Deloitte Consulting LLPDeloitte Consulting LLP
December 15, 2008
International Financial Reporting Standards (IFRS)
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Agenda
IFRS Background
Comprehensive View of IFRS Adoption
IFRS Adoption: Downstream Impacts and Strategic Benefits
IFRS Key Takeaways
IFRS Contacts and Resources
Questions & Answers
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What is IFRS?
Key characteristics of IFRS:Principals-based approach with greater weighting on interpretation and application of principles, rather than a rules governed approachGreater emphasis on the substance of transactions and an evaluation of whether the accounting presentation reflects the economic realityRenewed focus on the need for professional judgment in arriving at accounting conclusionsGreater use of fair value as a measurement basis placing emphasis on obtaining reliable measurements
IFRS (International Financial Reporting Standards) is a set of principle-based accounting standards put forth by the London-based International Accounting Standards Board (IASB) that is gaining worldwide acceptance on an accelerating basis.
Countries that require or permit IFRS
Countries seeking convergence with the IASB or pursuing adoption of IFRS
THE MOMENTUM TOWARDS GLOBAL IFRS ADOPTION
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IFRS: Today and Tomorrow
Today
Used in over 100 countries and by approximately 40% of the Global Fortune 500
Required for listing companies across all EU countries, starting in 2005
Adoption date announced by large countries like Canada, Brazil and India
Tomorrow
Expected that all major countries will have adopted IFRS to some extent by 2014
Convergence of Japan will be substantially completed
Substantial majority of Global Fortune 500 will report under IFRS
SEC proposed roadmap finalization for US companies expected in early 2009
Global Fortune 500
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U.S. GAAP IFRS Other
About 40% of the Global Fortune 500 companies currently use IFRS. That number is expected to grow as Canada and Brazil adopt IFRS over the next few years.
IFRS is quickly gaining worldwide acceptance as a global standard for financial reporting
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SEC Issues proposed IFRS roadmap
Proposed IFRS roadmap issued (Nov 14, 2008)
The SEC issued its long-awaited proposed IFRS “roadmap” outlining milestones that, if achieved, could lead to mandatory transition to IFRS starting in fiscal years ending on or after December 15, 2014
Proposed rule changes
The roadmap also contains proposed rule changes that would give certain U.S. issuers the early option to use IFRS in financial statements for fiscal years ending on or after December 15, 2009
Roadmap outlines the following: • Mandatory adoption of IFRS by U.S. issuers• Proposed rule on early use of IFRS• Proposed amendments to SEC rules and forms
SEC’s next steps regarding IFRS:The roadmap has a 90-day comment period that ends on February 19, 2009
The SEC believes “the use of a single, widely accepted set of high-quality accounting standards would benefit both the global capital markets and U.S. investors by providing a common basis for investors,
issuers and others to evaluate investment opportunities and prospects in different jurisdictions.”
Proposed IFRS roadmap
SEC’s Motivation for IFRS
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IFRS transition timeline: Adoption by 2014
Regulatory timeline
2009 2010 2011 2012 2013 2014
Nov. 2008 - Proposed roadmap and rules issued. Once finalized, select U.S. filers will be eligible to file IFRS financial statements in 2009.
2011 – SEC to decide whether to mandate use of IFRS for all U.S. issuers on the basis of the progress of milestones. SEC may also decide to allow other issuers to adopt before 2014
Assessment• Technical accounting
• Statutory reporting
• Taxes
• Systems, processes, and controls
• Training and communication plan
• Organizational impacts
• Conversion strategy
Dec. 31, 2014 -Mandated IFRS: Large accelerated filers could be mandated to report financial results using IFRS (accelerated filers in 2015 and non-accelerated filers in 2016)
Jan. 1, 2012 -Beginning of the first comparative IFRS year for companies that will adopt IFRS in 2014
Transition date Reporting date
Illustrative company timeline
IFRS reporting
Conversion• Accounting policies
• Statutory conversions
• Financial statements and disclosures
• System/data enhancements
• Tax structures/ planning
• Auditor coordination
Communication• Board of directors
• Shareholders
• Employees
• Analysts
• Business partners
Business as usual
• Planning, forecasting, and budgeting
• Process refinement
• Execute sustained reporting plan
Capture benefits• Shared services
• Off-shoring and/or outsourcing
• Tax planning
• Systems consolidation
Sustained reporting plan
• Close/reporting process
• Training execution
• Internal control alignment
• Statutory consolidation
• Collateral impacts (e.g., compensation plans, contracts, joint ventures, regulatory requirements)
Dual reporting
U.S. GAAP financial statements (through third quarter 2014)IFRS financial statements
IFRS preparation
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Broad View of IFRS
IFRS may impact many aspects of a company’s business
Technical accounting and reporting
Taxes
Systems, processes, and controls
Organizational impacts on people, training and communications
Collateral impacts may include
Debt covenant calculations
Bonus plan calculations
Dividend management
Contingent consideration
Revenue contracts
Tax returns
Joint ventures
Regulatory requirements
Financing arrangement
Investor, employee, and analyst communications
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Complete and sustained “business as usual”
IFRS reporting
Enable processes and infrastructure to accomplish conversion to
reporting under IFRS
Phase 1 – Assess Phase 2 – Convert Phase 3 – Sustain
GAAP differences - Perform U.S. GAAP/IFRS differences impact analysis
Statutory reporting - Develop a country opportunity analysis relative to statutory reporting
Tax impacts - Identify high-level tax impacts of adopting IFRS on financial reporting, tax methods and reporting, and distributable reserves
Systems, processes, and controls -Identify the high-level impact of IFRS on systems, processes and controls
Organizational functions – Analyze impacts and opportunities of IFRS adoption in other functional areas
Training - Develop and initiate training and communication programs
Roadmap – Develop IFRS implementation roadmap
A typical approach focuses on the critical steps necessary for management to execute a comprehensive IFRS conversion, which begins with a Phase 1 assessment:
Project planning and management
Technical accounting and reportingUnderstanding and summarizing the technical accounting differences (gap
analysis) and developing a statutory reporting plan
TaxAnalyzing impact on accounting for income taxes (gap analysis); tax methods; global tax planning; and operations, systems, and talent
Systems, processes, and controlsConducting a system architecture analysis to understand IFRS impacts on
the existing application systems, processes and controls
Organizational impacts, training, and communications Analyzing and addressing the change impacts of the conversion to the
organization, its people and its stakeholders
Roadmap and reportingSummarize findings from assessment work streams and develop a strategy,
timeline, and action steps for IFRS adoption
Key work streams
Develop implementation
roadmap
Illustrative Approach for an IFRS Conversion
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Accounting
Process, systems, and controls
Legal, regulatory and transition date
Key elements to successful conversions in the EU and
other parts of the world
• Learning IFRS principles-based standards vs. U.S. GAAP rule-based standards. • Maintaining multiple accounting frameworks during transition • Users tend to have a bias towards U.S. GAAP
• Changes to reporting processes and systems are often significant and costly • Failure to consider interdependencies between application systems and internal processes• Current systems and processes not designed to capture data necessary for IFRS reporting
• Lack of consistent standards/laws in many countries for IFRS statutory reporting• Management of discrepancies between foreign regulatory agencies is not fully developed• Lack of readiness on the transition date (in the U.S. this is 3 years before first reporting date)
• Alignment with other application or financial transformation projects• Ready by transition date (three years prior to first IFRS reporting date)• Early training and awareness building• Capture and replicate learning from early subsidiary conversions• Regular communication with auditor• Dedicated PMO/steering committee to oversee IFRS activities• Take advantage of opportunities to streamline statutory reporting• Focus on “business as usual” implementation
Common challenges/lessons learned
Tax• Understanding impact on tax provision calculations• Tax structures can be impacted (foreign entity net assets may be lower under IFRS)• Effective tax rate volatility due to IFRS accounting for income taxes
Organization and project management
• Poor cooperation from non-controlled entities• Lack of a Project Management Office (PMO) and/or steering committee• Underestimating the pervasive impact of changes and the training and timeframe required
Key success factors for a smooth conversion
Common challenges and success factors
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IFRS Adoption: Downstream Impacts and Strategic BenefitsIFRS adoption, while a significant regulatory event, is also an opportunity and potential catalyst for Finance and IT organizations to create global standards and achieve benefits.
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IFRS Adoption: Downstream Impacts and Strategic BenefitsPolicy & Process
Consider the impact on accounting/finance processes (inventory valuation, capitalization of costs, revenue recognition)
Implications of new disclosure requirements
Changes to existing close calendar
Changes to current consolidation logic
Potential for new performance metrics and/or KPIs to measure results of operations
Management reporting packages and global reporting packages
Treasury and cash management activities could be impacted
Legal and debt covenants will need to be reviewed for impact
IFRS can be a lever to help reduce the diversity of accounting policiesWith its consistency requirements, IFRS could be a catalyst to standardize management reporting and provide opportunities for streamlining statutory and tax reporting processesIFRS can facilitate efforts to minimize manual processes, especially with off-line adjustments and spreadsheetsIFRS can drive improvements in Integrated Performance Management
Assess impacts on accounting/finance processes
Determine impact of IFRS to key financial accounts
Analyze IFRS impacts to close, consolidation, reconciliation processes and current consolidation logic
Assess the need for new performance metrics or KPIs and impacts to data analytics necessary to benchmark performance against competitors
Analyze impact of IFRS to statutory and consolidated reporting
Evaluate opportunities to improve tax and treasury
Review legal and debt covenants for required changes
Potential Downstream Impacts
Key Assessment Activities
Strategic Benefit Opportunity
Policy & Process
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IFRS Adoption: Downstream Impacts and Strategic BenefitsGovernance & Controls
Assess overall governance framework and determine changes required to ensure policies are documented, updated and monitored for compliance
Assess governance around decision rights and determine need to establish new decision-making process
Assess span of control and identify changes required to support IFRS
Evaluate process level controls around changes to financial reporting structures
Evaluate the impact on current financial reporting structures
IFRS can facilitate the automation of processes to improve controls
Leading finance functions are moving towards a more centralized operating model, IFRS presents opportunities to simplify and standardize processes and drive enforcement across your organization
IFRS will provide an opportunity to strengthen the integrity of your control framework
Limited scope approach may create control challenges (spreadsheet risks)
Increased importance of clarity in policies and governance with shift to principles based approach
Alignment of internal audit approach with new processes
Systems change control and integration issues
Decision rights and governance around new decision-making processes
Potential Downstream Impacts
Key Assessment Activities
Strategic Benefit Opportunity
Governance & Controls
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IFRS Adoption: Downstream Impacts and Strategic BenefitsOrganization & People
Key Assessment Activities
Assess stakeholders readiness for change and determine communication needs by stakeholder group
Assess roles, reporting relationships and responsibilities
Identify changes required to finance operating model
Identify leadership role in driving change throughout organization
Determine revisions to training and learning materials and identify stakeholders who will require training
Identify key process owners and business owners impacted by change
Review current incentive compensation programs to ensure alignment with IFRS driven reporting structures
IFRS can be a catalyst for creating Centers of Excellence
Training is more comprehensive than most assume and will be required for implementation of principle-based approach
Assessment of skill sets and identification of competency “gaps”
Change management support for changes in processes, organization and systems
Alignment of performance objectives and incentive compensation programs with new reporting structures
Strategic Benefit Opportunity
Potential to consolidate accounting and/or statutory reporting into a Center of Excellence (COE)
Uniform standards will provide potential to increase operational effectiveness across Finance
Potential to enhance / optimize Finance operating model
Potential Downstream Impacts
Organization & People
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IFRS and TechnologyEach systems infrastructure is a specific combination of components and the magnitude of IFRS impact will depend upon how far anorganization has standardized systems and data, and what projects are underway
Regardless of company size and scope, IFRS will have an impact on systems
Even if you have an integrated platform, there are still important considerations for IFRS
Although major software vendors support IFRS, conversion is much more than just “flipping a switch.” An upgrade or adjustments to an existing implementation plan to accommodate the migration may be required
In any case, changes to systems do not occur overnight and will require coordinated efforts from IT and Finance
A roadmap exercise is critical and should be done ASARP (As Soon As Reasonably Possible)
Planning and Calculation Engines
ReportingData Warehouse
ETL
Extract
Transform
Load
Validate
Standardize
Normalize
General Ledger
Chart(s) of Accounts
Multi-Ledgers
ReportingCapabilities
Data Standards
BudgetingPlanning
TransferPricing
Industry Specific Applications
CapitalCalculation
Source Systems
Accounts Payable
Accounts Receivable
Assets
Inventory
Purchasing
Projects
Payroll
Management Reporting
Regulatory Reporting
Business Unit Reporting
Tax Reporting
Local GAAP Reporting
Financial Reporting
Illustrative Systems Infrastructure
Key Considerations
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Upstream Data Must Be Evaluated
Potential Impacts
Key Assessment Activities
Differences in the accounting treatment between current accounting standards and IFRS will create a need for new input data
Current data and transactions may not have all needed attributes or qualities
Sub-ledgers within the ERP system may have additional functionality to support IFRS which is currently not being utilized and could be implemented
Transformation layer may need to be adjusted
Over time the potential for acquisitions of companies using IFRS will increase; altering ETL tools to provide required data elements could make integrations more efficient
Understand the existing system landscape for all impacted business units and subsidiariesIdentify missing data elements due to differences in accounting treatmentAssess required enhancements to legacy systemsIdentify changes to ‘In Flight’ projects
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General Ledger is More Than Adding Accounts
Potential Impacts
Key Assessment Activities
Differences in the accounting treatment between current accounting standards and IFRS will likely drive changes to general ledger design
Multinational companies may ultimately realize a need to re-develop their general ledger platforms to enable compliance with multiple financial reporting requirements (statutory, industry / regulatory and tax)
Multi-ledger accounting functionality within newer releases of ERP may be considered for long-term solutions
Changes to IFRS will likely necessitate redesigned accounting, reporting, consolidation, and reconciliation processes, which may impact configuration
Assess high level changes to chart of accounts based upon differences between IFRS and GAAP(s)
Analyze reconciliation process between sub ledgers and general ledger; assess accounting, reporting, closing/consolidation, and reconciliation processes
Assess journal entry methods and templates
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Data Standards & Warehouses May Be Affected
Potential Impacts
Key Assessment Activities
IFRS has more extensive disclosure requirements, requiring regular reporting and usage of financial data that may not be standardized in current data models
Increased need for documented assumptions, sensitivity analyses may expand the scope of information managed by financial systems
Reporting warehouse feeds to calculation engines may need to be adjusted in a standardized way to support reporting processes
Data governance functions and meta data repositories (potentially including data dictionary, ETL & business intelligence tools) may require adjustment
Identify changes in information requirements due to IFRS and assess impacts on existing data model
Assess readiness of data governance function and meta data repositories to be updated to reflect new data definitions
Confirm impact of any data definition changes on third parties
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Reporting Changes Are More Than New Formats
Potential Impacts
Key Assessment Activities
The differences that arise in the accounting treatment between current accounting standards and IFRS will create a need for changes in reporting
Assumption changes from period to period may require detailed support for derivation and rationale for changes, requiring additional reports
External reporting templates will likely require revisions to reflect IFRS requirements
Changes to data structures may impact KPI production and balanced scorecards
New information delivery tools may be required to meet all requirements
Evaluate external reporting templates to identify changes required to support disclosures
Identify information sets that would be needed to meet IFRS reporting and disclosure requirements
Assess business intelligence environment’s readiness for identified IFRS changes
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System Considerations and Potential Impacts Vary“F
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Mature, but flexibly architected Systems
“Legacy” or Mixed Systems Environment
ERP starting now or under way
Mature ERP Install
Systems Impact of IFRS
Systems complexity could require significant design / implementation efforts, limiting the time to implement robust IFRS capabilities. Decisions could end up tactical if delayed
Numerous choices are available. Decisions should be made based on future system flexibility and business adaptability
Upgrade or targeted & efficient enhancements. Upstream & downstream systems are the focus
Robust technical capabilities allow various solutions to IFRS requirements. Decisions driven by pragmatism
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Key Takeaways
IFRS adoption generally can’t be accomplished by Finance alone; other functions (IT, HR, Marketing etc.) must be included
Major business transformation and/or technology initiatives either in progress or under consideration should evaluate IFRS adoption plans as ‘requirements’
Consistency of adoption can be better enabled by leveraging process and technology
Collection of new / additional data elements may be required to support disclosures
Potential modifications to sub-ledgers is likely to support some of the more challenging IFRS requirements
Mapping U.S. GAAP results into IFRS and adding top-side adjustments and process can work but is sub-optimal
Training is consistently under estimated and extends beyond finance
Communications should include both internal and external stakeholders
Implementation is a project in it’s own right and requires change management as well as centralized, dedicated program management
IFRS represents an opportunity to transform global financial reporting
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