With international financial reporting standards set to become the new accounting regime in Canada on January 1, 2011, most public companies there are well along in the conversion process. Their experience may prove useful to U.S. companies if and when the latter are required to switch to IFRS. One lesson: while the finance function naturally should drive the conversion project, the high-level participation of information-technology leaders is essential, especially in complex organizations.
In capital-intensive industries such as utilities, telecommunications, and mining, as much as 20% of the overall IFRS conversion effort may be technology related, according to Paul O’Donnell, a partner in Ernst & Young’s IT, risk, and assurance practice in Canada. “IT should have a seat at the table,” he says. “It is very important that there is open and frank communication between the two groups.”
At Hydro One, a major electricity supplier in Ontario, one of the first steps in the conversion project was to establish a tight partnership between accounting and IT, notes Frank D’Andrea, the utility’s director of corporate accounting and reporting. The teams worked together on the diagnosis of gaps between Canadian generally accepted accounting principles and IFRS pertaining to the company’s business. “As you move along, every time you make an accounting decision you want to get IT’s perspective” on what system changes may be required to accommodate it, he says.
A company has to figure out whether such gaps will be best filled with existing IT systems; low-cost, bolt-on solutions; upgrades to existing systems; or completely different systems. Typically, says O’Donnell, switching to IFRS is not by itself a reason for a complete system change. But if a company has had its existing technology platform for a number of years and added a lot of ad hoc tools as needs arose, an IFRS conversion project may become the proverbial straw that breaks the camel’s back.
IT should provide finance leaders with a cost-benefit analysis that includes a range of options at different price points for closing the gaps between GAAP and IFRS, adds O’Donnell. He advises CFOs to “rein in” the scope of the project, if necessary, so that it doesn’t go beyond what is material to the company’s financial results, running up costs.
D’Andrea recommends ranking the gaps using a matrix of three considerations: the magnitude of the change required, the degree of difference between current GAAP and IFRS, and the amount of time needed to implement a fix. IT projects already in the pipeline should also be ranked; some may need to be deprioritized, given the informational needs that may be required to shift to the new accounting framework.
Indeed, D’Andrea cites identifying new data requirements as a top-priority IT consideration regarding conversion to IFRS. The more principles-based international standards have fewer rules than Canadian (or U.S.) GAAP but compensate for that by requiring significantly more disclosure on events and transactions in the footnotes to financial statements. Thus, systems may need to be retooled to capture and report the new information. If data needs are not addressed early on, D’Andrea says, a company can risk rushing into a short-term solution that will prove unsustainable and therefore, in the end, more costly.