Is IT ready for IFRS?

As January 1, 2011 approaches, public companies need to consider the full impact of conversion on their IT systems

By Doug Steele

*This is an expanded version of a summary originally published in the January-February 2010 issue of CAmagazine.

Publicly accountable businesses in Canada now have their sights set on January 1, 2011, as the formal conversion date from GAAP to international financial reporting standards (IFRS). However, in addition to reporting under IFRS for the 2011 fiscal year, companies with a December year-end need to issue comparative financial statements for the preceding year under IFRS. This means many will need an IFRS-compliant opening balance sheet starting as early as this month -- January 2010.

As companies implement their strategies, they often fail to consider the full impact of IFRS conversion on their IT systems. This can result in significant compliance challenges. To avoid underestimating the work effort, advance planning is essential.

Beyond year one
In their haste to meet the 2011 deadline, many companies are focusing their IFRS transition strategies on identifying the risks, and setting timelines, for adopting necessary financial statement changes. But this approach fails to take into account the broader implications of conversion. Specifically, as organizations begin to implement new processes and potentially new systems to accommodate international standards, these changes trickle down to their staff responsibilities, internal controls and enterprise systems.

Companies that have engaged in system migrations or modifications often discover these projects entail a corresponding change in the way information feeds into their systems. As they convert to IFRS, they must consider the IT implications such as:

New data requirements. Compared to Canadian GAAP, IFRS frequently mandates more detailed disclosures. To capture a greater level of detail, organizations need IT systems capable of tracking more granular information across a range of new data fields.
Data storage and retention. Despite transitioning to new accounting standards, companies still need access to their legacy financial systems to comply with data retention requirements. This raises questions around their ability to effectively store and retrieve mass amounts of older financial data. It also has implications around the retrieval of data for comparative purposes, benchmarking and other business decisions that involve comparing data prepared under Canadian GAAP vs. IFRS.
Application level controls. Any migration to a new financial reporting system will alter the way in which a company processes transactions. In addition to mandating revised business process controls, this shift will result in the need to amend the general application environment to ensure security, authentication and access control mechanisms remain sufficiently robust to meet regulatory requirements.
Implications on business intelligence and decision systems. Another area organizations must consider is the way in which data is shared across their enterprise-wide operational systems. As financial data input evolves to comply with IFRS, the information that feeds into operational systems may shift as well. Companies may find that they have to amend key inputs into the systems responsible for such things as forecasting and budgeting, performance management, incentive-based compensation, decision-support tools or tax-related reporting. Similarly, companies that electronically file compliance forms with regulators may need to amend their reporting processes to ensure they continue to provide the information required.

Assessing the options
Given the wide range of IT implications presented by IFRS, accountants and other financial professionals must understand the magnitude of the changes companies may face upon their conversion. Only in this way can they determine the best course of action for their own — or their clients’ — organizations.

For instance, companies that do not need to make significant changes upon converting to IFRS may choose to simply tweak their processes rather than engage in a wholesale system modification. In this case, it may make sense to simply use existing systems to process IFRS financial statements, and manually journal any differences at the end of the reporting period.

That said, this type of approach can be unduly labour intensive, error prone and tedious. Given these detractions, this approach generally makes sense only for companies with very straightforward accounting requirements.

Other companies may prefer to modify their existing programs to enable more granular information capture. They can do this by either modifying their systems internally or by upgrading their applications to the most recent versions, which are likely to be more compliant with IFRS. Organizations considering this course of action should ensure their software vendors have in fact modified their applications to accommodate their specific IFRS requirements.

If tweaking existing systems or system modifications won’t bring a company into compliance, they may have to consider the need to implement a new financial reporting system. Although this will not be necessary in many cases, accountants and other financial advisers can only help companies identify the right solution for their organization by understanding the IT ramifications of the conversion in advance.

Avoiding common traps
Each company’s conversion to IFRS will require unique effort. However, advance planning can help avert common conversion pitfalls. To remain on track throughout their conversion, organizations should take steps to:

Conduct a detailed analysis of the impacts of IFRS on their IT systems (either internally or with third-party advisers) and document the differences between Canadian GAAP and IFRS as they pertain to the company, ranking their IT impact from low to high.
Carefully assess their software choices by getting unbiased advice about the various software options available.
Bolster their project management capabilities by engaging experienced project managers capable of ensuring each initiative is completed on time, on budget and according to specification.
Model international best practices by soliciting input from other companies in their industry that have already adopted IFRS in their own countries.

As the IFRS conversion deadline approaches, it’s important to safeguard your—or your clients’—company from common conversion errors and ensure you’re ready to hit the ground running in a post-conversion environment. The time to start planning is now.

For more information, visit www.GrantThornton.ca.

Doug Steele, CA, CISA, is a partner with Grant Thornton LLP. He is based in Vancouver