US companies are facing big changes in how they handle financial reporting, with the expected adoption of new accounting rules known as the International Financial Reporting Standards, or IFRS. And while fiscal concerns generally fall into the chief financial officer's domain, the expected accounting changes will affect IT, too.
"It's a CFO problem on Day 1. On Day 2, if the CIO or IT folks aren't involved in the project, then it will be one of the things that will end up on their plate for certain," says Dwayne Cook, partner and practice leader for the Mid-Atlantic area at Tatum LLC, an executive services and consulting firm in Atlanta.
By the Numbers
"The next several years will bring a near-constant rate of accounting change," according to a report on IFRS by PricewaterhouseCoopers. Recent surveys of US finance professionals provide the following snapshot of their views about the expected US conversion to IFRS accounting rules.
* 89% say IFRS conversion is highly or somewhat likely to become mandatory in the US
* 67% say their company has designated a person or team to monitor or focus on IFRS.
* 80% are positioning their companies to address IFRS.
Base: 245 US finance executives. Source: Deloitte LLP, July 2009
* 18% consider IFRS conversion a high priority. Meanwhile, 35% consider it a moderate priority, and 44% consider it a low priority or not a priority at all.
* 41% consider the overall pace of IFRS conversion in the US to be "just right," while 18% consider it too slow and 26% consider it too fast.
Base: 104 senior executives in large, US-based multinational companies Source: PricewaterhouseCoopers LLP, October 2009
The accounting overhaul stems from the expected switch from the long-standing US Generally Accepted Accounting Principles (GAAP) to the global IFRS model. Make no mistake: The switch to IFRS is complex. It will require more than just some tinkering to your company's financial software package. The adoption of IFRS will affect systems and processes throughout your organisation, and preparing for it could take several years.
"You have to be doing the planning right now and find out where there's going to be an impact," says Jane Fedorowicz, a professor of accounting and information systems at Bentley University in Waltham, Mass.
The US Securities and Exchange Commission has set preliminary dates for the conversion, saying that US publicly traded companies will need to use IFRS starting as early as 2014.
Because many countries have already adopted IFRS or plan to do so in the next few years, businesses with global operations will need to comply sooner. This includes US firms with overseas offices, as well as US businesses owned by foreign companies or traded on foreign stock exchanges. Indeed, some US companies in those categories have already adopted the new standards.
IFRS at a Glance
* Goal: The goal of the movement toward International Financial Reporting Standards is to have a single set of global accounting rules.
* Convergence: US and international accounting boards have numerous "convergence" efforts under way to reduce the differences between US Generally Accepted Accounting Principles and IFRS, such as their differing treatment of revenue recognition.
* The gap: The greatest difference between IFRS and US GAAP is that IFRS provides much less detail. The IFRS, which sets out principles, is about 2,500 pages long, whereas the more rules-based US GAAP is about 17,000 pages.
* Timeline: The SEC is expected to decide in 2011 whether to mandate the adoption of IFRS rules by US companies, which would have several years to convert. According to the SEC's current timeline, the largest companies would start IFRS reporting in 2014, and all public companies would switch by 2016.
* Status: Over 100 countries have already adopted IFRS, and that number will increase to more than 150 in 2011. Brazil, Canada and South Korea are expected to adopt IFRS in 2011, with Mexico on board in 2012.
Sources: American Institute of Certified Public Accountants; PricewaterhouseCoopers LLP; CFO.com; webCPA.com
However, the SEC might not adopt IFRS as it stands today. Rather, it could adjust the standards to move them closer to the US GAAP model, Cook says. This has left everyone guessing about what the standards might look like when they're adopted in the US
Moreover, public companies aren't the only ones that need to focus on IFRS. Private companies that are thinking about going public someday or that get sold to a public company might opt to use IFRS too, Cook says. Private companies might also find that banks and private investors will push for statements based on IFRS so they only have to deal with one format for financial statements rather than different ones for public and private companies.
"IFRS looms in the horizon for most folks," says Cook, who has worked with companies around the world as they've converted to IFRS.
As the US moves forward with the expected IFRS adoption, companies are beginning to assess what it means for them and their systems. Cook says companies will have to change the way they record and report financial data because IFRS and US GAAP rules differ regarding revenue recognition, compensation, fixed assets and inventory, for example.
Ken Gabriel, a Chicago-based partner in the performance and technology division of KPMG LLP, says he performed an accounting assessment with one company and found 103 differences between US GAAP and IFRS in how data was recorded. Each of those differences represents a change that will be needed in the IT systems.
"IFRS is going to require different, more detailed or more frequent data. You're going to have to grab data from new places or new data from existing places, and you need the systems in place to accommodate it. So IT has to think about how to collect it and the business process responsible for collecting that data," Fedorowicz says.
Consider, for example, that the finance department's applications might rely on inventory figures that are coming from, say, a manufacturing application. Fedorowicz says that that manufacturing system, as well as all other applications that provide accounting and financial data, will need to conform to IFRS.
"A lot of people say [IFRS will affect] just the financial reporting ledger. They think the financial people will just be able to figure it out. But you won't be able to get the needed information from the general ledger," says Terri McClements, a partner and US IFRS advisory leader at PricewaterhouseCoopers LLP.
Although systems throughout the organisation will be affected by the conversion to IFRS, IT leaders seem slow to take up this project. McClements says she moderated a webcast in April 2009 and asked participants how many were already working with their IT leaders on this issue. Only 16% of the 2,000 participants said they were.
"IT has not engaged as much as it potentially should be," McClements says. "So our advice to an IT organisation is get engaged [and] ask questions of the CFO organisation as to where are we and where is the company in terms of assessing the impact."
Gabriel suggests that IFRS needs to be built into the IT organisation's overall road map for the future. For example, if you're planning an upgrade to a system with a worldwide rollout starting in 2011, you need to make sure the new system accommodates IFRS from the start. Otherwise, you'll be handling another upgrade quite soon.
5 Questions IT Must Ask
Terri McClements, a partner and US IFRS advisory leader at PricewaterhouseCoopers, advises CIOs to work with the CFO's organisation to build a team to handle the conversion to IFRS. The IT team members should ask the following questions:
1. Can our current software support IFRS?
2. Can current IT systems support both GAAP and IFRS, in case they both need to be used during the transition?
3. Are our software vendors planning updates to handle IFRS?
4. Are we planning any major software upgrades in the next few years? If so, how will the new systems handle IFRS?
5. Would this be a good time to replace some legacy systems?
In a 2008 report titled "Effects of IFRS on Information Systems," KMPG said that IT expenses generally account for more than 50% of the cost of an IFRS conversion.
"Depending on the solution and where you want to address this, it could cost in the millions of dollars," Gabriel says. And that will need to be budgeted well in advance, which is why it's important to start this assessment sooner rather than later.
"IT needs to know [what's required] because they have to put dollars into their budget to accommodate changes," Gabriel adds. He acknowledges that the conversion is a moving target, with the final timeline and the standards themselves still not set. "But you can still understand what the significant differences will be for your company and what the system impact will be for your company."
The consequences for not being prepared could be pretty severe, Cook says. If you're not ready on time, your finance department might be forced to convert figures from GAAP to IFRS manually -- a time-consuming and costly endeavour. Or you might have to perform patch fixes to your system, which could lead to costly and embarrassing errors.
"I've seen it done in other countries as an afterthought," Cook says, "and companies spend a lot more time and a lot more money if they don't do the proper planning."
Pratt is a Computerworld contributing writer. Contact her at [email protected]