Slide HeadingIFRS and the Key Effects ofIFRS and the Key Effects of Information Systemy

Heather C. PaquetteKPMG

September 23,2009

What is IFRS? A Knowledge Check

A International Fun Reporting StandardsA. International Fun Reporting StandardsB. International Financial Reporting

StandardsStandards C. I Find Retirement SwiftlyD. Integrated Financial Reporting StandardE. B is correct but A and C have merits co ect but a d C a e e t

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Agenda

• Overview of IFRS• IFRS Conversion Approach• IT Lessons Learned• IT Lessons Learned• Case Study• Organizational Impacts• Internal Audit Involvement• Successful Elements of a Conversion• Questions?

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• Questions?

What is IFRS?

• Globally-accepted set of US GAAP 25 000

c

y paccounting standards

• Contains similar concepts as

25,000 Pages

Contains similar concepts as U.S. GAAP

• Limited industry-specific guidance• Limited industry-specific guidance • Less detailed application guidance

IFRS 2,500 Pages

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g

Current Views on U.S. Adoption of IFRSIFRS

Required or permittedNo/unknown plansSource: IASB

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Convergence plans

SEC Roadmap Proposal

• Issued November 19, 2008• Comment deadline ended April 20, 2009• Identified “milestones” for IFRS decision• Potential SEC decision in 2011• Indicated potential IFRS adoption p p

– 2014 for large accelerated filers– 2015 for accelerated filers– 2016 for other filers

• Proposal for “early adoption” of IFRS by large

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companies operating in IFRS industries

Characteristics of Companies Likely to Consider Early Adoptionto Consider Early Adoption

• Jurisdictions already utilizing IFRSy g• Perceived favorable accounting treatment • Competitors currently file under IFRS• Competitors currently file under IFRS• Subsidiaries domiciled in IFRS countries • Attractive foreign capital markets• Global ERP systems implementationsy• Significant finance transformation

initiatives

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initiatives

IFRS Transition Milestones and TimelineTimeline

Comparative years on IFRSyears on IFRS basis (2 years)

Year of adoption

12/31/12 12/31/1412/31/1312/31/09 12/31/10

( y )

12/31/11

T iti

A

Start first IFRS

Reporting Date

D i d

Transition Date

Assessimpact of conversion

IFRS year

Design and Implementconversion

N t Ill t ti ti li f US l A l t d Fil

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Note: Illustrative timeline for US large Accelerated Filers.

Examples of Differences with U.S. GAAPGAAP

• Revenue Recognition – less application g ppguidance

• Inventory – LIFO not permittedInventory LIFO not permitted• Fixed Assets – component depreciation

requiredrequired• Reversal of Impairment – required if

nderl ing facts and circ mstancesunderlying facts and circumstances change

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Examples of Differences with U.S. GAAPGAAP

• Restructuring Provisions – recognized g gonce company is committed to a plan

• Consolidation – measurement of control,Consolidation measurement of control, including de facto

• Income Taxes – a number of differences• Income Taxes – a number of differences exist

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Some Benefits of Adopting IFRS

• Streamlined global and statutory reporting g y p g• IFRS 1 first time adoption alternatives • Easier access to foreign capital markets• Easier access to foreign capital markets

and investmentsF ilit t b d i iti j i t• Facilitate cross-border acquisitions, joint ventures and spin-offs

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Challenges of Adopting IFRS

• Manage magnitude of effort: more than g gjust an accounting exercise

• Plan sufficiently upfrontPlan sufficiently upfront• Facilitate organizational buy-in and

commitment from company-widecommitment from company-wide resourcesIdentif and address ne risks to• Identify and address new risks to maintaining effective internal control

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• Coordinate with other major initiatives and projects

What are Companies Doing

• Little current interest to adopt earlyLittle current interest to adopt early• Broad preparation activities are occurring across

industries.industries. 25%

15%

15%

Little – noneRaising awareness

45%

Raising awareness

Plans for 09Assessment activity

45%

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IFRS Conversion: “It’s more than an accounting exercise”It s more than an accounting exercise

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Organizational Impact – IFRS Beyond FinanceFinance

Data availability in

Compliance Requirements

Data availability in source systemsProcess redesignS t l bilit

IFRS

Systems scalability & architectureOrganization design

Businessimplications

ControlsFinancial Reporting

d T I tand Tax ImpactRegulatory & Risk reporting

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Systems and Processes Impacts

• Identify information “gaps” for conversiony g p• Evaluate/revise policies and reporting

proceduresprocedures • Evaluate changes needed to internal

controls over financial reportingcontrols over financial reporting• Embed IFRS in local ledgers as

appropriate and minimi e man alappropriate and minimize manual workarounds

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Systems and Processes Impacts

• Perform dry-run data collection to check yintegrity of numbers

• Develop transition plan for data transferDevelop transition plan for data transfer and parallel system runs

• Establish contingencies for data collection• Establish contingencies for data collection needs

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Assessing the Effect of IFRS on Information SystemsInformation Systems

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Source: KPMG LLP (U.S.), 2008

Types of Changes to Information SystemsSystems

• New data requirementsq• Chart of account changes• Interface and mapping changes• Interface and mapping changes• Consolidation of entities• New reporting requirements• Financial reporting toolsg

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Information Systems Conversion AlternativesConversion Alternatives

Hig

hFull Conversion

Hybrid Approach

mpl

emen

t

Shadow

Approach

Time to implementCos

t to

im

High

Workarounds

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Common ERP Alternatives

• IFRS Chart of Accounts• Company Codes • Enterprise ERP structure• Enterprise ERP structure• Multiple Ledgers• Parallel Ledgers• Consolidation

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Information Systems Impact –Time and Complexity of ChangesTime and Complexity of Changes

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Source: KPMG LLP (U.S.), 2008

IT Lessons Learned

• IFRS information systems conversion ycosts represent 50 % of the overall costs to convert

• Benefits from integrating IT and business earlyearly

• IT conversion approach is a function of time cost resource commitment andtime, cost, resource commitment, and other competing factorsOpportunities for achieving synergies with

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• Opportunities for achieving synergies with other IT projects and strategic initiatives

IT Lessens Learned

• IFRS conversions have more often led to enhancement, rather than system replacement.p

• Multiple global legacy systems can create problems for conversion as reportingproblems for conversion as reporting entities learn to convert to IFRS.

• Some companies implement new systems• Some companies implement new systems• Some companies elect to embed IFRS at

the local ledger24

the local ledger

Case Study

• Project Backgroundj g– Initial assessment – Gap identification p– Milestone planning

• Key Financial Systems• Key Financial Systems– SAP

PowerPlant– PowerPlant – PowerTax

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Scope and Approach Taken

Understand Environment

Assess Accounting and Reporting

Assess reporting requirements

p g

q

Assess systems and processes impactsp p

Assess People and Change impacts

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Change impacts

Selected Impact Areas

Process IFRS Requirement

Parallel Reporting

IFRS requires 3 years of comparative financial statements (1 current and 2 historical)

Property, Plant and Equipment

IFRS requires assets to be depreciated at the component level

Consolidation IFRS requires some of client’s subsidiaries to be accounted for using the cost method opposite of current equity method accountingcurrent equity method accounting

Regulatory Assets

IFRS may not allow balance sheet accounting for Regulatory Assets

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Sample Recommendations

System ApproachSAP –Management Reporting

•Add IFRS Special Ledger; Add a chart of accounts to support both reporting standards•Dual reporting and journalizing of GAAP and g j gIFRS differences•Upstream and downstream systems and processes significantly impacted•Create IFRS period-end review reports

SAP – •Add consolidation configuration groups; Add newSAP Consolidations / Financial Reporting

Add consolidation configuration groups; Add new Consolidation and Period-End reports for dual reporting•Modify of data extracts to Excel for EC-CS

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yupload and change in validation

Sample Recommendations

System Approach

SAP – FERC •Change source program to remap P&L entries for IFRS•Create compatible org model to allow reporting down to the Service Company•Update chart of accounts and cost collectors

PowerPlant v9 •Upgrade to newest version of PowerPlant ( 10 2) hi h i l d IFRS f ti litPowerPlant v9 (v10.2) which may include IFRS functionality –Not upgrading may cause significant manual effort•Engage and coordinate with vendor to upgrade

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•Engage and coordinate with vendor to upgrade system•Modify interfaces and chart of accounts

Next Steps - Planning Conversion

Implementation and parallel run

Assess Business impact

Design Conversion Work Plan

Q1 2009 Q2 2009 - 2010 2011 2012 - 2015

of b

usin

ess

vem

ent

high

low

Leve

lin

volv

Project ManagementMaster conversion planning, resource allocation, progress monitoring, coordination, communication

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Organizational Impacts

• IFRS reporting requires a strong control environment– Tone at top

J b d i i d l– Job descriptions and placement– Training

Impact to business level processes and controls• Impact to business level processes and controls– Less specific application guidance– Requires more judgment– Requires more judgment– Process changes will require control and test of

effectiveness changes

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Organizational Impacts

• Consideration of department skill setsp– PMO support– Financial reporting, including IFRS specificp g, g p– System skills needed

• Consideration of internal audit involvement• Consideration of internal audit involvement

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Likely Internal Audit Focus

Assess Design Implement Monitor

• Appropriate and timely involvement during all phases Governance over significant entity-wide project– Possible management distractiong– Significant financial cost– Impact to entity level, process, application and p y , p , pp

ITGC controls

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Likely Internal Audit Focus

• Missed opportunities with other finance or IT transformation initiativesA i t b d d i t• Appropriate board and senior management monitoringConsideration of appropriateness of accounting• Consideration of appropriateness of accounting policy elections and underlying process and controlscontrols

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Elements of a Successful IFRS ConversionConversion

• Start earlyy• Plan to utilize synergies with other projects• Corporate-level sponsorship and strong• Corporate-level sponsorship and strong

governanceE k t k h ld d• Engage key stakeholders and resources

• Invest in education at all levels, including shareholders

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Resources for more information about IFRSabout IFRS

• International Accounting Standards Board www.iasb.org

Questions?

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