INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

IFRS (International Financial Reporting Standards) is the result of decades of pursuing a universally accepted set of accounting and financial reporting standards. This pursuit began back in the 1970s and slowly gained momentum over the years, especially over the last decade.

Currently, there are more than 113 countries permitting or requiring IFRS reporting, including those of the European Union. A survey conducted in late 2007 by the International Federation of Accountants (IFAC) indicates that the majority of accounting leaders around the world agree on the importance of a single set of accounting standards for economic growth. 

eBrief: Get On Board the IFRS Train

In this eBrief, we’ll discuss:

1. The reasons for IFRS compliance
2. IFRS implementation strategy
3. The importance of IFRS implementation software

For more information on how to download the eBrief, please click here.

For many companies, especially those that have multinational operations, complying with International Financial Reporting Standards (IFRS) is synonymous with extra workload. Whether the company has already begun the adoption process or are bracing themselves for a major change, they should know that IFRS, in fact, is not as scary and daunting as they seem.

Businesses should develop a mindset that facilitates IFRS transition by understanding key benefits of IFRS. The two primary groups that can benefit from IFRS adoption are:

1. Investors and investment institutions

With IFRS in place, investors get greater financial and operational transparency so they can more accurately compare the health and performance of one company with that of others, and, as a result, make better fact-based investment decisions. If a business can convey a promising outlook, the pool of potential investors and lenders will expand.  

2. Compliant companies

After implementing IFRS, businesses will be able to measure their operations and company finances more precisely, setting the stage for improved business performance. They will also gain better insights into the operations of their competitors, customers, and partners as they make the transition. Some specific benefits of IFRS compliance include:

• Improved financial reporting and tax planning: Under IFRS, companies will produce a standardised and consistent set of accounting and financial reports for complying with local statutory and consolidated requirements. This will help improve the analysis of financial reporting and tax planning processes.
• Improved day-to-day operations: Businesses will get faster access to more in-depth financial performance information to use in analysing and making better decisions about day-to-day operations.
• Better managed resources: By standardising processes and accounting, companies will be able to standardise and streamline accounting systems across the enterprise and reduce the cost of auditing and statutory reporting.

• Improved financial controls: By standardising the approach and control over statutory reporting, businesses will reduce the risk of penalties and compliance problems enterprise-wide and in individual countries.
• Lowered cost of capital: Increased insight into financial results and adherence to high-quality financial standards, as specified by IFRS, can benefit both companies and their investors with a reduced cost of capital.  

Regardless of where you fall on the adoption timeline, one thing is clear: IFRS requires major changes in the way most companies measure and report business performance.

If you’re just getting started in the transition process, you’re probably asking yourself, “Will transitioning to IFRS do anything for my business beyond satisfying a regulatory requirement?”

Read the whitepaper "Adopting IFRS: A challenge for some, Well worth it for everyone" to understand:

• The benefits of IFRS
• The implications for financial statements
• How to approach the transition

Undoubtedly, there are quite a few benefits of IFRS adoption. Many multinational companies and national regulators endorse IFRS because it would be easier to compare the financial results of reporting entities from different countries if public companies’ financial statements were prepared using the same standards, allowing investors to understand opportunities better.

Also, large public companies with multiple charts and books in multiple jurisdictions would be able to use one accounting language enterprise-wide and present their financial statements in the same language as their competitors. Another benefit, as pointed out by the AICPA, is that in a truly global economy, financial professionals, including CPAs, will be more mobile, and companies will be able to respond more easily to the human capital needs of their subsidiaries around the world if one standard is used.

Building business efficiencies and greater competitiveness for North American companies. Regulatory authorities are on track to make the International Financial Reporting Standards (IFRS) a requirement for all publicly-traded companies in the US, Canada, and Mexico over the next few years. For public companies in these countries, the transition to IFRS will be the most significant regulatory change in many years and one with the potential to directly impact overall competitive position.

The impetus for the change is clear—create a consistent international approach to financial accounting so investors can better compare the financial performance of companies operating in different countries and, by doing so, foster deeper and more liquid capital markets that facilitate economic growth.

However, the specific implications for the companies who must transform their financial accounting from the applicable Generally Accepted Accounting Principles (GAAP) to IFRS are less clear. Will the adoption of IFRS simply mean companies must undergo a costly technical conversion of their internal accounting processes? Or will the change represent a more fundamental business transformation that leads to greater efficiency and a more competitive position, both domestically and internationally? Or will it be a combination of the two?

Since first becoming a mandatory requirement in European Union countries in 2005, IFRS has become the financial accounting standard in more than 100 countries. With more than 70,000 customers worldwide, many of whom have made the transition to IFRS, Infor™ has had considerable direct experience helping companies make the transition and in observing how the change has impacted their business. Based on our experience, we believe there are distinct competitive advantages that can be realised as part of the IFRS transition process.

Explore the business process changes that US and Canadian companies have to make to transition from their respective GAAPs to IFRS in our whitepaper, which is available to download today!

Globalisation has made the transition from VAS accounting to IFRS accounting a pressing issue for many organisations. It does not only apply to global companies operating in Vietnam but also to Vietnamese companies with foreign capital investment, which helps increase mutual understanding and trust for foreign investors, who do not have an insider’s knowledge of VAS.

Why are companies not yet willing to adopt International financial reporting standards IFRS?

• Costs of IFRS adoption: Although IFRS increases financial visibility for financial report users across the world, some might think that IFRS is too complicated.  Also, to some SMEs, investing in IFRS financial accounting is costly, in terms of training and hiring qualified accountants as well as upgrading technologies to accommodate the new financial reporting standards. However, these should not be considered as disadvantages when it comes to long-term business growth.
• The fundamental difference between VAS and IFRS accounting: The major cause of hesitation is the fundamental gaps between VAS and IFRS. For instance, the former one leans on a historical value basis, while the latter does on a fair value basis. Though it is not easy to define the fair value in certain cases, especially in the Vietnamese market context, this concept has been widely supported. Recording based on historical value basis will not give a proper view on the financial situation of the business, especially for assets, whose fair value fluctuates over time, such as land and building, equipment, etc. Generally, companies in Vietnam adopting IFRS need to run parallel systems for both VAS and IFRS accounting.
• Lack of treatment for certain items in VAS: According to Deloitte, VAS was based on IAS accounting standards that were issued from 2003 backward and VAS has not adopted any of the new IFRS or the IASB's amendments to IAS accounting standards. IFRS financial accounting includes the treatment for certain items that VAS does not have. For example, VAS has not addressed the issue of Share-based Payment transactions (IFRS 2) although equity instruments have been commonly utilised by many companies. Also, it is usual for large companies to have investments in separate projects or subsidiaries temporarily, and to hold them for disposal but there is still a lack of treatment defined by VAS for Non-current assets held for sale and discontinued operations (IFRS 5). In addition, VAS has not yet defined treatments for financial instrument as IFRS 9 has.
• Other obstacles: Translating accounting terminologies from Vietnamese to English is also challenging. Besides, like IAS, IFRS can be amended or terminated by IASB; thus, companies have to update frequently to catch up with such changes.

Why should companies be more open to IFRS adoption?

The transition from VAS to IFRS requires that new concepts to be established and old concepts be changed. Companies moving from VAS accounting to IFRS accounting will have to equip themselves with the necessary knowledge to handle transactional information for detailed records and disclosures, as more strictly required by IFRS.

Although this takes time and effort, adopting IFRS will lead to many benefits. Under the consistent financial reporting standards of IFRS, the company’s financial position is reflected more accurately and consistently, allowing worldwide managers and investors to make better decisions.

Furthermore, using IFRS accounting can help companies have a better understanding of its value in the global market. This is especially beneficial when it comes to mergers and acquisitions, comparison with competitors, forging cooperation with foreign partners and attracting foreign investors.

In our view, companies are best served when they take an integrated approach to build an IFRS framework. Toward that end, they need a fully integrated solution ideal for supporting the IFRS adoption. A key element is the ability of enterprise applications to work in conjunction with financial management ones to meet a wide range of accounting requirements and processes mandated by the International Financial Reporting Standards.

Financial management solutions should provide specific support for the requirement of companies reporting in both IFRS and VAS. By supporting multiple charts of accounts, fiscal calendars, and accounting currencies, they should deliver fully automated capabilities to comply with multiple accounting practices.  The ability to have multiple representations of core financial data will make it possible to understand the impact of IFRS adoption on their businesses without imposing a significant burden on the financial teams. 

Here are some capabilities that enterprise solutions should have to cater to specific IFRS requirements:

• Financial statement presentation: They should provide the flexibility to present financial statements in multiple formats, use multiple currencies and exchange-rate scenarios, and use flexible accounting group headings.
• Segment reporting: They should allow companies to record and report information for segments using a variety of dimensions, including geography, service, and product. They should also enable multiple views into operational performance and multiple versions of the same structure, including budgets, targets, and actual results.
• Foreign currency transactions: To comply with the IFRS requirement that companies report the effect of foreign exchange rates, they should have the capabilities to specify by account and/or statement which currency and exchange rate sets apply.
• Minority interests: They should enable consolidation adjustments such as share of associated entity profits, minority interests, and intercompany and recurring adjustments. They should also dynamically book journal entries at the proper proportional value for subsidiaries and generate full audit trails on adjustments.

• Financial reporting in hyperinflationary economies: They should provide built-in currency intelligence that eliminates time-consuming and error-prone manual conversion processes. They should also support consolidation using multiple sets of exchange rates for multiple currencies and enable a company to track information in a business unit’s local currency, functional currency, and reporting currency.
• Discontinuing operations: They should provide analytical tools and support for multi-organisation structures to show the consolidated effect of the disposition.
• Multiple reporting requirements: They should support a variety of consolidation and reporting processes within the application and simplify data collection from multiple remote transaction systems and charges of accounts.

Adopting IFRS alongside VAS requires technical, strategic, and operational changes. There also will be an unavoidable impact on information technology (IT) systems, as companies change the way they manage and report on numerous business activities. Hence, companies should employ a methodical approach when building the IFRS framework.

There are three major phases: 

1. Diagnosis

In the initial phase, a company should assess its readiness for IFRS. Since IFRS has an impact far beyond the accounting department, the assessment should address all parts of the company that have a role to play in transitioning to IFRS. Some of the specific focus areas:

• IFRS-specific skills: Are there IFRS-specific skills available within the company and, if not, what is the best way to get access to the skills—good sources include your enterprise software vendor and specialised vendors, such as accounting firms and training firms, that have IFRS practices? 
• Training: What training is required across the enterprise to support the transition effort? Many employees will have part-time responsibility for the adoption of IFRS that stems from their primary responsibilities.
• External agreements: What agreements are in place that have financial ratio covenants attached that may be affected by the introduction of IFRS accounting?
• Financial instruments: What impact do the financial instruments have on your operation? With changes in a reportable position triggered by IFRS adoption, will there be a business case for changing operations?

2. Development

With your company’s readiness for the IFRS framework determined, the next step is to develop strategies that each part of the business will need to implement. This phase is more detailed and action-focused.

• Financial management: Specific plans for aligning hedging strategies, covenant ratios, etc. with IFRS need to be developed. Specific changes in account structures, analysis codes, integration changes, financial reporting, etc. also need to be developed.
• Human resources: The need to comply with IFRS can have a significant impact on a company’s human resources. Companies will have to segment geographies and business units that contribute more than 10% to bottom-line revenue. In keeping with this segmentation, companies may also believe it is prudent to ensure bonus payments for employees in these business units are more clearly defined.
• As with any change-management activity, prompt, clear, and comprehensive internal and external communications is essential. In addition to employees, you will need to communicate your progress in transitioning to IFRS to analysts, the press, banks, shareholders, and government regulatory officials.
• Review end-to-end business processes: In addition to the targeted business processes of financial management, human resources, and communications, it is also useful to assess how IFRS will impact end-to-end business processes such as Order-to-Cash and Procure-to-Pay.
• Supporting technology: The Development phase is the time to determine the specific ways in which your IT systems will need to change and begin the process for implementing those changes.

3. Delivery

The development of specific IFRS-related business changes is followed by a Delivery phase. In the Delivery phase, you begin implementing your IFRS compliance strategies. This requires several steps, including:

• It will be necessary to test modified business processes to ensure that the correct information is captured and processed correctly.
• It is important to have flexible reporting processes. Rigid, spreadsheet-based reporting based on a prescriptive model will not support multiple reporting requirements.
• The final step in the delivery phase is to have external auditors review and confirm that your process changes will lead to IFRS compliance.

One of the steps in an effective IFRS implementation strategy is to assess the impacts of IFRS on the whole organisation. Reporting and disclosure (e.g., financial statements) are likely to be at the forefront of major changes.

The preparation of the first IFRS financial statements may require the capture of information that was not collected under a company’s previous GAAP. Hence, businesses need to identify the differences between IFRS and their previous GAAP in advance so that all of the information required can be produced.

Specifically, the opening IFRS balance sheet should include a reconciliation of:

• Equity from previous GAAP to IFRS at the adoption date and at the end of the latest period presented in the organisation’s most recent annual financial statements under previous GAAP
• Net profit from previous GAAP to IFRS for the last period in the company’s most recent annual financial statements under previous GAAP

The reconciliations should give adequate detail so users can understand the material adjustments to the balance sheet and income statement, and distinguish changes in accounting policies from the correction of errors identified during the transition.

Some adjustments included in the opening IFRS balance sheet will depend on other adjustments (such as deferred taxes and any noncontrolling interests). Therefore, some balances should be calculated after other adjustments have been processed. In general, the recommended sequence of adjustments is as follows:

• Recognition of assets and liabilities whose recognition is required
• Derecognition of assets and liabilities whose recognition is prohibited
• Adjustments to values of recognised assets and liabilities
• Recognition and measurement of deferred tax
• Recognition and measurement of noncontrolling interest
• Adjustment to goodwill balances

As a manner of presentation, for income statements, the entity should select a method of presenting its expenses by either function or nature. While businesses are encouraged to use one of these on the face of the income statement, putting it in the notes is permitted. Additional disclosure of expenses by nature is required if a functional presentation is applied.

Also, balance sheet items (asset/liability) should be separated and shown as current and non-current (short term/long term) items.

The "Big Bang" in Accounting System 

Purchasing a new management software, particularly a cloud-based accounting solution, is not a passing trend of the century.

In a study conducted on 3,000 accountants worldwide by Sage People in 2018, 67 per cent of the accountants stated that they "have their heads in the cloud"; more than half of the respondents have already adopted cloud-based solutions. 

As cloud computing is becoming more mainstream, early adopters are now reaping their benefits. Many IT experts and accountants believe that the future is in the cloud.

The whitepaper includes:

• Do's and Don'ts in implementing a cloud accounting system
• Why do you need a deep understanding of your current accounting system?
• What is Cloud and how can it fit your organisation? 
• The differences between Cloud accounting and Traditional accounting

Why wait? Download our whitepaper "The Next Big Things in Accounting Software" today!