Around 600 Indian companies are slated to follow the International Financial Reporting Standards (IFRS) norms in phase one, come April 1, 2011. Conversion to IFRS from Indian Generally Accepted Accounting Principles (iGAAP) is one of the biggest challenges confronting the Indian CIOs due to the revisions in business processes, valuation, and reporting.
IFRS conversion involves four steps:
- Impact Assessment
- Planning & designing
- Data conversion
In this article, we will look at the first step of impact assessment. A company should appoint an external auditor to analyze the functional and information technology (IT) impact of IFRS conversion.
1) Functional impact of IFRS conversion
The external auditor will analyze and compare the company’s current accounting processes, policies and systems with what is expected under IFRS conversion. After this, the auditor will do a functional impact assessment from accounting perspective.
2) IT impact of IFRS conversion
Based on functional impact, an IT checklist will be made for IFRS conversion. For instance, currently the company’s accounting software may be tuned to work as per iGAAP standard. Under IFRS conversion, the IT systems will have to be changed.
For IT impact assessment, a company needs to ask the following questions.
IT checklist question 1: Does the current IT system provide a solution for parallel accounting?
Given the ambiguities surrounding impact of IFRS on taxation, it’s a safe bet to opt for parallel accounting for the next two to three years. This involves maintaining records to comply with both iGAAP and IFRS standards, by making appropriate changes to software.
IT checklist question 2: Do the existing software tools meet requirements viz. consolidated as against standalone/entity-level accounting?
A company should evaluate whether its current IT systems have provisions for consolidated accounts, instead of entity-level. If not, a functional upgrade may be required.
For IFRS conversion, a corporate group’s entire accounts on assets and finished products, including its global operations will be part of consolidated accounts. Currently, the iGAAP system follows entity-level accounting.
IT checklist question 3: Which business processes will have to be redesigned?
Revenue recognition is a good example to explain this. According to the current system, a company, after dispatching goods on certificate of insurance (CoI) basis, wherein it bears the cost of insurance and freight, can recognize the sales revenue once the goods leave its warehouse irrespective of proof of delivery to the customer. Under IFRS, the company may not be able to recognize revenue until the proof of delivery of goods.
Thus, for IFRS conversion, companies will need to redesign their business processes by changing their contracts with customers to freight on board (FoB), whereby they can transfer risks and rewards to the buyer.
IT checklist question 4: Which types of master data need to be revised?
In the current system, a company may classify a whole item as a single asset. IFRS conversion expects a company to identify a divisible asset (single asset that can be split into components) based on the life of each component. Hence, if a component of an item has a life of 10 years versus another which has 30 years, both will have to be classified separately.
The corresponding changes will need to be made to various master data to reflect the new classification and valuation of assets.
IT checklist question 5: Will the change in valuation method be handled through IT system or manually?
With conversion to IFRS, asset valuation methods are slated to change. Currently, due to lack of clarity, most Indian companies are prepared for manual interventions in their automated processes in the first year with respect to asset valuation.
However, large companies are amending their IT systems to align with the changes in valuation methodologies. These large players cannot depend on manual interventions even for a single quarter, given their extensive dependence on IT systems.
A company has to ascertain its level of dependence on IT and choose a suitable short term approach.
IT checklist question 6: What will be the impact on present statutory and management information system (MIS) reporting?
Typically, for a company, segmental reporting is used for external and MIS for internal consumption. Segmental reporting is how the accounting data of different segments of a company is presented to the board and investors. With IFRS conversion, there will be changes in segmental reporting and thus, the IT systems will have to be amended accordingly. Similarly, the internal MIS reporting will also need to be changed for IFRS conversion.
About the author: Mandar Joshi is director - advisory services at KPMG. He specializes in IT impact of IFRS and has been involved in design, development, and implementation of customized solutions in the areas of financial accounting, asset accounting, and cost accounting.
(As told to Anuradha Ramamirtham)
This was first published in February 2011