International Financial Reporting standards, or IFRS, are standards and interpretations adopted by the International Accounting Standards Board (IASB). IFRS financial statements consist of a balance sheet, income statement, statement in changes of equity or statement of recognized income, cash flow statement, and notes. The impact of International Financial Reporting Standards on technology should not be an issue to be overlooked. IFRS is rapidly acceptance around the world, forcing the United States to assess the implications of the change to come. By the year 2011 the entire world, including the United States could potentially using IFRS to some extent. Viewing the financial reporting standards change as simply a technical change could lead to costly rework for processes and programs.
The extents to which systems need to be changed depend on multiple facts and vary for each company. Some factors that will affect this change are the company’s strategy for responding to IFRS, the number of applications that go into generating financial statements, and the capabilities of the current systems. The accounting treatment between IFRS and Generally Accepted Account Principals (GAAP) will create a need for changed calculations, new data, and changes in reporting. Systems will need to be re-mapped or reconfigured to facilitate these changes. It will be crucial for management teams to make strategic decisions early on in the conversion process to try to limit unnecessary costs.
The new accounting disclosure and recognition requirements of IFRS may result in a more detailed presentation of the financial information, information to be calculated on a different basis, and new data elements to be recorded. The changes to the chart of accounts will require creation of new accounts and deletion of accounts on the information system. Spreadsheets and models use by management should be included when considering the required system modifications. Interfaces may be impacted by the timing and frequency of data transfer requirements.
Each individual International Accounting Standard (IAS) will require different technological changes to the information systems. For example, IAS 39 (Financial instruments: recognition and measurement) will cause many problems due to the need of extensive data access and storage requirements that come with the following new standard. Even though changes to financial reporting standards may seem time consuming and costly, being ignorant to the necessary technological changes could prove to be devastating.
Another problematic change arises for companies that use the Last in, First out (LIFO) inventory system. LIFO is not allowed under IFRS, and may lead a company to revisit their inventory system and change their process. Also, data feeds from systems used for calculating revenue recognition may have been tweaked to make up for the way IFRS lets companies record revenue differently from U.S. Generally Accepted Accounting Principles.
Another example of a technological change that companies must address relate to changes in accounting for research and development. U.S. GAAP allows companies to expense their research and development costs as one item, whereas under IFRS companies must capitalize their development costs. Most of the U.S. companies’ IT systems aren’t built to separate out that information. This would require these companies to make a change to their development costs accounted for on their balance sheets, which would require a technological system change.
IFRS may represent a significant cost savings opportunity, since it affords many advantages. Some advantages of IFRS include improved communication between subsidiaries by providing an international accounting language. IFRS also provides more efficient use and availability of resources. Allowing for more control over statutory reporting to help reduce the risk related to penalties and compliance problems at the local level is another benefit of the adoption of IFRS. As long as technological issues are assessed and work-out before integration, IFRS will be a globally productive change to financial reporting standards.