Ventana Research: IFRS and IT Choices: Are You Planning?

It’s pretty clear that the version of Generally Accepted Accounting Principles used in the United States (US-GAAP) will give way to International Financial Reporting Standards (IFRS). The only real questions are when the switch will happen and exactly how the governing bodies will bridge the vast gulf between the two approaches to accounting. Meanwhile, the run-up to the U.S. shift will give financial executives a golden opportunity to improve the functioning of their organizations. That’s because as part of the transition, many will be forced to make important choices about the IT systems they use to support their operations – systems that include ERP, accounting and the software on which they do their statutory consolidations.

Will financial executives take advantage of this opportunity? Alas, if history is any guide, probably not.

The introduction of IFRS will not necessarily require companies to buy new software, but some companies will find that replacing software, consolidating their vendor base (larger companies typically have ERP software from multiple vendors) and adding some financial data management capabilities (master data management, for example) will be cost-effective moves. Indeed, even without the change in the accounting standard it would be a good idea to implement these within the next three to four years. Because the IFRS phase-in for U.S. companies will begin within this period, businesses ought to have a long-term IT capital spending plan that factors in its requirements. For most companies, this longer planning time-horizon will be a departure from the year-to-year approach they now use.

CFOs and other financial executives are understandably loath to replace their accounting systems, because it is analogous to having a root canal procedure: potentially painful and always expensive. However, with the shift to IFRS, companies will benefit from having to sort out how changes in their accounting environment can best be handled by their IT systems. In fact, it’s an uncommon and remarkably valuable opportunity, because it is a lot easier to plan for a better (perhaps even optimal) finance IT infrastructure that will meet IFRS requirements and then gradually implement it over the next several years than it is to make a series of ad hoc decisions that may, and if so only accidently, turn out to be the right choice.

Yet, despite its obvious value and appeal, it’s hard to be optimistic that many (let along most) finance departments will take this path. After all, a majority of companies dragged their heels in addressing the Sarbanes-Oxley Act requirements. Current polls of U.S.-based corporations confirm this pessimism, indicating that only a relative handful have started their migration to IFRS and only a few more plan to start in the near future. For U.S. public companies with 1,000 or more employees, further delay in starting to consider both the accounting and IT ramifications of the shift to IFRS will be an expensive mistake.

When it comes to IT, different companies (and in larger ones, specific business units) will have very different needs depending on their existing infrastructure and – crucially – how their specific accounting processes will change in the switch from US-GAAP. There will be substantial differences in the impact on financial companies and those in manufacturing, for example. Moreover, who’s doing the planning matters. Finance executives looking at the accounting treatment implications of the switch, for example, may not be asking important parallel questions about how best to support these changes with their IT systems.

The shift from the rules-based GAAP standard will put a premium on strengthening existing high-level financial controls. Addressing this potentially will reduce the amount of external and internal auditing that will result from a principles-based system (IFRS) colliding with manual processes. By using software to “bake in” process controls and monitoring systems for out-of-compliance conditions, corporations can reduce the need for external audit hours.

However, many companies are unlikely to realize that potential. In our research into ERP usage, for example, we found that only about half of the companies we benchmarked had automated at least some their order-to-cash or requisition-to-pay processes. This is despite the fact that this sort of automation makes it far easier to ensure that accounting treatments consistently follow acceptable principles, especially in the downstream accounting processes that take place during the close and in the close-to-report phase of the accounting cycle.

To save time and money and reduce their stress levels, finance executives ought to start today and plan to manage the shift to IFRS as a staged multi-year project. The exact timing of individual events will be fluid, of course, but planned or not, the shift will happen. Planning this project in advance will save time and money over the long run. Putting decisions off another year or so, on the other hand, will result in a reactive, ad hoc and costlier approach in deciding how best to deal with the IT aspects of a company’s shift to IFRS.

See a larger view of this table.