How adoption of IFRS will impact IT systems in Nigeria
The directive by regulatory bodies for companies to adopt International Financial Reporting Standards (IFRS) as the new basis of financial reporting, and the release of the adoption roadmap, requires that companies quoted on The Nigerian Stock Exchange (NSE) publish their financial statements in accordance with IFRS with effect from years ended 31 December 2012.
This effectively means that the transition day to IFRS is1 January 2011: on this date, the organization is required to prepare its “opening balance sheet” in accordance with IFRS. It is quite surprising that as of now, most of the organizations in that category are yet to start the transition process.
This is probably due to misconceptions surrounding the conversion to IFRS; many think it’s just an “accounting event” that can be handled by “Corporate/Finance”, some others think it’s simply a need for new templates and rollups in their financial reporting applications that it has no real impact on other areas of the business and the people involved. Perhaps some are just not yet bothered and think it can be handled in their typical “fire brigade approach” at the last minute. It is even more startling that some companies assumed they have already converted to IFRS when, in reality, they haven’t. A banker recently told me that his bank has converted to IFRS over 2 years ago and I immediately knew where he was missing it. It is possible to ‘convert’ your audited financial statement to IFRS, but this is entirely different from recording of daily transactions on IT systems in accordance with IFRS, which is what we should already be doing.
It will come as a surprise to many especially the unprepared that the IFRS adoption is an event that will affect IT systems to their core; something that requires planning and coordination across functional lines (accounting, tax, treasury, HR, IT) and it is only through well planned execution before a company can benefit from its adoption. Viewing the adoption of IFRS as simply a reporting change can lead to costly rework at a later date and/or cumbersome and inefficient processes.
A typical IT environment supporting financial processing has five components - Source Systems, General Ledger, Data Warehouse, Reporting System and the physical Infrastructure. IFRS adoption may impact all these components depending on the industry and the level of standardized systems and data in an organization.
A typical IT environment supporting financial processing has five components - Source Systems, General Ledger, Data Warehouse, Reporting System and the physical Infrastructure. IFRS adoption may impact all these components depending on the industry and the level of standardized systems and data in an organization.
Some examples of IT areas that may be impacted by IFRS include:
-General provision of 1% on performing loan already configured on bank’s IT systems may need to be replaced by specific provision while the current provisioning method for “non-performing loans” may be replaced by’ source systems’ that captures the result of impairment tests according to IAS 39.
-IT systems should be able to breakdown and recognize information components of Property, Plant and Equipment in line with IFRS 8.
-IT systems that maintain spot exchange rates may replace the use of average quarterly or annual exchange rates by some entities for their foreign currency transactions.
-Effective interest rate for income recognition may be configured on IT systems to replace the current method being adopted by some financial institutions.
In order to see the whole picture of IT system changes that would be required, organizations need to spend time understanding the technical accounting difference between Nigerian GAAP (SAS, CAMA, BOFIA, SEC Rules)and IFRS as it relates to their own operation, thereby identifying the key impact on IT, and strategically designing future state systems. The time to do so is NOW.
I find it mind-boggling that some companies have already issued request for proposals to reputable IT vendors seeking for middleware to address IFRS conversion issues without first taking time to understand the technical accounting difference between their current reporting requirements and IFRS. Just as it doesn’t make much sense to recruit someone before consideration is given to drawing up his job description, organizations need to prepare a functional requirement blueprint that stems out of a detailed gap analysis between the capabilities of your current IT systems and required future state systems that is “IFRS compliant”.
It may interest you to know that in other parts of the world where IFRS have been adopted, some organizations had 3 to 5 years conversion plan in order to benefit maximally from the adoption of IFRS. In Nigeria, we are already beyond the transition date and with just a few months left to 2012, quoted companies and significant public entities will have to work harder and faster if their conversion must be successful.
It is pertinent to mention that companies should implement IFRS in a way that makes sense for their organization. No One Size fits all. The assessment phase is crucial. During a thorough assessment phase, you can evaluate cost/benefit trade-offs carefully. Project Management is also crucial to a successful adoption of IFRS; a project management office should be set up to establish a program structure to develop the IFRS conversion roadmap.
IFRS adoption has some benefits and organizations should view the conversion as an opportunity to consider the long term vision/plan for an information platform. System design should include an adequate level of flexibility to incorporate additional accounting and regulatory changes in the future. The program should include a strategic knowledge transfer plan to convert the new processes into the “business-as-usual” state. The key to achieving benefits to IFRS is to understand that it’s not just accounting. Starting to understand where you are today will help you lay out a roadmap to be ready when it’s time to “flip the switch”.
Aladenusi can be contacted at HYPERLINK “mailto: attaladenusi@deloitte.com ” attaladenusi@deloitte.com or comment@businessdayonline.com
Aladenusi can be contacted at HYPERLINK “mailto: attaladenusi@deloitte.com ” attaladenusi@deloitte.com or comment@businessdayonline.com
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