongst several revenue groups. During consolidation, they can each roll up an equal percent of the base-level cost data. If expenses are allocated based on a formula (such as revenue contribution), then you would need to use consolidation logic instead. Acquisition and disposition dates are useful for running consolidations at different points in time. For example, you may have a full year of data for a recently acquired company. However, you should only consolidate them in starting with the month you acquired them. If someone needs to re-run a prior period consolidation (financial restatements), the system should know not to include them prior to the date of acquisition. Alternate roll-ups are very important. Base-level data is commonly rolled up in a management reporting path and a legal reporting path. For IFRS in particular, this will be critical to be able to share the same data for simultaneous U.S. GAAP and IFRS reporting.

A couple of other features that are nice to have are workflow and impacted consolidations.

Workflow, in this case, is simply a way to track which data is in. Whether the data is manually entered or fed in from a transactional system, you need to know that it’s in and ready to be consolidated.

Impacted consolidations grow in importance with the size and complexity of your business. If you have hundreds or thousands of entities to roll up for many line items, with multiple roll-up paths and numerous calculations, the consolidation process can take quite a bit of time. Suppose at the last minute, after you have already consolidated, someone needs to make an adjustment to one base-level piece of data. Without the impacted consolidation feature, you would have to re-run the entire consolidation process. With that feature, the system would figure out, based on where the base data was modified, just which paths and entities need to be reconsolidated, greatly reducing the time required. For example, if you changed data for Chicago, the system may need to reconsolidate your Midwest Region, Total U.S., and Total Company. Europe and Asia, in this example, would not need to be re-run. You, of course, could just selectively reconsolidate parts of the organization on your own, but sometimes it’s quite complex to figure out and certainly risky.

When evaluating consolidation vendors, particularly as it relates to IFRS, there are certain traits to look for. First, consolidation probably won’t be the only element of BPM you implement over time. Make sure the vendor offers most of the other capabilities that are part of your long-term BPM road map. Most consolidation products being sold today have the functionality to support both current U.S. GAAP as well as IFRS – be sure to confirm this is the case with your chosen product. In addition, you want to make sure that the vendor’s staff has experience in helping companies make the move to IFRS. Vendors with a large installed base in countries that have already moved to IFRS have an edge over primarily U.S.-focused vendors.

While IFRS appears to be quite a way off for U.S. companies (although Canada’s target transition date is much closer), there are several reasons to start the technology transition process now. Selecting and implementing a new BPM system is not a quick and easy process. You want to be able to take the time to get it right to avoid a last-minute rush where you may potentially be forced to settle and take shortcuts. In addition, your executives will want to become comfortable with the new system prior to the new accounting rules being implemented. If you are going to make the investment in time and resources anyway, why not do it sooner rather than later so you can start enjoying all the other benefits of BPM today?