CIOs Must Account For IFRS In Long Term IT Strategy

IFRS (International Financial Reporting Standards) has been on the mind of the Indian CIO for some time now. Although, the deadline for IFRS adoption in India has been extended from April 2011 to April 2013 for medium sized and small enterprises, companies will have to chart a long term strategy to implement IFRS to align the IFRS rollout, with the overall IT strategy.

It will also be imperative for companies to wait for certain regulatory changes, in order to sync it with the IFRS and other planned IT implementations. For this, companies should get the timing right. Since IFRS is an entirely different accounting standard, it will have a long-lasting effect on the IT systems of an enterprise. The fundamental change will be in the way various accounting entries will be valued, since IFRS values items on the basis of fair value accounting. The valuation is more on the basis of Mark To Market (MTM). Hence, this will be the underlying point that will also change enterprise IT.

Why IFRS Would Drive Changes in IT?

“IFRS is a more comprehensive accounting standard and the way we do accounting right now will completely undergo a change,” says Shrenik Baid, Exec. Dir- Global Capital Markets Group, PricewaterhouseCoopers.

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For instance, as compared to GAAP, the presentation of the expense statement or the presentation of the Balance Sheet will undergo a change under IFRS. The Balance Sheet has to be looked at from various current and non-current classifications. The expense will be considered from the nature of expense, or function of expense to make any changes and all this has to be changed from an IT perspective.

From an acquisition viewpoint, companies will have to make system changes. Currently, in case of an acquisition, the accounting process is simple, where the accounting entries are considered on a book value basis. After IFRS, acquisition accounting will undergo a sea change and this will require system changes as well.

Kotak Life Insurance is in the process of shifting to IFRS. With the regard to this, According to a source from Kotak Mahindra Life Insurance, “Kotak Life Insurance uses MFund for asset management business and Oracle Financials for financial accounting. The necessary changes in business rules in these products will ensure the consistency with IFRS requirements.”

At What Level of IT Will The Changes Take Place?

It’s certain that IFRS will stir up the IT system, at the enterprise level. But, at what level of the IT set up will that apply, is the next question.

“The level of changes will depend on the prevalent scale of automation at the company,” says Baid. It also hugely depends on the business vertical. The BFSI vertical has to make enormous disclosures, and this would drive maximum IT system changes. Whereas, the manufacturing vertical would not have to make changes at the same scale as the BFSI sector, adds Baid.

There are two perspectives to this. The first is from a management perspective and the second relates to accounting systems viewpoint. The maximum impact is going to take place at the middle and senior management level. This is so, because the senior level is going to finalise the accounts, while the middle level will implement policies and manage systems.

According to the Connectivity Research Group of Springboard Research, although the shift to IFRS would involve fundamental changes at the core of the IT infrastructure and operations, more specifically, it is likely to reform data management and reporting processes. Furthermore, IT applications and analytics function are also likely to undergo significant changes

Tips for Implementation

With predictions about this implementation bringing a sea change, the implementation process and the issues associated with it, would definitely be a top priority for CIOs.

To begin with, companies should identify the grey areas and chart out their IFRS path accordingly. Change in IT systems will take place only once this is done.

Most of the companies are making makeshift arrangements as of now because the timeline for moving to IFRS has been postponed to 2013.

The Connectivity Research Group goes on to say that companies must conduct preliminary analysis of their existing IT systems to gauge the gaps and address them efficiently. Training of employees on the new system and processes is another key aspect of this transition.

Although, the deadline for the adoption has been pushed, the key element for enterprises will be to consider IFRS in their long term IT Strategy.