implications of ifrs by dr. martin ikpehai [email protected] 0803 306 7208...

Implications of IFRS

By Dr. Martin Ikpehai

[email protected] 306 7208

mailto:[email protected]

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

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

IFRS conversion key activities

► 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

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

Some Industries Where IFRS Will Mean Significant Accounting Changes

Banking Telecommunications Utilities Manufacturing Real Estate Oil and Gas

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 Adoption

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

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

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


— 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


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


— 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)

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:


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?


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.


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.


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.


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.


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

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 viewpoints0804-0933872

Example project management team

Page 35

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


—Validate and provide feedback relative to the work being performed by individual impact assessment work streams

—Coordinate and attend meetings with the relevant executives


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

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


—Conducting workshops and training—Build on foundation of US GAAP knowledge


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

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.


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.


► 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]

mailto:[email protected]

implications of ifrs by dr. martin ikpehai [email protected] 0803 306 7208...

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