implications of ifrs by dr. martin ikpehai [email protected] 0803 306 7208...
TRANSCRIPT
Agenda
What is IFRS? Benefits of IFRS Conversion IFRS Adoption Roadmap in Nigeria IFRS Conversion Methodology Impact of the IFRS Conversion on the Business IT Implications of IFRS Conversion IFRS Compliant Software Solutions IFRS Conversion Project Management Lessons Learned from EU IFRS Conversion Experience
Slide2
What is IFRS?
• International Financial Reporting Standards (IFRS) are a set of accounting principles that is rapidly gaining acceptance on a worldwide basis. These standards are:– Published by the London-based International Accounting
Standards Board (IASB)– More focused on objectives and principles and less reliant on
detailed rules than US GAAP
• Today, more than 100 countries require/permit the use of International Financial Reporting Standards (IFRS), or are converging with the IASB’s standards
Slide3
IFRS reporting trends
Every major non-US capital market is moving to IFRSAdoption of IFRS in the EU in 2005 (8,000 companies)Over 100 countries around the world require or permit IFRSIFRS quickly picking up share of Global Fortune 500 companiesIFRS is becoming the predominant accounting framework outside the US
Top 10 Global Capital Markets
US US GAAP – moving towards IFRS
Japan Convergence to IFRS
UK IFRS
France IFRS
Canada Convergence to IFRS
Germany IFRS
Hong Kong HKFRS (equivalent to IFRS)
Spain IFRS
Switzerland IFRS or US GAAP
Australia AIFRS (equivalent to IFRS)
New Accounting Regulations - IFRS?
International Financial Reporting Standards (IFRS) are a global set of standards for financial accounting and reporting
At a high level, the biggest difference between IFRS and some GAAP (e.g. US GAAP) is that IFRS uses a more principles based approach and US GAAP is more prescriptive
The International Accounting Standards Board has generally avoided issuing interpretations of its standards, leaving more of the implementation of the standards to preparers and auditors
Slide5
Why Convert to IFRS
According to the IFRS Primer for Audit Committees, considerations for filing of IFRS financial statements include:► Multinational companies may benefit from the use of common
financial reporting systems► IFRS may ease financial statement comparability among
companies ► I FRS is intended to facilitate cross-border investments and
access to global capital markets
Slide6
Why Convert to IFRS
Other key benefits include: ► opportunities to improve/streamline business functions and
processes, ► globally integrate the financial IT systems, and achieve
consolidation/reporting efficiency.
Slide7
Benefits of IFRS
Improved quality of reporting
Improved transparency and investor confidence
Reduced accounting complexity
Potential process and cost efficiencies
Process and Technology optimization
Slide8
IFRS adoption roadmap in Nigeria
Phase 1 : January 1, 2012– Public listed entities– Significant public interest entities
- Government business entities- Financial and other credit institutions- Insurance companies
Phase 2: January 1, 2013– Other entities which are of significant public interest because of their natures of
business, size, or number of employees or their corporate status.– Not for profit entities– Pension funds– Other publicly owned entities
Phase 3: January 1, 2014– Small and medium-sized entities.
Slide9
IFRS conversion activities
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IFRS Conversion Methodology
Accounting and reporting workstream
Business processes and systems workstream
Regulatory and industry workstream
Change management, communication and training workstream
Tax workstream Fir
st
IFR
S a
ud
it
La
un
ch
th
e p
roje
ct
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
Diagnostic
Design and
planning
Solution development
ImplementationPost
implementation
Co
nc
lud
e t
he
co
nv
ers
ion
Project management
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IFRS conversion key activities
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► Accounting and reporting
► Tax planning and compliance
► Business processes and systems
► Regulatory compliance
Diagnostic (Impact Assessment)
Design and planning
Solutiondevelopment
ImplementationPost
implementationreview
Today First year of reporting
► Change management, communication and training
► Project management
Determine key accounting differences
Evaluate potential impact on the
business
Prioritize conversion
activities and make recommendations
Validate conversion recommendations
Evaluate solution alternatives
Determine future state
Model IFRS accounts and chart
of accounts (IFRS)
Develop accounting policy
manual
Develop process and system change
requirements
Implement solutions
Test and remediate
Parallel reporting under IFRS
Debrief
Identify opportunities for
improvement
Implement improvements
Education and awareness
IFRS impact assessment
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Scope of IFRS impact assessment Accounting and reporting work stream
Accounting and reporting objectives ► Identify the critical GAAP to IFRS conversion
accounting, reporting and disclosure differences ► Build a strong IFRS knowledge base within the IFRS
core team► Gain greater visibility into unique historical regulatory
accounting, and other industry specific issues.► Inventory regulatory reporting requirements and
identify IFRS conversion impacts
Key performance indicators► Number of critical GAAP to IFRS accounting and
reporting differences ► Number of regulatory reports impacted► Number of IFRS proficient internal resources
Resource assumptions► Core team
— Identify key accounting differences and potential options
— Attend training and develop own skills— Coordinate and attend key meetings with the relevant
corporate and operating unit resources
► Others— Assist with the identification of where the accounts
are located (corporate, operating companies, etc.)— Provide the existing applicable accounting policies— Identify regulatory reports
Impact assessment activities
Conduct initial review of consolidated financial statements and develop consolidated accounting differences “heat map"
Validate significant differences through a detailed review of each IFRS standard versus US GAAP at the consolidated level
Provide training related to the top differences to team
Identify where the applicable accounts reside within corporate and (or) operating units
Inventory regulatory reporting requirements and identify IFRS conversion impacts, including trends and activities of the regulating bodies
Identify disclosure requirements and differences between IFRS and US GAAP
Identify historical regulatory accounting and its applicability under IFRS, including dual reporting considerations
Determine the potential options and IFRS 1 considerations through:• Review of IFRS standards• Analysis of peers and other IFRS filer information• Consider impact of options both currently and in the future
Evaluate convergence activities between the FASB and IASB and the directional impact on accounting policy options
Develop a convergence monitoring process to update the Impact Assessment
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Some Industries Where IFRS Will Mean Significant Accounting Changes
Banking Telecommunications Utilities Manufacturing Real Estate Oil and Gas
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Accounting and Reporting: Top Ten IFRS Issues in the Banking Industry 1. Financial Instruments - Classification, Measurement,
Recognition and De-recognition
2. Financial Instruments – Impairment
3. Hedge Accounting
4. Definition of Debt vs Equity
5. Consolidation and Special Purpose Entities (SPEs)
6. Presentation of Financial Statements and Disclosures of Financial Instruments
7. Leases
8. Insurance Contracts
9. Post-Employment Benefits
10. IFRS 1 – First Time AdoptionPage 16
Accounting and Reporting: Top Ten IFRS Issues in the Telecomms Industry
1. Revenue Recognition
2. Capacity Transactions
3. Intangible Assets
4. Property, Plant and Equipment
5. Impairment of Non-Financial Assets
6. Leases
7. Financial Instruments
8. Provisions and Contingencies
9. IFRS 1 – First-time Adoption
10. Presentation of financial Statements
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Accounting and Reporting: Top Ten IFRS Issues in the Real Estate Industry
1. Investment Properties
2. Property, Plant and Equipment
3. Impairment
4. Leases
5. Sale of Real Estate
6. Sale and Lease-Back
7. Joint Ventures
8. Taxes
9. IFRS 1 – First-time Adoption
10. Presentation of Financial Statements
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Scope of IFRS impact assessment Tax work stream
Tax objectives ► Understand the potential impact of IFRS on your
company’s effective tax rate, deferred tax assets/liabilities, tax planning and compliance and treatment by federal, state and local taxing authorities, and tax related processes
► Identify the tax impact of critical US GAAP to IFRS conversion accounting differences
► Build tax-specific IFRS knowledge base within the company’s tax department
Key performance indicators► Involvement of tax personnel in IFRS conversion
Resource assumptions► Core team
— Be represented on project team— Attend training— Inventory FIN 48 positions— Identify US GAAP and Tax reporting differences— Coordinate and attend key meetings with the
relevant SBU and operating unit resources
► Others— Assess impacts on systems used for tax reporting
Impact assessment activities
Identify and analyze the accounting implications of potential differences between current income tax accounting policies and IFRS required and (or) allowable policies used for financial statements purposes
Coordinate with accounting and reporting and business process and systems work streams to identify impact to internal controls (e.g., 404 processes), major tax disclosure data gaps, etc.
Evaluate the effect of IFRS on tax resources (e.g., assess challenges involved in identifying and implementing recommendations, i.e., resource needs and timing)
Determine the tax accounting effects of non-income tax IFRS accounting adoption changes
Identify potential recommendations for potential conversion effects, including:• Formal or informal ruling requests (e.g., in relation to change in tax
accounting methods)• IFRS accounting policy elections
Determine the tax planning, compliance and controversy effects of non-income tax IFRS accounting adoption changes
Scope of IFRS impact assessment Business process and systems work stream
Business process and systems objectives ► Identify key business processes and (or) functions
affected by an IFRS conversion► Develop an efficient approach to integrate IFRS
considerations into any potential Business Transformation initiatives
► Understand the impact of IFRS to systems data, configuration requirements and (or) reporting
► Determine whether IFRS can be further leveraged to support the organization’s strategic initiatives
Key performance indicators► Participation by the appropriate process and
systems personnel during interview/facilitated sessions
► Number of potential discrete synergies and impacts of an IFRS conversion to any business transformation initiatives
Resource assumptions► Core team
— Be represented on project team— Validate and provide feedback relative to the work
being performed by A&R work stream— Provide feedback relative to the scope and approach
of business transformation (if applicable)— Coordinate and attend meetings with relevant project
resources► Others
— Participate in process and systems-oriented interview/facilitated sessions
Impact Assessment activities
For accounts analyzed in the accounting and reporting work stream:
Assess the impact on processes and systems required for the additional disclosures under IFRS
Key business and system owners should develop observations regarding potential impacts of converting to IFRS
Where appropriate and relevant, conduct facilitated sessions to develop deeper understanding of issues relating to people, process and systems
Assess the impact and synergies of an IFRS conversion on business transformation (if applicable), for example: ► Project management► Change management► Data► Business requirement definition► Business process design
For high impact systems, determine the nature of potential changes relating to systems data, configuration and (or) reporting
Assess the impact and synergies of an IFRS conversion on business transformation processes
In connection with process and systems review, provide observations related to the impact on internal controls over financial reporting (SOX 404)
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Impact of IFRS Conversion on IT
Current systems may not have the functionality to handle IFRS requirements, so changes in financial information requirements due to IFRS should be identified and the impact of these requirements on the existing data models should be assessed.
Changes in accounting policies and financial reporting processes can also have a significant impact on a company’s financial systems and reporting infrastructure.
These changes may require some adjustments to financial reporting systems, existing interfaces, and underlying databases to incorporate specific data to support IFRS reporting.
Executives will need to collaborate with their IT counterparts to review systems implications of IFRS.
Key considerations include:
Impact of IFRS Conversion on IT
Will a change from local GAAP to IFRS result in additional reporting requirements?
How do you ensure systems are capable of addressing the changes?
How do you assess the impact of IFRS on existing data models?
What changes will impact the consolidated entities, mapping structures and financial statement reporting formats?
Will the resulting systems be sufficient to enable tax compliance needs?
Will the systems need to support preparation of accounting records under both IFRS and or local GAAP prior to the date of conversion?
Impact of IFRS Conversion on IT
The conversion to IFRS can also result in changes to the number of consolidated entities, mapping structures and financial statement reporting formats, all of which will require adjustments to the consolidation system.
Evaluating the Potential Technology Impact of IFRS Conversion
The extent that systems will need to change depends upon multiple factors and choices:► the size and complexity of the business, ► the strategy for responding to IFRS, ► characteristics of the current infrastructure ► and capabilities and number of applications that are
involved in the collection of financial data and► the generation of financial statements.
To explain where potential IFRS requirements could drive changes in your IT platform, consider the impact across five dimensions:
Illustrative Systems Architecture
General LedgerChart of AccountsLedgers / Books
ReportingData Warehouse
Planning and Calculation Engines
Transform
ation Layer / Interfaces
Output / D
istribution
AP
AR
Assets
Inventory
Purchasing
Projects
UpstreamSystems
Financial
Management
Regulatory
Business Unit
Tax
Local GAAP
DownstreamReportsAnd Systems
Evaluating the Potential Technology Impact of IFRS Conversion
Upstream Systems: Financial subledgers (transactional systems), financial instrument/investment valuation systems, product specific systems and interfaces that post financial transactions.
General Ledger: Chart of accounts and policies and procedures related to these.
Reporting Data Warehouses/Data Marts: Consolidation and/or allocation tools and engines.
Downstream: Reporting solutions outside of IFRS reporting, including compliance solutions and statutory reporting systems.
Infrastructure: Support applications such as rules engines, allocation engines, middleware, and operational data stores that affect or transact financial information.
Areas to Investigate in the Technology Arena
Upstream Systems: ► Identify and document all internal and external data sources that
must be updated. ► Identify missing data due to differences in accounting treatment. ► Assess required enhancements to legacy systems.
Areas to Investigate in the Technology Arena
General Ledger: ► Assess high-level changes to charts of accounts based
upon differences between IFRS and local GAAP. ► Analyze the reconciliation process between sub-
ledgers and the general ledger. ► Assess accounting, reporting, close consolidation, and
reconciliation processes.► Assess journal entry methods and templates. ► Assess existing expense allocation methods and
engines to determine whether rules need to be adjusted.
Areas to Investigate in the Technology Arena
Reporting Data Warehouses: ► Identify changes in financial information requirements due to
IFRS transition and assess current financial reporting capabilities. ► Assess impacts of these requirements on existing information
management systems. ► Assess readiness of data governance functions and metadata
repositories to be updated to reflect new data definitions.
Areas to Investigate in the Technology Arena
Downstream Reporting: ► Evaluate external reporting templates to identify changes required
to support increased/different disclosures. ► Identify information sets that would be needed to meet IFRS
reporting and disclosure requirements. ► Assess the business intelligence environment’s readiness for
identified IFRS changes.
Areas to Investigate in the Technology Arena
Infrastructure: ► Assess impacts to middleware, rules and allocation engines,
including capacity to maintain additional transaction detail. ► Another very important factor in considering change would be to
understand how technology outsourcing arrangements and systems will be impacted.
IFRS Compliant Software Solutions
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IFRS Compliant Software Solutions
Some corporate IT Systems are not IFRS CompliantWhat do you do? System Maintenance / upgrade Intermediate SolutionsSome IFRS Compliant software solutions were implemented based on the local GAAPWhat do you do?
Re-implement
Every software manufacturer is now upgrading their software to be IFRS compliant
IFRS Project Management
IFRS insights and viewpointsPage 350804-0933872
Example project management team
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Change management and training
Steering committee PMO
Tax work stream
Accounting and reporting
work stream
Other finance process
Accounting policies
Financial close process
Reporting packages
Business processes work stream
• Upstream impacts: consider key leads• Downstream impacts at divisional level;
consider key Divisional team leads
Planning assumptions
Human resources
Debt agreements
Financial planning and analysis
Other business processes
Information technology
Regulatory compliance work
stream
Scope of IFRS impact assessment Project management work stream
Project management objectives ► Meet the project plan objectives on time and on
budget► Develop an efficient approach to integrate the IFRS
conversion into any business transformation initiatives
► Develop a preliminary conversion roadmap
Key performance indicators► Progress on IFRS Impact Assessment vs. agreed-to
timeline
Resource assumptions► Core team
—Validate and provide feedback relative to the work being performed by individual impact assessment work streams
—Coordinate and attend meetings with the relevant executives
Impact assessment activities
Identify core team members with competency to lead, manage and execute all work streams
Develop communication protocols for effective communication across work streams
Analyze the output from the various work streams and assess where they need to be factored into any business transformation initiatives and conversion roadmap
Complete the conversion roadmap and prepare initial Phase 2 plan
Validate preliminary results with other work streams, IFRS core team and key stakeholders (i.e., CIO, CFO, controller)
Develop the overall strategy for communication and presentation to executive management
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Change management/communication and training
Project management objectives ► Meet the project plan objectives on time and on
budget► Clarify roles and responsibilities
Key performance indicators► Organization becomes knowledgeable of IFRS► IFRS accounting becomes embedded in daily
processes
Resource assumptions► Core team
—Conducting workshops and training—Build on foundation of US GAAP knowledge
Impact assessment activities
Raise awareness of the IFRS issues within the company and give momentum to the IFRS conversion project
Understand the company’s organizational structure and knowledge management approach
Develop and execute communication protocols
Recommend an overall training roadmap to embed IFRS knowledge in the organization
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Lessons Learned from European IFRS Conversion
In July 2002, the European Parliament passed legislation requiring listed companies to convert to IFRS by 2005.
The short timeframe and extensive reach of the directive had many companies scrambling to comply.
Anecdotal reports suggest that the conversion placed significant resource pressure – human and financial – on finance teams and their companies at large.
A more tangible measurement of the effort can be found by comparing the length of European companies’ 2004 (local GAAP) and 2005 (IFRS) financial statements. The latter averaged more than 50 percent longer than the former; in some instances, reports doubled in length. Much of the increase can be attributed to an increased level of disclosure in the financial statements in areas such as judgments made and assumptions
used.
Lessons Learned from European IFRS Conversion
Certain accounting issues proved especially vexing during the transition, including asset impairments, financial instruments, and lease accounting.
Among the lessons learned from the European experience were the following:
► The effort was often underestimated. The original misconception that conversion was solely an accounting issue was replaced with a growing realization that the initiative was larger and more complex.
► Projects often lacked a holistic approach. Because of the limited view cited above, companies frequently did not take the collateral effects into consideration, such as the impacts on IT, HR, and tax.
► A late start often resulted in escalation of costs. Those few companies that anticipated conversion and took steps to prepare for it were in much better shape than those that did not. Companies that delayed their response paid a price for it, in terms of higher costs and greater diversion of resources.
Lessons Learned from European IFRS Conversion
► Many companies did not achieve “business as usual” state for IFRS reporting. The highest quality financial data is obtained when companies fully integrate IFRS into their systems and processes. The compressed timeframes often precluded this possibility; instead, first-year financials were often produced using extraordinary, labor-intensive, and unsustainable measures.
► Several companies are only now starting to explore benefits from IFRS implementation. Due to multiple constraints, the first-year effort in the EU was focused more on “getting it done.” Potential benefits in terms of reducing complexity, increasing efficiency, decreasing costs, and improving transparency had to be deferred.
Questions?
Dr. Martin O. Ikpehai
Tel: +234 803 306 7208
E-mail: [email protected]; [email protected]
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