Data Retrieval From Legacy Systems Is IFRS Convergence Challenge

International Financial Reporting Standards (IFRS) is a common accounting language that Indian entities plan to adopt by April 2011. This will allow listed companies in India to raise capital from offshore markets. As most other nations across Europe and Asia have already adopted or are in the process of implementing IFRS, it is important for Indian companies to move on to this accounting standard. The impact of this on IT would be that IT systems operational within enterprises will have to support a multi-GAAP environment with IFRS. Biztech2.0 spoke to Prasad Kulkarni, ED–IT Advisory Services, KPMG, on the impact of IFRS convergence on IT systems.

How should companies prepare the right ground for IFRS implementation from an IT perspective?

The most important fact about IFRS is that it should be considered by the IT departments of companies as unlike a typical IT project. This project has to be completed on time since the date of conversion is known in advance and is not changeable, at least as of now. As per a recent survey, more than 75 percent of IT projects have time or cost overrun and this is one characteristic that must be avoided for the IFRS project. But like a typical IT project, this IFRS conversion project too needs to get the right kind of sponsorship from the client in the form of core team allotment with considerable time to work for the project. The right kind of budget allocation is also very important as this is a strictly time-bound project and for a change, IT departments may not face too much of a challenge in getting budgets sanctioned as this is a ‘must do’ project from a regulatory and statutory point of view.

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Please enumerate the IT Challenges associated with the IFRS project.

A major challenge for companies in preparing for the IFRS implementation is gathering clean data from the legacy systems to support ‘conversion’ to IFRS. It is likely that during the first conversion attempt, a lot of data may have to be dug out from archives to prepare opening balances. The question uppermost in our mind is – ‘Will all companies have this data readily available and accessible?’

The second challenge for IT is – ‘To what extent will they be willing to change the transaction capturing system (ERP) of the enterprise?’ For example, take the case of a bank, which has many front-end systems such as treasury, credit card, retail banking, core banking system, internet banking etc. IFRS may mandate changes in a number of ‘transaction screens’ in these systems as some data may have to be captured at the point of origin. In such cases, some of these front-end systems may have to be tweaked, which means co-ordination and project management will become important activities for IT departments.

The basic challenge arises if the company is reporting both in India and US GAAP and now IFRS, the interpretation of a transaction entry as it reflects in the IT system may be different for different GAAPs. Let us take a theoretical example: in case of a typical sales cycle from order to cash, revenue may be recognised when the goods leave the company premises as per current standard. However, IFRS may interpret it differently and revenue may be recognised only if the entire liability is transferred to the customer. This will happen only when goods reach the customer’s premises assuming road/rail insurance is borne by the selling company.

In such a scenario, the sales system may now have to be configured to record ‘a new event’ when goods reach customer premises and only then recognise revenue. This is just one example; however, there are many instances where the accounting treatment in different GAAPs may be different. Following the above example, it is clear that the IT expert should take inputs from the accounting expert and conduct an ‘Impact Analysis of IFRS on the IT systems of the company.

Which are the standard ways to adopt IFRS from a technology perspective?

Basically, there are two ways to capture the accounting information in both IFRS and Indian GAAP (considering most companies in India are reporting in Indian GAAP). The first method is to customise the rules in the business system of the company such as ERP, so that it captures the effect of any transaction in Indian GAAP and IFRS simultaneously. For example, the system recognises a particular transaction as event A in Indian GAAP and the same transaction is captured as event B in IFRS, probably in a separate General Ledger (GL). The challenge in this model is to build rules in the core ERP for each legal entity of the business group since IFRS is applicable to consolidated accounts of various group companies that may be using different ERPs.

The second method is to employ a different ‘intermediary solution’ where trial balances from different legal entities of the group are captured (or uploaded) and pass on the adjustment entries as per Indian GAAP and IFRS standards. There are intermediary solutions like Hyperion, Business Objects etc that consolidate the accounting entries taken from various ERPs according to the accounting standards followed without changing the core ERP system.

The role of IT gains importance when a parent company having many legal entities needs to report in IFRS. This is because depending on the size of the entity; they may be doing their accounting in ERPs of varied nature. One entity might be on SAP; the other on JD Edwards and the third one may be using Tally or maybe some other homegrown package.

In such a scenario, IT will have to take a decision of whether to make changes in each of these ’transaction capture systems’ (ERP) or to leverage an intermediate consolidation system. The intermediary solution model could be leveraged for reporting the accounts of multiple companies of the same group. The only challenge is to prepare trial balance for each of these entities in IFRS standard so that it could be uploaded in the consolidation system.

In fact, many companies that have gone in for IFRS in the European Union (EU) have used intermediary consolidation systems for reporting in IFRS standards. Companies in the EU have chosen this model as making customisations in the core ERP is more complex and time consuming, given the necessity of the project to be completed in a timely manner.

How would you explain the impact of IFRS’ Fair Value accounting on IT?

Fair Value is defined as the current market price of the product also termed as mark-to-market (MTM) and not the cost price of the asset, commodity etc. The valuation is not on the basis of the written down value of the asset as a whole but on the useful life of the asset on component-to-component basis.

The Indian GAAP requires for example depreciation of an asset to be calculated according to the Income Tax act and the Company Law. Some companies also compute depreciation for MIS requirements. Going forward, companies will also have to calculate and account depreciation according to IFRS requirements that calculates depreciation on the basis of the useful life of the core components of the asset. Companies need to build rules in the IT system to support the computation of depreciation in all the four required formats/standards.