No one is sure what the problems will be or the extent to which companies will have to re-engineer their systems. The packaged accounting application vendor community has been saying that customers will be OK, provided they use a system that has a flexible chart of accounts.
This is a gross oversimplification. The reporting and consolidation vendors like Frango and GEAC (Comshare) say that most of the issues can be handled in their packages. Needless to say, they expect to see a sales bonanza.
But this won’t cut it either because as Nigel Rayner, product manager at SunSystems, says: ‘It’s a bit flippant to say that adding another layer over the accounting application will solve your problems.’
The scale and extent of the issues is only now becoming clear. Apart from reviewing accounting and reporting systems, companies will need to take a hard look at the underlying transaction systems and associated data because these will provide the source of information needed to determine how different assets, liabilities, costs and revenue are treated.
This means that IAS goes well beyond the boundaries of the general ledger.
Once that has been done, then finance directors will need to study the impact on the published numbers, along with considering the requirements of regulatory bodies like the Financial Services Authority.
Finally, companies will need to see how local versions or legal requirements impact published accounts.
Volkswagen provides a good example of the IAS impact. VW quoted its capital and reserves for 2000 under German legal requirements at EUR9.2bn (£6.4bn) and then showed EUR20.9bn under IAS.
There were 11 separate categories where change impacted the results.
VW had been using value-based reporting methods internally for some time prior to making the change so considered itself well placed to review the position.
The project to validate and tweak its systems alongside undertaking the accompanying change management and education programmes took well over a year using a team of PricewaterhouseCoopers consultants.
Bryan Kettles, FD at insurance company Aegon Distribution says: ‘We will need to educate analysts and business journalists about the impact on our figures.’
The combination of these factors has important software implications.
There will be a three-step change between now and 2007/08. Early in 2004, companies will need to understand the IAS impact across all their business systems and consult with their software providers about how to overcome the ‘fair value’ hurdles.
They will also need to implement change so that comparatives for 2004 can be drafted. This will mean dual accounting internally for 2004 and externally for 2005. The next wave comes in 2005/06 when the full impact of standards, some of which are still under discussion, becomes mandatory.
Dual accounting will not necess-arily go away because much will depend on the different impacts of IAS and US GAAP, especially at group consolidation level. Finally, in 2007/08, fresh change will occur if US GAAP and IAS converge.
Chris Montcrieff, senior manager information risk management at KPMG, believes large organisations will need ‘at least a year’ to understand the implications and take steps to comply in advance of the effective start date of 1 January 2004, so that they can provide comparatives.
He advises companies to undertake: ‘An impact assessment, especially as it affects feeder systems to the financials.’ This means looking at core business transaction and trading systems that interface to the general ledger and in turn reporting systems.
In common with others, he is concerned that not enough companies have devoted appropriate resource to reviewing the critical issues. John Sinclair, international product manager at GEAC and a BASDA general council member, says: ‘Complacency is a worry. We’ve not seen the uptake that we anticipated.’
With a fresh emphasis on the balance sheet, companies will need to ensure they have consistently applied, well-documented methods of valuation.
This has a direct impact on systems because companies will need to be certain they have all the information needed to arrive at an informed opinion, while ensuring that all data is both captured and synchronised.
Today, the anticipated complexity and diversity surrounding valuation methods makes it difficult for software providers to do much by way of automation.
At present, the emphasis in the software community is on ensuring that systems are capable of thorough audit.
Rejigging the chart of accounts will provide minor relief, but that assumes it can be readily done.
According to Dave Turner, marketing director at CODA: ‘Companies using software that operates out of a unified database and which has flexibility in the chart should have little real difficulty.’
Much uncertainty remains and the issues flagged here are only the start.
In our next look at the software implications, we will examine some of the detailed issues. In the meantime, senior management should be assessing the systems risk, consulting with their software providers to understand the likely impact.
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