Sundays were never too hectic for Reema Seth till the last month. For this senior IT manager at one of the leading tin manufacturers, the erstwhile lazy weekend afternoons have all of a sudden been packed with a series of tutorial classes and practical sessions.

She never thought that the last year’s announcement made by Institute of Chartered Accountants of India (ICAI), to make International Financial Regulatory Standards (IFRS) mandatory for Indian organisations from FY 2011, will compel IT managers like her to deal with alienated terms—asset, liability, equity, revenue and expense, at such fundamental level.

Reema was recently given the additional responsibility of leading the change management team set up to evaluate the technical complexities in transiting from Generally Accepted Accounting Principles (GAAP) to IFRS.

The context: India has decided to join the pool of 150 countries that are determined to embrace IFRS standards in 2011. Though the decision for a common accounting language will certainly relieve enterprises from filing multiple financial reports and will help them compete better, the process of transformation will see organisations making massive changes in their books and information systems.

Until now, many organisations have had separate procedures for tax, statutory (US and Canadian GAAP), and management reporting. The adoption of IFRS gives them the chance to more closely synchronise these areas.

A structural exercise
The conversion from Indian GAAP to IFRS requires significant efforts. The consequences are far wider than financial reporting issues and extend to various significant business and regulatory matters.

These include compliance with debt covenants, structuring of ESOP schemes, training of employees, modification of IT systems and tax planning, change in new data requirements, charts of accounts, reconfiguration, interface and mapping, consolidation of entities, reporting packs, financial reporting tools and workability of new operating systems compliant for IFRS processes.

“The IT implications of conversion to IFRS can be extremely challenging because of the different information systems present within an organisation,” says Abhishek Asthana, Director, Piron Operations

“The problem is further complicated by the fact that the country has very limited number of IT professionals with thorough understanding of IFRS, and the ability to interpret and translate IFRS requirements into IT changes,” he adds.

According to a recent survey commissioned by Resources Global Professionals India, only 27% of blue chip foreign and Indian multinational corporations said they were prepared for the conversion to IFRS from the current Indian GAAP.

Moreover, nearly 60% reported that critical milestones and success factors for a clean and cost-effective conversion have either been overlooked or are not properly understood.

It is critical to note that IFRS, by no means is just a reporting issue. For any organisation or IT manager, understanding the significance of the overall impact the standard will have on the organisation, its philosophy, and operational IT systems at both corporate and subsidiary levels is very important.

“There are lots of disclosure requirements which are coming in for the first time. Some new fields may have to be introduced. Getting the data mining right could be very challenging,” says Sunder Iyer, Partner, PwC

“For an IT manager, it is going to be also about change management. Earlier, they were focusing on a particular set of accounting to get information, but now they will have to modify their systems. The real challenge with IFRS will be to ascertain the information that was either never captured or only partially captured,” he adds.

The new accounting standard should be seen as an opportunity to institute effective changes to the internal operations and decision-making systems of an organisation.

Shaleen Khetarpaul, Sr Manager, IT, Reliance Infrastructure agrees, “The challenge is much bigger than what it appears. Everything from accounting policies and procedures, financial reporting and disclosures to IT systems and the processes used to accumulate and report financial report information will be affected.”

“At the end of the day, training both finance and non-finance staff on changes to policies, procedures, and contractual and legal obligations will make key differences in overall success of the transformation,” Khetarpaul comments.

However, for Arun Dixit, CEO, Udyog Software, things are not that difficult as they appear to be. According to him, it is only a presentation layer—so it will take minimal time and investment. 

“Indian CIOs and IT managers are smartest. In India, one has to address taxation and various regulatory needs by way of a number of reports over specific intervals,” Dixit elaborates.
“They have also implemented a lot of complicated processes and procedures in global ERPs.  It is not a big challenge for this community at all,” he points out.

Making transition strategies
IFRS is ‘principles-based’ and not ‘prescriptive-based’. Therefore, a comprehensive review of regulated reports is needed to assess the differences between current reporting data and processes and the new data and processes that will be required under IFRS. Both the scope and the nature of the required information will change, as will the means by which it is recorded and managed.

Therefore, it is critical to evaluate the potential impact of the IFRS transition process on your organisation and formulate a realistic IFRS transition strategy. IT Next recommends taking a close look at some of the best practices that will help you to control costs, manage the scope of implementation and create a smooth transition plan.

First, it is extremely important to verify that your existing financial consolidation system should support the transition. It should be able to support parallel reporting, top side adjustments, rules-based environment, disclosures and commentary, and a flexible and powerful reporting and XBRL publishing.
Second, if you are evaluating a new financial consolidation application, the evaluation criteria should stress upon software vendors that provide pre-configured IFRS complaint content in order to accelerate your IFRS implementation.  

The third and most important consideration is to improve source systems. Integration of the financial consolidation system as the underlying transactional general ledger (GL) systems will provide reliability, flexibility and ability to fast adapt to changes.

“If it is not realistically possible to use a single-instance enterprise-wide ERP or GL system, your IFRS implementation strategy should consider avoiding flat files and manual data entry as much as possible. This way your IFRS transition will progress more smoothly,” suggests Simon Dale, Senior Vice President, SAP Asia-Pacific.

“Therefore, in order to cover the wide array of issues involved in adopting IFRS, companies will need an interdisciplinary team. The broad nature of the project requires the support and participation of management at the highest level,” Dale points out.

“The major issue comes when organisations fail to do the impact analysis well ahead of the actual implementation date,” says Gaurav Kohli, IT consultant, Xebia Architects India. According to him,  it is advisable for the IT manager and the organisation to assess and evaluate if the existing technology or ERP systems are capable enough to support the new changes.

“An IT manager should gear up to address issues like additional quantitative and qualitative disclosures required under IFRS. He will also need to keep multiple sets of books during the transition period to resolve complexities better,” advises Zoeb Adenwala, CIO, Essel Propack.

The implementation team should include, at a minimum, management accountants, tax accountants, external auditors, IT managers and IT staff. Since implementation of IFRS is likely to affect many aspects of the business, several departments outside financial accounting should be involved as well.

7 steps to successful transition

• Wake up and start the process, the earlier you start the better
• Manage the transition in project mode
• Allocate and mobilise adequate resources
• Map the IFRS change impact for all transactions
• Determine the approach for parallel running multi gap reporting
• Initiate training and testing of changes
• Identify the sources of additional information as required under IFRS

The impact on Information Systems

New data requirements: New accounting disclosures and recognition requirements may result in more detailed information, new types of data, and new fields. Hence, information may need to be calculated on a different basis.
Action: Modify the system to capture new or changed data

Changes to the chart of accounts: There will almost always be a change to the chart of accounts due to reclassifications and additional reporting criteria.
Action: Create new accounts and delete accounts that are no longer required.

Reconfiguration of existing systems: Existing systems may have built-in capabilities for specific IFRS changes, particularly the larger enterprise resource planning (ERP) systems and high-end general ledger packages.
Action: Reconfigure existing software to enable accounting under IFRS.

Modification to existing systems: New reports and calculations are required to accommodate IFRS. Spreadsheets and models used by management as an integral part of the financial reporting process should be included when considering the required systems modifications.
Action: Make amendments such as new or changed calculations, new or changed reports, and new models.

New systems interface and mapping changes: As previous financial reporting standards did not require the use of a system for IFRS reporting, certain new software will be required. The interfaces may be affected by modifications to existing systems, the need to collect new data, the timing and frequency of data transfer requirements.
Action: Evaluate and carry out the new software implementation.

Consolidation of entities: Under IFRS, there will be potential changes to the number and types of entities that need to be included under the head ‘consolidated financial statements.’ Also, the application of the concept of ‘control’ may be different under IFRS.
Action: Update consolidation systems/models to account for changes in consolidated entities.

Reporting packages: Reporting packages may need to be modified to gather additional disclosures in the information from branches or subsidiaries operating on a standard general ledger package or to collect information from subsidiaries that use different financial accounting packages.
Action: Modify reporting packages and the accounting systems used by subsidiaries and branches to provide financial information.

Financial reporting tools: Reporting tools can be used to perform the consolidation and the financial statements based on data transferred from the general ledger or prepare only the financial statements based on receipt of consolidated information from the general ledger.
Action: Modify reporting tools used by subsidiaries and branches to provide financial information.

Source: KPMG (IFRS for technology companies: Closing the GAAP?)