International Financial Reporting Standards (IFRS) is a set of standards that finds its root in International Accounting Standards (IAS), which seeks to harmonize and synchronize the reporting requirements of different local reporting standards such as US and Canadian GAAP. The intention is to bring transparency, consistency, and uniformity to global businesses and financial reporting. It aims at consolidating financial reporting across the enterprise while encouraging detailed disclosure of the books of companies listed on the stock exchange.

Although the adoption of IFRS has challenges, the benefits can be enormous. These benefits include comprehensive reporting, improved access to capital, greater transparency, comparability for investors, and enhanced decision making. With IFRS, global companies can better consolidate their accounts, perform subsidiaries’ financial appraisals, and access global funds. For example, a company in Nigeria trying to access global funds or capital in the US is better positioned for favorable consideration if its financial statements are prepared based on a globally acceptable standard. The inherent disclosures help enforce transparency and comparability with other companies. IFRS is based on the premise that an entity continues to be in business for the foreseeable future (called a going concern) and that the effect of a business transaction is recognized when the transaction takes place and not necessarily when cash is received (called accruals). 

Impact of IFRS

You can observe the impact of the adoption of IFRS under the following three topics:

• People: The readiness of your workforce for adoption of IFRS is important. Also, appropriate communication plan is essential in achieving IFRS conversion success. The executives and top management owe the people the responsibility of effective policy communication. IFRS affects the way people go about their business activities, so it is expedient to sensitize people on the inevitable changes to business processes that comes with IFRS adoption. IFRS changes the way people consider transaction processing and disclosures. The roles and responsibilities of the staff of an organization might also change because some employees might be moved to strategic units to make IFRS adoption a success. The way employees are compensated also changes under IFRS. As a result of changing reporting format and presentation, investors’ interpretations of financial statements also change. It is pertinent that these changes are communicated to affected people in good time. The transition to IFRS exposes your organization’s appetite for change to a litmus test. Executives should champion effective change management strategies with the aim of making the transition to IFRS reporting less of a nightmare for their staff.
• Business process: Under IFRS, the way business transactions are processed, interpreted, and disclosed may differ from the local standard. Questions on the mind of executives as the deadline for IFRS conversion draws near include: How will assets be depreciated, how will stocks be valuated, how will deferred tax be managed, how will revenue be recognized, how will liabilities be treated, how will the accounts of combined businesses such as joint venture operations be consolidated, and how will contractual agreements be managed? IFRS might greatly affect legacy business processes if the IFRS requirements are not the current practice in your company, especially in the areas of revaluation of property, plant, and equipment (PPE), stock valuation, taxation, receivable and payable recognition, employee cost, and share-based payment. For example, an organization using a last-in, first-out (LIFO) policy for stock valuation has to change that valuation method because it is not acceptable under IFRS as stated in IAS 32. This change in valuation method affects an entity’s operating result and cash flow. Furthermore, IAS 16 affects the PPE asset retirement process because it encourages the management of the components of a PPE asset at a more granular and disaggregated level, thus leading to a faster pace of asset retirement, especially when parts of a large asset group are replaced.
• Cost: Converting to IFRS has its associated cost implications especially in the areas of human resources and technology. For example, you need your external auditors and consultants (if applicable) to come into the game and you have to pay them for their services. If your system is not IFRS compliant, then you have to incur costs in the areas of a software upgrade, acquisition, implementation, and maintenance. The training of affected staff on the principles of IFRS is also another area in which you will have to invest.

The Compliance Framework

Successful transition to IFRS reporting needs a strategic and planned approach based on a defined and proven framework (Figure 1).

Figure 1

The IFRS compliance framework

Exercise Corporate Governance  

Corporate governance involves the processes, policies, standards, procedures, regulations, and legislations that define how an organization is governed, directed, and managed by the stakeholders. A business case is needed in providing sound corporate governance for IFRS transition. Corporate governance must drive the development of a business case for IFRS adoption by leveraging laws and regulations that affect the company’s operation within its jurisdiction. You should employ a holistic approach in developing the business case to ensure that all factors are considered in their entirety. The business case needs the approval of the senior executives of the company to ensure management buy-in and commitment. The development of the business case lies with top management and it should reflect the following indices:

• Justification: The reason for adopting IFRS reporting must be clear to management. This might involve some form of sensitization and researching of IFRS objectives, expectations, and principles especially as it affects your organization.
• Benefits: Why will you embark on IFRS if you cannot identify the benefits accruable from compliance? The principal benefit is a matter of regulation if the country you are in uses IFRS, but it also has benefits for your organization as enumerated earlier. Benefits should be unambiguous and measurable to ensure that the attainment of defined objectives can be clearly ascertained.
• Risk: IFRS has risks on business processes, technology, and even the organization. It is important to critically analyze the impact of these risks and assign action plans aimed at remediating or mitigating the risks. For instance, if an organization does not plan properly for IFRS transition, the organization can face the risk of missing the deadline for IFRS compliance, so it is expedient to have an objective roadmap for IFRS adoption. Furthermore, if reporting standards are misinterpreted, transaction posting can be defective, thus exposing an organization to inappropriate decision-making risk as a result of inconsistent and inaccurate information. It is best to align the benefits of IFRS opportunities and associated risks with the corporate strategy and processes of an entity.
• Cost: The cost of IFRS adoption can differ as a result of the chosen technology and resource use among others. For instance, an organization might choose to use its internal work force to achieve most tasks associated with IFRS adoption instead of outsourcing them completely to external consultants that may be expensive. This approach can represent serious cost savings for an organization, especially if the internal resources are competent in handling the challenges of IFRS. Furthermore, it might also be cheaper to upgrade your existing system instead of acquiring an entirely new one.
• Timeline: Although SEC has a roadmap for IFRS transition, it is not cast in stone. An organization is expected to define its roadmap and schedule for IFRS adoption before the defined deadline. Time is a critical factor in the planning and allocation of resources for IFRS adoption. In your plan and schedule, you need to consider dependent activities for IFRS compliance (e.g., system upgrade).

Build the Organizational Structure

An organizational management structure is essential in managing the process that leads to IFRS compliance. The essence is to establish and enforce management control on people, processes, and procedures. It defines the line of reporting (i.e., who reports to whom) and the communication plan aimed at increasing the awareness of the key elements in IFRS adoption. Where skills are inadequate, especially in terms of technical and functional expertise, you might need to recruit capable hands. Depending on your operating environment and organizational structure, you might need to define the following responsibilities for the associated job roles (if not already in existence) for your IFRS conversion project.

• Senior executive (e.g., chief compliance officer):
  • Approve the business case for IFRS adoption
  • Define the scope of regulatory compliance
  • Approve or reject identified risk associated with IFRS adoption
  • Conduct periodic review of project status
  • Communicate IFRS adoption status to the board, management, and audit committee
• Financial consultant:
  • Implement the SAP General Ledger (formerly called new G/L) functionality and other IFRS controls
  • Customize the system to allow for specific reporting requirements
  • Customize the system to allow for easy financial statement consolidation
  • Provide end-user training
• Business process manager:
  • Identify risk associated with IFRS adoption against specific business processes
  • Monitor identified risks
  • Carry out proactive compliance monitoring
  • Provide recommendations to management on how to streamline and optimize business processes for IFRS compliance
• Audit manager:
  • Provide documentation that assists in ascertaining that defined IFRS controls and requirements are effective
  • Act as a liaison between external auditors and regulators
  • Ascertain the sufficiency or otherwise of the existing system to support IFRS conversion
  • Responsible for identifying the differences between local accounting standards and IFRS
  • Approve audit programs to ensure that IFRS controls are in place
• IT manager:
  • Evaluate software for the acquisition of an IFRS-compliant system
  • Assume responsibility for high system availability
  • Coordinate the upgrade of legacy system to a new system such as SAP ERP Central Component (ECC) 6.0
  • Supervise data migration activities and the development of custom reports

A good approach to communicate responsibilities is to hand over the job description or work package of each role to the beneficiary. This helps to enforce control and form the basis for performance evaluation and accountability.

Assess the Business Environment

The first step to building a controlled IFRS-based reporting environment is to identify the differences between your local reporting standard and IFRS as it relates to your organization. Furthermore, an understanding of how IFRS affects existing internal controls — especially as it relates to financial reporting, consolidation, and disclosure — is central to having an IFRS-compliant environment. Organizations should define where they are and understand where they are going as it relates to IFRS. See Table 1 for an example of how a company might deal with transitioning from the Statement of Accounting Standards (SAS) certified by the Nigerian Accounting Standards Board (NASB) to IFRS.

A thorough analysis of IFRS reporting requirements helps to assess the associated risks and impact on various business processes. IFRS adoption normally requires you to modify existing policies and procedures to reflect the new way business is to be conducted within an entity. You also need new or modified controls, policies, and procedures to reflect new requirements that are associated with IFRS conversion. For example, an organization might need to define policies and procedures that guide the testing of impairment of assets as required under IAS 36. Also, you may need to create or review policies that guide the allocation of dividends.

Because IFRS affects the business processes on which financial reporting is based, business process owners must be fully involved in developing policies and procedures that drive IFRS reporting and account consolidation. You can achieve this by setting up a committee (consisting of accounting and non-accounting professionals) that is responsible for studying and implementing the requirements of IFRS while paying close attention to how the requirements affect existing processes and procedures. Furthermore, financial and time constraints can compel organizations to resort to the use of spreadsheets for data analysis and account consolidation. The use of spreadsheets is error prone and can lead to data unreliability, inconsistency, and inaccuracy. IT policies and procedures should be well-incorporated into the control structure, especially as it relates to data handling and manipulation using migration, analysis, and reporting tools such as spreadsheet solutions. The policies and procedures should be designed to enable data integrity and security in transaction processing. The focus of this phase should not just be on core financial issues, but it should encompass all facets of the business.

Align IT with Business Processes

IT is central to the success of an IFRS adoption. After business process re-engineering and accounting calculation changes, you need to identify IT requirements that are required to simplify IFRS adoption. The technology to leverage must have robust capabilities in the areas of complex calculation and data analysis. Also, the system must be enhanced with multiple reporting dimensions, consolidation, and formatting functionalities. Depending on the complexity and functionality of your system, you might need to develop new programs or upgrade your existing infrastructure. For example, if you are running SAP R/3 4.6C, it is recommended that you upgrade to SAP ECC 6.0 and migrate to SAP General Ledger to optimize IFRS capabilities in your SAP ERP system.

IFRS is driving technological revolutions in the implementation of shared services, ERP, and business intelligence systems. ERP systems such as SAP ERP play vital roles in fully complying with IFRS. Staff should be properly trained on how to use the system to discharge their duties with particular emphasis on IFRS-centric functions. A holistic and best practice approach to information systems management is essential when implementing IFRS-compliant systems. For example, you should adopt Accelerated SAP (ASAP) Focus methodology, or SAP Solution Manager, to ease system configuration and implementation in an SAP environment. This is because ASAP Focus methodology provides a framework that guides all the phases of SAP project management, including project preparation, business blueprint, realization, final preparation, and go-live and support.

Additionally, SAP ERP offers SAP General Ledger, which allows for parallel financial statement reporting, direct and indirect cash flow statements reporting capabilities for meeting the mandatory component of IFRS, percentage of completion (POC) method in Managerial Accounting (CO), and Project System (PS), which allows for long-term contract management. SAP BusinessObjects applications for detailed analysis and formatting requirements that are invaluable for IFRS compliance include SAP BusinessObjects XBRL Publishing for preparing and formatting extensible business reporting language (XBRL) documents, and SAP BusinessObjects Planning and Consolidation for IFRS business impact analysis and account consolidation.

Continuous Monitoring

Complying with IFRS is no easy feat and it has its associated challenges. If controls are not continuously reviewed, sustaining IFRS compliance might be more difficult. Monitoring is an ongoing exercise that aims at ensuring a relatively steady compliance level while reviewing processes and procedures for potential compliance issues. Continuous monitoring ensures that the degree of compliance to IFRS is sustained. It is possible for ambiguity to arise about some requirements in IFRS as it affects an organization. For instance, accounting for income taxes as it relates to shared base compensation and intercompany sales can present gray areas to some companies that might need further clarification from tax advisors and management. In such a case, you should formally obtain management approval before implementing recommendations. This helps to enforce internal control.

Enforcement of internal controls plays a major role in the success of IFRS conversion because it is important that there is control over financial reporting, especially in the area of disclosure controls. The monitoring and testing of the effectiveness of existing and new internal controls at defined intervals is pertinent in sustaining IFRS compliance level. The adoption of IFRS should not conflict with Sarbanes-Oxley regulation, hence, it is expedient to review and update Sarbanes-Oxley documentation in line with changes to internal controls that comes with an IFRS transition.

Kehinde Eseyin

Kehinde Eseyin is a security architect. He holds a bachelor’s degree in computer science. He has about 12 years of IT security, governance framework, IS risk, and compliance experience gained by working in numerous global organizations. Over the years, he has demonstrated competencies in security design, information assurance, cyber security, data privacy, threat and vulnerability management, penetration testing, business architecture, project management, IT audit, IS controls framework, and identity and access management.
 

You may contact the author at eseyinok@gmail.com.

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