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Deloitte Insight: Implementing IFRS effectively

Author: Dr. Nordin Zain

In our first article (The Star, Starbiz, Monday, 20 April 2009), we indicated the importance of starting International Financial Reporting Standards (IFRS) efforts early, and highlighted the hurdles Malaysian companies may face in their journey towards convergence. It’s now time to look at how the companies can handle IFRS convergence efforts effectively.

One of the most effective ways to successfully roll out convergence is to undertake a deep and holistic look at where your company stands from an IFRS perspective. It is critical that any IFRS convergence effort begins with an initial assessment of the company through an analysis of differences between local FRS and IFRS. This will serve to indicate the depth and breadth of the required changes and will send a first flag about what needs to be done. The extent of changes can vary widely depending on the industry, the level of technology and the staff skill level. Expect wider gaps to exist for financial and banking services, aviation services, international companies, plantations, and oil & gas services.

As part of the initial assessment, a global inventory check of trends in IFRS reporting should be conducted. This is necessary to ensure that any exercise today will be able to cater for the changes of tomorrow and will help indicate which areas are in need of financial resources. At a micro-level, the company will need to assess its internal IFRS skill sets to establish the level of training required to equip accounting and finance personnel, both during and subsequent to the first implementation.

Therefore, it is also important to identify the broader implications of the IFRS requirements. What would be the tax consequences of IFRS differences? What are the system implications for new reporting requirements? Other similar questions need to be asked to avoid underestimating the scale of effort necessary for convergence.

The final component of the initial assessment involves designing a strategic IFRS approach and a road map for implementation. This will help illustrate the actions and timings necessary for convergence.
It is important for top management to be involved from beginning to lend commitment and authority in allocating resources for the next step in IFRS convergence, the planning process. This typically includes assessing the company’s process and statutory reporting, technology infrastructure, and organisational issues. Top management must provide direction on the overall approach to IFRS implementation, financial policy considerations, including the company’s first-time adoption policy choices, reporting dates and use of exemptions.

When it comes to assessing process and statutory reporting, companies need to look at areas such as their management reporting packages; global and statutory reporting requirements; and internal controls and processes, including documentation and testing.

The technology infrastructure of the company shouldn’t be overlooked. IFRS convergence stands to heavily impact the IT infrastructure to support charts of accounts, consolidation, management of multiple GAAPs and any sub-system issues related to configuration and data capture.

The final area of assessment, organisational issues, requires a large time investment due to its direct impact on the company. Examples include tax structures; treasury and cash management; legal and debt covenants; internal and external communications; and human resource issues such as education, training, and compensation.

At this point, it may be helpful to draw upon the experiences of IFRS implementation in Europe and learn from our European counterparts.

Firstly, the European companies faced relatively higher complexities with financial services than other industries. Banks, insurance companies and unit trusts are major beneficiaries but require much more organisational resources to migrate and to keep up with the ever changing requirements of the reporting standards.

Secondly, directors and key executives faced challenges in understanding the accounting regime due to its changing requirements and its consequential yet less readily quantifiable pervasive impact on the organisation. This was especially true for large conglomerates in diverse geographical locations, with different levels of IFRS development.

Thirdly, our European counterparts found that late starts in implementing IFRS often resulted in costs of convergence escalating beyond initial estimates. This message is a real concern for Malaysian companies which have merely six months to implement FRS 139 Financial Instruments Standard. A comforting news is companies currently have more than an 18-month window to migrate to full IFRS in 2012. Careful evaluation of risks of unnecessary spending for migration is very important and this points towards the need to engage professionals early.

Fourthly, there are still unresolved issues where there can be more than one answer. This is especially prevalent in the case of FRS 139, where the concept of fair value is still being debated up to this day.
Lastly, our European counterparts indicated that companies will find it difficult to get IFRS convergence correct the first time around. Teething problems will be regular. Top management needs to ensure that the conversion exercise gets the full endorsement organisationally and commitment from staff over an extended period until the exercise meets its intended goal.

In summary, Malaysian companies can adopt several best practices to smoothen the impact. Start early as costs will escalate as the cut-off date approaches; endorse the migration with commitment; build awareness within the company; have regular communications with professionals who can guide and help; have a dedicated implementation team; integrate efforts; learn from prior conversion exercises; and finally, see that it achieves its desired goals.

The writer, Dr. Nordin Zain is an Executive Director in Deloitte Malaysia. He specialises in advising companies on IFRS implementation and Islamic accounting standards. He can be contacted at myinsight@deloitte.com.

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