As Canadian companies transition to IFRS, it will be important to examine the accounting and information systems from a data collection standpoint.
Although there are requirements to collect new data classes for IFRS purposes, this data may already be available in the organization’s systems. The size of the organization may have some bearing on the availability of this data.
The systems side of data collection is an issue for all companies from smaller venture exchange listed companies using relatively simple systems which don’t have a complex chart of accounts, to large blue chip multi-national with deeply entrenched systems which also feed into the general ledger. At the end of the day, it boils down to accountants, still doing debits and credits – the larger companies may have a bigger task ahead because of a more complex system, but smaller companies may have to imbed IFRS specific data collection in their business processes. Even if the entity is a small 4 person shop, once the major IFRS changes are identified and understood, they can effectively capture the relevant data. In a larger entity highly reliant upon systems which need to be re-checked, there will likely require much more time compared to a company that does not have inter-linked systems and cross controls.
Larger organizations generally have more sophisticated management information systems and even though they may not have isolated particular data classes from an accounting standpoint, the data is probably located somewhere in the information systems. It would be a matter of extracting the required information, and having the IT departments generate a new report. For large organizations, this may simply be a data extraction systems exercise.
Smaller organizations may have more data collection issues because they don’t necessarily have sophisticated management information systems – they may rely more on key decision makers in the company who talk to each other, rather a complex information system. This may create challenges for smaller entities lacking a robust repository of data.
Configuration of a company’s accounting systems is an area of data collection which requires careful review – there can be some changes that a company needs to be aware of – especially if highly modified legacy systems are being used that pulls data and classifies into accounts in a prescribed format – for instance, if consolidations are set up in a specific way. If systems are going to have to fundamentally change, then early on in the process, data points will need to be collected, and it will be necessary to understand how this will feed into the systems, not only for external reporting, but also for the internal management reports.
Some companies use Enterprise Resource Planning (ERP) systems as opposed to pure financial reporting systems. ERP systems are diverse and cover many industry sectors. With the ERP environment, the data collection is enterprise wide, and feeds into the financial systems as part of ERP. The IFRS project team will need to carefully review how data is currently collected through the ERP system, and what the issues are within the business rules applicable to that particular data collection environment. It would also be advisable to involve the ERP vendor, to address the IFRS data collection needs.
Another data collection issue regarding IFRS pertains to the use of spreadsheets. For example, if divisions are subsidiaries are reporting as a group – as opposed to updating the subsidiary systems and getting systems capable for reporting under IFRS, they would prefer to report under the previous GAAP, and then use spreadsheets to adjust to IFRS. This is a concern and a risk, especially under the internal control environment within Canada – on an ongoing basis, this fraught with risk, and not a sustainable practice.
Band Aid Solutions
In dealing with IFRS differences with a quick short cut method in the first year, the same issues will need to be dealt with in the second year and beyond – these challenges are best managed properly upfront so they don’t have to be revisited after implementation when the project funding may no longer exist. The best strategy for IFRS conversion is to push it down to the transactional level, right from the beginning.
If company is already in the process of revamping systems before planning started for the IFRS conversion – put on the brakes – reconsider the systems overhaul in light of the IFRS change. Take the time now to work it into the IFRS work plan. This will be more effective than revamping your systems now, and literally in 2 years time or possibly less, having to rethink the systems again.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your accounting professional for further guidance.