Accounting standards - Preparing for 2005.

Big international changes, top management challenge, the threat of a meltdown if it all goes wrong. Haven’t we been here before? Remember Y2K and the euro? In both cases, it was all right on the night, but will that also be the case with the latest major systems challenge – preparing for international accounting standards (IAS)?

When the Institute of Chartered Accountants in England and Wales surveyed members recently, it found that one-third were not aware of the new standards.

And even though only listed companies will be obliged to adopt international standards for accounting periods starting on or after 1 January 2005, only one in seven were aware that the DTI is consulting on extending the standard to unlisted companies.

It’s no wonder that Hazel Powling, ICAEW’s new head of IAS implementation, is concentrating her early efforts on an awareness campaign. “We’re communicating the message to our members that they shouldn’t sit back and wait for something to happen because time is running out,” she says.

Nick Forman, FD at software house Cartesis, is another IAS pioneer who finds that too many of his peers are taking a laid-back attitude to the switchover. “When I did a presentation about IAS, I asked the 26 seminar participants how many had a project running,” he says. “Only four or five put their hands up. The message I’ve been trying to get over to our clients is that you’re storing up a lot of aggro if you don’t do something about it now.”

While the switch involves a raft of changes to accounting treatments, including – according to the Association of Chartered Certified Accountants – pension costs, deferred tax, financial instruments, hedge accounting, preference shares and convertible bonds, merger accounting, goodwill amortisation, share option schemes and many others, they also involve some significant challenges for the software systems which FDs currently rely on for financial reporting and consolidation.

Forman, who has written a white paper on the subject, notes: “Companies are required to provide comparative data for periods before the ‘go-live’ date and will inevitably encounter serious problems if they fail to make the necessary systems changes. Collecting data always proves to be more difficult and time-consuming than collecting the required information at the time of the transaction.”

What all this means is that companies whose systems aren’t ready to collect financial data in IAS formats from the beginning of 2004 could find themselves in complex reworking and restatement to provide the comparative accounts they need to publish when IASs go live in 2005. In fact, it’s even more complex than that because some companies will also need (as at present) to provide accounts based on US GAAP to satisfy US regulatory bodies. So, for a few years at least, three sets of results could be needed.

Yet as Oracle – which has also got into the growing IAS white paper business – notes, the switchover could bring long-term benefits. These include improved convergence between group and individual subsidiary statutory and legal filing worldwide, and more convergence between management analysis and reporting and external reporting. “Across the world, you can focus your management team on the core objectives and deliverables of the enterprise using a common language of evaluation,” says Oracle’s white paper.

Yet from a systems and software perspective, none of this is likely to happen quickly, or without plenty of hard graft. Eduardo Loigorri, chairman of the Business Application Software Developers Association (BASDA), points out that while IAS defines international accounting standards, these are not always being carried through to international software standards.

He cites the case of XBRL reporting software that aims to allow companies to publish their results in a standard electronic format so they can be picked up by analysts and government bodies without unnecessary reworking or rekeying. And XBRL could be key to making many IAS-compliant reporting systems work more effectively.

But Loigorri says, “It is another idea bogged down in the detail. Progressively, the national interests of various countries are going to sabotage an international standard. We’re finding that global players are saying that because there isn’t an international standard they’re going back to their separate countries to develop national variations to a standard.”

To some extent, the XBRL problem is something of a sideshow in the bigger story of IAS-systems implementation. But it’s indicative of the kind of problems the software industry itself finds hard to solve when confronted with a global need from its customers.

For the moment, Loigorri says the problem of the lack of international standards in XBRL is likely to be met with some kind of mapping tool that allows data in one format to be compared with data in another. But it’s another workaround that finance professionals could do without as they struggle with the bigger picture.

So what are some of the bigger software problems? Forman sees four critical issues, the first of which is data collection. “At the transaction level, businesses will need to ensure that information is recorded at the required level of detail and, since some of the standards necessitate a change to the basis of calculation, sufficient information to calculate the value of both GAAPs will be needed.” As Forman notes, this means updating entity data-collection pack formats to make them IAS-compliant.

Then there is the question of handling multiple GAAPs during the changeover periods. “Consolidations will need to be performed under both GAAPs in both the year of change and the prior year in order to provide comparatives,” says Forman. “Meanwhile, many entities will still be required to prepare their individual accounts under local GAAP.”

A further question of both accounting processes and systems is report formats. “Balances will need to be mapped to the new IAS account names, in addition to the current account names. Report formats will need to be amended to reflect IAS standards and the additional disclosure requirements will need the generation of new reports,” Forman says.

Finally, reconciliations. These are going to be critical in order to make certain that data is consistent and accurate. “Under current proposals, it will be necessary for companies to present a reconciliation between current GAAP and IAS accounts in order to explain how the reported performance has changed under the new regime,” Forman says.

With all these issues on the table, software that can perform and store consolidations under multiple GAAPs are going to be vital. But there is also a long-term problem. As the accounting institutes have pointed out, the steady convergence between UK GAAP and IAS, and between IAS and US GAAP, means there will be a steady stream of significant changes in the years ahead. So setting up systems to cope with this is not a simple matter of moving from one solid state to another. Flexibility will be key.

In the medium term, there could be further changes which trigger changes in accounting standards, argues Loigorri. He points to the work currently taking place at the OECD designed to introduce international standards for filing electronic invoices. “I believe the standards that will determine what an electronic invoice should look like will be driven from IAS,” he says.

But that’s for the future. In the meantime, FDs need to be asking some hard questions about whether their existing software will serve their IAS needs in the immediate future. Forman suggests some key questions (see box, right). “Businesses have two choices to make – do they start now or later, and can they justify the cost and long-term benefits of the solution they choose?” asks Forman. “The answer to the former should be a resounding ‘now’. Unfortunately, the second isn’t so clear cut. It’s therefore imperative that companies do their homework, analyse the possible scenarios thoroughly and make the right choice based on the value they gain.”

BEEN THERE DONE IT

British companies pondering the IT problems of switching to IAS might learn from the experience of German companies that have already completed the process. For its year-end 31 December 2001, Sartorius, a biotech and mechatronics company quoted on the Frankfurt Stock Exchange, produced its accounts under IAS. Previous accounts had been produced under German GAAP.

The standards switch was made easier by installing new software, but according to Rainer Lehmann, Sartorius’ vice president of treasury, investor relations and management accounting group, the change has also helped the company to harvest a raft of other benefits.

“There has been an enormous improvement in time management,” Lehmann says. “Before we installed the new system, it was a tedious process to consolidate results and sometimes took four or five weeks before we had previous months’ results. Now that’s down to no more than two weeks.”

German listing rules also mean the company has to publish quarterly results within 45 days of period-end and annual accounts within 90 days. Again, the new software helps. “Traditionally, we’d used Excel as our default financial reporting tool for consolidation and reconciliation. That was combined with email for distribution of reports,” explains Sartorius’ chief financial officer, Thomas Hartwig.

Hartwig says it was clear that this process was becoming inefficient anyway, but approaching IAS provided the trigger for change. “In fact, IAS compliance gave us a natural window to upgrade current reporting capabilities,” he says.

“To have adapted the existing system would have taken a great deal of effort and it would not have had the innate flexibility required to integrate future changes seamlessly.”

Lehmann, who project managed the changeover, called in consultants to help review options and support software selection. Sartorius is an SAP user but decided to install Cartesis Magnitude for financial reporting.

One of the big benefits of the new approach is the greater transparency that the finance department in Germany has over its global operations.

“We like companies to produce accounts according to their local GAAP, but also reconcile them to IAS,” explains Lehmann. “Using the new software, we have more transparency about how the changes from local GAAP to IAS have been made.”

Bringing the new system on stream was a major effort for the finance department, even though Lehmann opted for a web-based system. “There were only four-and-a-half months from purchasing the software to going live,” he says. “We would never have been able to do that with a conventional software roll-out in 50 companies on four continents.”

Even so, Lehmann is convinced that the fact the software implementation had a full-time, dedicated project manager was a key success factor. Switching to IAS has been an administrative burden, but because Sartorius used it to improve reporting, it has harvested benefits which go well beyond adopting new accounting standards.