Indian companies looking at International Financial Reporting Standards (IFRS) implementation will have to enable technology applications based on the impact assessment.
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IFRS implementation involves four stages:
1. Impact assessment
2. Planning & designing
4. Data conversion
The first step was covered in the first part of this series. This article discusses the next three steps for IFRS implementation in India.
2. Planning and designing
In the planning phase, a company needs to answer the following questions while deciding on the solution to be deployed for IFRS implementation.
• How complex is the solution and is there a practical and user friendly workaround for it?
During IFRS implementation, if an organization is unable to implement a policy change, the configuration of the IT systems should be modified. For instance, a company may have to configure its IT systems in such a way that it can track the proof of delivery of goods to customers so as to recognize the revenue.
• Can implementing the additional functionality/ module/ component be leveraged for other business processes?
With respect to IFRS implementation, the financial instruments are significantly impacted. For instance, if a company gets an approval for implementing financial supply chain management based on IFRS implementation requirement, it should also consider if the component can be used for other requirements like risk mitigation and, currency conversion.
• Is there a need to upgrade the IT system and does the return on investment (ROI) justify it?
Computation of ROI should not only consider conversion to IFRS, but also other additional processes or capabilities from the upgraded version, which an organization can leverage from. Many companies planning for an upgrade one year down the line have advanced their plans, thus combining it with IFRS implementation.
• Is it practical to revise master data manually or develop a solution for the same?
If the master data requires an IT solution, a practical/ user-friendly solution should be developed for it.
After the planning, the company should get the design approved from its various businesses and blueprints for upgrading the IT system should be prepared, as part of the IFRS implementation process.
In this phase of IFRS implementation, the configuration changes planned and agreed in the planning and design stage need to be realized or configured in the system. Post configuration changes, the company should test the solutions that aid in IFRS implementation with the current IT environment.
As part of IFRS implementation in India, the relevant end users need to be trained. Additionally, as part of the IFRS implementation process, the management staff should be acclimatized with the revised IT impacts, so that they can amend the management analysis processes accordingly.
4. Data conversion
In the last phase of IFRS implementation, financial statements as per IFRS on the conversion date need to be prepared by an accounting team. Based on the converted financial statements, data conversions required in IT need to be identified. During data conversion, the company should consider the following factors:
• During IFRS implementation, the company should decide whether the data conversion needs to be done at every sub-account level or at general ledger level. For instance, while performing asset accounting, some assets have to be revised based on useful life or value perspective, resulting in changes in sub-account level. However, changes in a loan can happen at the general ledger level.
• Should the data conversion be given effect retrospectively or prospectively?
For instance, if an entity opts for cost model of fixed asset valuation, there will be changes in the cost values from the previous years. However, the company can’t reinstate its financials from previous years in the current year or change the value, as the books have already been closed.
Retrospective data conversion in the present system can be done when the company converts to IFRS. E.g. if a company goes for IFRS implementation from April 1, 2011, it may first convert its March 31, 2010 data as per IFRS norms and adjust all the figures accordingly and start operating from April 1, 2011.
• How to revise relevant plan and budget values of the relevant fiscal year?
IFRS implementation impacts asset accounting, revenue recognition, capital expense, or working capital; a company’s planning and budgeting policies will revolve around these. Hence, if there is a change in the accounting policy, the planning and budgeting should also be revised, accordingly.
• As many IT systems use real time stock accounting, there will be significant point on ‘revision of product cost estimate for the next fiscal year’.
This refers to depreciation of an asset. If a company’s asset accounting is impacted, due to which depreciation changes, the overhead for the product cost will also change. Thus, if a company changes its IT systems in line with IFRS implementation, it should also change its overhead absorption rate.
Take a hypothetical example of a company which traditionally maintains the overhead absorption rate at Rs 10 and an estimated depreciation at Rs 4. With IFRS implementation its depreciation may reach to Rs 5 and hence the company may have to change its overhead cost to Rs 11, correspondingly
About the author: Mandar Joshi is director - advisory services at KPMG. He specializes in IT impact of IFRS and has been involved in design, development, and implementation of customized solutions in the areas of financial accounting, asset accounting, and cost accounting.
(As told to Anuradha Ramamirtham)