IFRS: beyond mere IT compliance

Upgrading systems to accommodate international accounting standards is a costly, complex and time-consuming process. But, as Lesley Meall discovers, once the necessary changes have been made, the business benefits extend beyond IFRS compliance

Once upon a time, a famous fizzy drinks company devised a global advertising campaign to convey the message that anyone drinking its product would be invigorated with new life. Unfortunately, by the time it reached the Philippines, the message claimed that the life-giving drink would bring back dead ancestors. Apocryphal or otherwise, the tale makes a serious point: international communications can be a tricky business - as the world�s listed companies are finding with international accounting standards.

Around 60 countries are committed, in principle, to a globally harmonised framework for accounting standards. In practice, we may yet see significant divergence at a national level, with a great deal lost in the translation. As countries adopt IFRS, they are each responsible for enforcing compliance in their own listed companies, based on their national language translation. And, although the Committee of European Securities Regulators has produced guidance for national enforcement agencies in the EU, no single body has a remit for international enforcement, as yet.

Struggle with standards

Meanwhile, the world�s listed companies struggle to come to terms with the standards as they emerge, and the consequent need fundamentally to change the way in which they handle financial reporting. �The introduction of IFRS is not simply the conversion from one financial reporting standard to another,� says Simon Gealy, a partner with PricewaterhouseCoopers, who has worked on a number of IFRS transformation projects around the world. It will influence the entire language used to share financial information throughout the organisation. �The impact moves beyond the finance function to all aspects of management within the business,� he asserts.

No-one has to convince those working on IAS transition programmes. �Finance has been leading the understanding of policy, and then translating this into what it will mean for other parts of the business,� says Patrick Sullivan, IFRS programme director with Standard Chartered Bank. But this is no small undertaking, as he explains: �All existing transactions and products have to be reviewed for international accounting standards.�

The bank has operations in more than 50 countries in the Asia Pacific region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. So it is already using IFRS in some countries, and converting the numbers for group consolidation in the UK. But it has needed to devote a huge amount of time and effort to preparation for 2005: it began its impact review at the start of 2002, then mobilised teams throughout the business to work on policy, systems and solutions at a local level.

Systems challenges

In addition to working out what IFRS will mean for all parts of the organisation, Standard Chartered had to consider its supporting IT infrastructure. �I think any system is going to be challenged by the requirements,� says Sullivan, but the impetus of IFRS has given the bank a chance to see where the business could benefit from �the opportunity for systems to be upgraded.�

IFRS has a major impact on information systems, particularly the applications used to bring together management and financial information, as they don�t typically provide the type or amount of data the new standards require. �In many cases, systems cannot easily be recalibrated to collect the new data because they are too fragmented,� says Gealy. Systems that are fine-tuned to provide corporate results quickly and easily are not necessarily capable of accommodating the multiple charts of accounts and multi-dimensional reporting IFRS demands.

Ideally, corporate reporting systems should be able to perform and store consolidations under multiple GAAPs. Where possible, adjustments should be automated. In order to deal with the new reporting formats and disclosures under IFRS, systems should hold more than one standard chart of accounts. Multi-account names for the same balance are required, and the system needs sufficient dimensions to store all the necessary data. But once the appropriate systems are in place, the benefits can extend beyond IFRS compliance.

�IAS compliance gave us a natural window to upgrade our reporting capabilities,� says Thomas Hartwig, CFO with German technology company Sartorius. �To have adapted the existing system would have taken a great deal of effort, and even then it would not have had the innate flexibility required to seamlessly integrate future changes.� The company opted for Magnitude, a sophisticated business performance management tool from Cartesis; it had previously been using Excel for consolidations and reconciliations.

Need to know

IFRS requires financial data to be reported along product and service lines, as well as along geographical lines, something that�s no mean feat with the hotchpotch of disparate and disconnected systems that characterise today�s complex international organisations. �Multidimensionality is the key phrase,� says Hartwig, adding: �We now have a single, consistent, global system which we can query in a large number of different ways. This means we can examine the business on a regional basis, then take a look at how each legal entity is performing, making the company more agile and better able to meet the various information need of all of its internal and external stakeholders.�

Internally, staff can gain an instant overview of their areas of responsibility in a multidimensional manner, in order to make more informed decisions about the business. Externally, Sartorius can deliver the appropriate reports to investors quickly and confidently. The systems changes necessitated by IFRS have also improved the company�s financial close procedures. �We�ve cut the reporting process by up to 14 days,� says Lehman, �so we can make better decisions faster.�

In common with RTL, Sartorius, and Standard Chartered, Barclays Bank has also embraced IFRS as an impetus for positive change. �We�ve been working to change our systems and processes in order to comply,� says Geoffrey Mitchell, director, finance projects, Barclays Bank, �because if we didn�t do it we�d be out of business.�

Business benefits

But the bank is also looking beyond compliance for potential business benefits. �I think it presents an opportunity to do more than just achieve regulatory change,� explains Mitchell, adding: �It�s an opportunity to look at some of the things that you�ve lived with, and that you might be able to improve and enhance as part of the move towards achieving this statutory requirement.�

And you might as well try to get the maximum bang for your buck, if you have to spend money on compliance. After all, according to a recent survey of European companies, the average cost is in the region of £360,000, a figure that rises to £625,000 for companies with a market capitalisation value between £1bn and £2bn, and goes beyond the million mark for companies valued at more than £2bn.

Mitchell suggests: �Try to get added value from your expenditure, by not just doing the minimum that you have to do.� Either it�s an opportunity to invigorate financial reporting with new life, or a struggle to hang on to its dead ancestors. You choose.

Lesley Meall is a writer on business and technology issues.