IFRS: a shock to the system?

Convergence is complex and controversial. But for an increasing number of countries it's unavoidable; and so is the process of preparing financial systems for compliance, as Lesley Meall discovers

Global accounting standards may eventually be the norm across the world, from Uzbekistan to the US, regardless of culture, history, and local politics - and fleets of flying pigs will deliver them, hand written, in Esperanto, and everyone who reads them will be ecstatic about the contents. Back in the real world, the move towards International Financial Reporting Standards (IFRS) is a little less idyllic. Among those in some way committed to convergence, numerous approaches abound, and look likely to do so for the foreseeable future. Even companies listed in countries committed to deadlines for compliance seem largely unprepared for the scale of changes they will need to undertake, particularly on the systems side.

�Companies beginning to scope their IFRS conversions are often surprised by the volume of disclosures, and how different they are from their national GAAP,� comments Simon Gealy, a partner at PricewaterhouseCoopers, who has assisted a number of companies with the process. �They find that their current systems are not collecting the type - or the amount - of data that IFRS will require,� he says, adding: �It�s often available somewhere in the organisation, but not subject to an acceptable control environment or capable of being produced sufficiently quickly.�

ACCA, which has had international accounting standards as part of its syllabus since 1997, began reporting to both UK GAAP and international accounting standards in 2002 and has made its annual accounts available in accordance with both. ACCA�s policy director, Ross Midgley, said: �My first thought when the CEO suggested that we make an early move to IFRS accounting was �that�s all I need�. But it was an interesting exercise. The biggest challenge was accounting for the defined benefit pension scheme under three standards - SSAP 24 for the UK GAAP accounts, FRS 17 for transitional disclosures and now IAS 19 as well. But it was a good learning curve and it makes perfect strategic sense given ACCA�s global reach and status and the fact that we are not only committed to accounting convergence but examining under IFRS all over the world.�

In almost every case, IFRS will require some alteration to systems, though the actual amount and type of data required depends on national culture, individual company circumstances, and the state of existing reporting systems.

�Back office systems are impacted hardly at all,� says Dennis Keeling, chief executive of BASDA (a trade association comprising more than 350 business software developers), and where they are, software suppliers do not anticipate many problems. �We�ve been through all the published standards and identified which changes will need to take place in code or outside,� says Dave Turner, international marketing manager at Coda. �It�s a bit of a moving feast but, as we understand them, most IFRS are about reporting.�

The Enterprise Resource Planning systems that tend to be the norm among the world�s listed companies are used to prepare management accounts; then accountants use the information they�ve collected as the basis for more specialised reports. This can be done using a variety of tools such as analytics, consolidation systems, final accounts production software, financial reporting applications, and spreadsheets, and most organisations use a hotchpotch of approaches.

�Some companies have a different system for each office or part of the business,� confirms Gealy, making the changes required by IFRS difficult to mechanise. �In many cases, systems cannot easily be recalibrated to collect the new data because they are too fragmented,� he says, adding: �Companies with legacy systems from recent acquisitions, or with manual systems still operating in subsidiaries or branch offices, will have to do a lot of work to upgrade.�

In the circumstances, the process of aligning internal reporting systems designed for national standards, with external reporting systems under IFRS, looks like being one of the biggest barriers to conversion. In a recent PwC survey of European CFOs, 52% identified systems issues as a concern, compared to the problems of implementing individual standards such as those on pensions and share options (both 24%), and many are planning modifications to their management information systems to ease the move towards compliance. Where companies have already adopted international accounting standards for their consolidated financial statements, 72% have also adopted it for internal management reporting, and 60% of those that haven�t already done so plan to within the next two years.

However, time is running out for EU-listed companies that want to convert their management information systems to capture live IFRS-compliant data as the transactions take place. Although they are not required to apply the standards until the end of 2005, IFRS will affect the earliest year presented in their statutory financial statements. To comply, many of Europe�s listed national GAAP users will have to present IFRS-compliant data going back to 1 January 2004 - and a few will have to do this back to 1 January 2003. So how are they doing?

Feedback from suppliers and users in this area is mixed. It�s coloured by cultural differences, and the fact that the CFOs of most listed companies would rather go to an early grave than into print on anything that might adversely affect their share price.

On a national level, countries where listed companies have been able to adopt international accounting standards as they emerged are, understandably, more advanced. �We can see that Austria and Germany are much further ahead than most countries,� says Nick Forman, finance director with Cartesis, a supplier of financial analytic applications. More importantly, he adds: �The UK is lagging behind, badly.� It�s an observation confirmed by PwC�s survey, in which only 3% of UK CFOs felt they were prepared for IFRS.

�More is being done to educate and inform on the [European] continent,� observes John Sinclair, international product manager with ERP supplier Geac, from his base in Paris. The standards emerging from the IASB are closer to GAAP in the UK than to many other national standards in Europe, but the UK remains �very insulated from IFRS�. So much so, that many companies have yet to realise that they will need to make systems changes in preparation for IFRS, let alone start planning how to go about it.

�We haven�t had one single enquiry from any of our customers, anywhere,� asserts Gary Waylett, the UK-based managing director of Eclipse Computing, a financial solutions provider with multi-national clients in Europe, North America and in the Asia Pacific region. But, as a result of attending an IFRS course in Holland, the company recently decided to initiate an education programme in the UK, and organised its own event for customers and other software companies. Waylett says: �We got the highest response we�ve had for a mailing, ever. So people want to educate themselves.�

Cartesis and Comshare are among the financial reporting specialists that have produced white papers to help their clients plan for the conversion process, pointing up areas where software and systems will be impacted (see www.cartesis.com and www.comshare.com). Nonetheless, many UK companies are struggling to find the necessary guidance, and lack of education is a serious issue.

According to the PwC survey, CFOs see scarcity of trained people as the biggest hurdle for any company trying to prepare in time for the 2005 deadline. For some, it could become critical. �IFRS is not well-publicised in the UK,� says Phil Harris, financial controller at Time Warner Books (UK). �So it�s difficult to educate yourself on the headline issues, let alone understand what the changes will mean for your particular business, or its financial systems.�

Professional bodies are working to bring IFRS to the attention of their members, and ACCA has taught international standards to students since 1996 and has developed a dedicated section of its website to IFRS. Although the IASB is working on an exposure draft on first time application, practical help is thin on the ground. �They�ve been as helpful as they can,� says Geac�s Sinclair, �but they have no idea of the impact to systems; and with 59 countries to deal with, they�ve got lots of other things to think about.�

So do EU-listed companies. There is very little time left in which to conduct an impact analysis, educate the appropriate financial staff, and modify the necessary systems - and consultants can do only so much to help. PwC�s Gealy recommends companies ensure that conversion projects are �done with them, not to them�. Organisations need to be able to manage the ongoing work themselves: any initial implementation is just the first step on a long and winding road. �You have to grow your own experts,� he explains. �There just aren�t enough people out there with expertise in IFRS for you to be able to buy them in.� You have been warned.

Lesley Meall is a writer on business and technology issues.