SAP

In continuation to my previous blog post on "IFRS adoption and IT systems: What should be your focus area ?", we realize that transition to IFRS is a major challenge for any organization. It is far more than a technical accounting exercise. Implementing IFRS will have impact on many business process of the organization, if not all. It will give rise to new risks as well. The issues include changes to the system, implementation of the new system, modification to the business process, enhanced reporting requirements, etc. Day to day activities of employees will be affected by the additional requirements which will in turn lead to changes in their roles and responsibilities. New accounting policies may have to be drawn up for complying with the requirements.

IFRS is a principle based standard and it is entirely different from the rule based approach of US GAAP. Companies responsible for internal control over financial reporting under SOA section 404 and operational audits will have to analyze how IFRS is going to impact their company. The risks and controls may have to be redefined and monitored.

In the initial years of IFRS adoption, duel reporting is inevitable. Organizations will have to adjust their reporting packs and ERP systems to meet the complex reporting formalities. It is a time consuming process. At the same time, additional resources will be required to meet the requirements. Staff training for the new processes will have to be developed and implemented for the successful adoption of IFRS.

IFRSs available now are not the final standard. IASB is making changes to the standards from time to time. An organization will have to monitor these changes and need to incorporate them in their accounts. The documentation and testing will have to be changed in line with the accounting changes. The controls will need to be revisited from time to time to ensure that all the risks are remediated or mitigated.

The other major challenges for the IFRS adoption are:

• The shortage of IFRS trained employees
• Under estimation of time required
• Determining the areas where the company needs to apply fair value and determining those fair values.
• Familiarizing with new concepts in IFRS which did not exist in previous GAAP.
• Identifying the areas of GAAP differences and making a decision on selection of the exemptions to be applied.
• Analyzing complex topics like Financial Instruments and drawing up the necessary disclosures.
• Identifying changes required in the existing financial reporting system to confirm with IFRS requirements.
• Identifying the extend of effects on the existing contracts and agreements.
• Lack of co-ordination between group entities and the limited knowledge transfer
• Poorly defined roles and organization structures

The major risks concerning IFRS adoption are :

• Failure to effectively communicate the impacts of change to stakeholders including boards, audit committees, investors and analysts.
• Managing the issues associated with accounting and reporting under multiple GAAP in the transition period.
• The impacts on internal controls and the certification process.
• The impacts of change on retention of key employees.
• Excessive costs and work levels resulting from ineffective planning.
• Inability by management to conclude and certify on the design or effectiveness of the company's internal controls over financial reporting.
• Inability to interpret the principle based standards and adopting the appropriate accounting policies.

The success of IFRS adoption depends on how organizations tackle these challenges and risks.