Eleven tips to help prepare your ERP systems for IFRS conversion

The eventual conversion of U.S. GAAP to IFRS requires preparation for changes to your ERP systems. Here are 11 tips to get you started.

It might come in with a whimper rather than a big bang, but conventional wisdom indicates that somehow, some way, someday, the accounting standards for public companies in the United States will be shifting to or converging with international accounting standards.

Although the U.S. Securities and Exchange Commission may never issue an out-and-out mandate to public companies to convert from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to the International Financial Reporting Standards (IFRS), the stage has already been set for a gradual convergence of the two standards.

For enterprises affected by the shift, it will likely require changes and modifications to the existing enterprise resource planning (ERP) systems used to collect and report financial data, according to Mathew Kinver, director in the Calgary, Alta. office of Sunera LLC, a business and technology consultancy.

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"The movement to IFRS can impact key processes and systems in treasury, payroll, general ledger, financial instruments and asset management, to name a few," Kinver said. "If companies have started -- or are about to start -- an ERP or finance transformation project, now could also be the time to factor in IFRS considerations."

Although there isn't a set date for replacing U.S. GAAP with IFRS, a series of changes -- some major -- to U.S. GAAP will be implemented over the next several years, including changes in accounting for revenue recognition and accounting for leases, according to a blog post by Robert Kugel, senior vice president and research director at Ventana Research, based in San Ramon, Calif.

"The upshot is that rather than waiting for some formal adoption date, which realistically will remain four or five years out, companies now will have to confront these changes piecemeal over the next several years," he said.

How IFRS impacts ERP

Recent versions of major ERP systems from companies like SAP, Oracle, Infor and Microsoft have been designed to incorporate IFRS.

"Thus, a finance transformation project conducted in conjunction with an IFRS assessment that effectively maps IFRS-related changes into the ERP can yield efficiencies for both initiatives, which could be significant depending on the facts and circumstances," Kinver said.

But whether U.S. regulators ultimately decide whether companies should converge with or convert to IFRS, enterprises still need to evaluate the likely impacts on ERP under both scenarios.

"Given the lead times for system changes, it is better to understand the capabilities of current ERP systems in meeting emerging accounting policies, [rather] than waiting until every detail has been finalized," Kinver said.

With that in mind, here are 11 tips to help you get your ERP systems ready for an IFRS convergence:

  1. Understand IFRS reporting requirements. Not knowing what IFRS entails will make it difficult to continually meet IFRS requirements, according to Tyler Wilson, senior ERP consultant at Panorama Consulting Solutions, based in Centennial, Colo.
  2. Assess the impact. How will convergence or conversion affect information and system requirements beyond existing ERP capabilities? Determine the major areas where financial statement reporting will require new information and process changes, Kinver said. "If a finance organization team is undertaking IFRS convergence/conversion assessments, an evaluation of the needed information and system changes should generally be part of their assessment agenda," he said.
  3. Know your policies. Define the accounting policies your company will implement to be consistent with IFRS. "While there could potentially be a range of permissible interpretations of new accounting standards, companies should apply their judgments to best interpret these principles and convert them to policies," Kinver said. "These choices should drive the design of ERP system refinements."
  4. Explore your options. Choose how to adapt systems to meet the needs arising from IFRS, according to Kinver. "Are separate systems to support IFRS convergence cheaper and more effective than fully integrating the changes now or later into an ERP system? At what level should the integration occur and what are the related cost/benefit tradeoffs? Guidance for these choices has to come from how to implement and execute new accounting policies."
  5. Do your research. Form a core team to examine how existing system capabilities address IFRS, frame the accounting policies that drive information requirements, and weigh the company's level of commitment to change existing systems, Kinver suggested. "This includes deciding whether to use IFRS as a catalyst for transforming and improving management information systems or only making minor changes to existing ERP infrastructures," he said.
  6. See IFRS as a tool for broader change. If necessary, use IFRS as a reason to implement meaningful change and performance improvements in your organization, Kinver said. "While IFRS generates new systems requirements, the move to IFRS can be used as a lever to drive a more comprehensive improvement in management information systems or to consider shared service solutions to reduce costs," he said. CFOs must be the catalysts in a transition to IFRS, and finance must substantively contribute to managing the transformation of key systems and processes, according to Kinver.
  7. Manage the change. With the adoption of IFRS, change is inevitable. "The success of any software or process implementation is reliant upon the users," Wilson said. "Most ERP failures occur because of people issues and not the technology," he said. "This is why it is important to manage the change through with organizational change management processes."
  8. Don't rush it. Allow enough time for implementation, especially if a new system is being implemented. "From our studies, ERP projects have tendencies to take longer than expected," Wilson said. Pushing the timeline on an IFRS conversion could result in missing a potential deadline and incurring costly fines or other penalties that the SEC might decide to impose for noncompliance.
  9. Invest in the experts. Although IFRS will be a new requirement to organizations in the U.S., some consulting firms have already taken on IFRS implementations. Take time to ensure the organization guiding you through your IFRS adoption has experience with IFRS, according to Wilson.
  10. Take an agnostic approach to technology. Consulting firms independent of software are able to take an agnostic approach and help you find the best software to meet your IFRS needs. "This ensures that your functional needs are met, and you are not settling for software that is too much or too little for your needs," Wilson said.
  11. Learn from your peers. It's likely that you know, or will know, someone in the industry who has made the switch to IFRS. Use these contacts as a reference to learn from their experiences, Wilson said.

"For most companies, I expect there will be no single obvious approach," Kugel said. "Tradeoffs will need to be made. For example, companies may have to decide between spending money to adapt existing systems or replace them sooner than intended to get added features or functional capabilities."

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