IT chiefs may not think compliance with the new International Accounting Standards is their business, but ignoring it could create more work than you bargained for.
In 2005 it will be mandatory for all publicly listed European companies to file their accounts in accordance with the new International Accounting Standards.
The IAS, also known as the International Financial Reporting Standards, will replace the Generally Accepted Accounting Principles. This change will affect IT in that the software involved in generating and presenting financial figures for the company may have to be modified.
Financial software is a core component of IT inventories and such systems are often major implementations. When firms are running enterprise resource planning systems such as SAP, JD Edwards and Peoplesoft, the question of what will be involved in IAS compliance will be a cause for concern.
Accounting giant KPMG, for example, has called IAS "the biggest thing since Y2K". Analysts have also been prompt to run up warning flags for users. Rakesh Kumar, vice-president of technology research at Meta Group, said, "Most UK organisations appear to be ill-prepared for the convergence of accounting standards."
The effect of IAS on IT
The good news is that the IAS changeover, if tackled in a timely, effective manner, will not be a costly mega-project, at least not for UK companies.
"The UK is fortunate," said Dennis Keeling, chief executive of the Business Application Software Development Association. "Because our existing accounting standards are closer to IAS than some other European countries, the move will be minor compared with France or Germany, where it will be significant."
Moreover, said Keeling, UK users are not going to have to buy new IAS-compliant versions of their finance package. "As far as we can tell, users do not have to worry about their basic accounting software," he said. "It can handle all the IAS issues."
"The accounting systems should be able to cope," agreed Chris Moncrieff, senior manager at KPMG's information risk management division. But that does not mean IT directors can simply disregard IAS - there will still be ramifications for IT. IAS will change the kind of information in company accounts and the way existing financial indicators are calculated across a wide variety of metrics.
There will be changes, for example, to the way assets are depreciated, how revenue is recognised and how pension funds are reported. The general thrust of IAS is to increase the amount of disclosure a company makes in order to ensure its financial condition, both past and future, is more transparent to analysts and investors.
Moncrieff said, "The impact on IT is more a matter of getting the new information from the feeder systems that generate the data for the accounting software, such as policy or mortgage systems." Richard Hawksworth, managing director of software firm Outlooksoft, said, "You will need more operational data to support the financial information. "IAS will bring much closer integration between internal management reporting and external financial reporting, so data needs to be captured, organised and unified from many disparate systems." Keeling said, "Users will have to move data around to change the way accounting software shows depreciation of fixed assets, so you may also need a tool for data conversion."
Don't let IT work alone
Determining what new data IAS will require and how it will be used is not something IT should do in isolation. Getting the company ready for IAS is not the responsibility of the IT department, said Kumar.
"The IT department should not use its existing budget for this - the finance department should pay," he said. But according to Moncrieff, even if the buck for IAS readiness stops with the finance director, it is only prudent that the IT department ensures that the finance department is on track for IAS.
"You need to do a joint IAS impact analysis between business, finance and IT, as different firms in different sectors will be affected in different ways," he said. Kumar agreed. "It is quite a small project - about four out of 10 in terms of project size - but I would put a priority of seven or eight on it. If you leave it until the last moment, it could become a big headache. You need to get going."
What needs to be done now
The 2005 timetable for IAS means companies will need to produce accounts in both IAS and GAAP standards for 2004. This not only means that a company has to be ready for IAS in time to run the 2004 accounts, but it must have the capacity for dual reporting. "The accounts database is fairly small but you will need extra capacity for about a year, which must be planned and budgeted," said Kumar. Moreover, companies that are already affected by other legislation, such as the forthcoming Basel requirements for financial companies, need to co-ordinate those projects with IAS in terms of interdependencies and synergies, said Moncrieff.
A bank creating a datawarehouse for expected lost data under Basel requirements could, for example, use that data for IAS impairment calculations. The bottom line is that, for the IT department, IAS should not be a major hassle - provided it is not neglected or deferred.
Firms will need International Accounting Standards accounts for 2005 and IAS/GAAP accounts for 2004
An impact analysis with business, finance and IT is now an urgent priority
Accounting package suppliers say current versions should cope with IAS in the UK l IAS requires disclosure of new data, so feeder and reporting systems for accounts packages may need to be changed
Dual reporting of GAAP/IAS accounts in 2004 means extra IT capacity will be needed
Check for interdependencies and/or synergies between IAS project requirements and timetabling and that of other financial legislation projects, such as Basel
Prepare for a climate of ever greater exposure and disclosure of company information to outsiders, increasingly via the web
IAS compliance should not be a major project for IT, but it is becoming increasingly urgent.