Acts of compliance

Acts of compliance

New Zealand enterprises need to prepare for the impact of the new global accounting standards on their IT systems.

By 2007 at the latest, the International Financial Reporting Standards (IFRS) will take effect in New Zealand. IFRS, developed by the London-based International Accounting Standards Board, is a major step to globally harmonise accounting standards.

Australia and the European Union adopted the new standards in January 2005, which means New Zealand organisations with links to these countries as subsidiaries or major trading partners, will generally be early adopters.

But for other New Zealand organisations, this would mean more time to prepare for the transition.

Matthew Prichard, partner, audit and risk advisory services, KPMG, says one of the "most sensible things" New Zealand did was to have a staggered time frame for IFRS adoption.

He points out early adopters in New Zealand would include the major banks that have parent companies in Australia. IT people in these banks, he says, are "definitely fully integrated into these [convergence] projects." But it would be a different situation for local finance companies that have fewer resources and staff.

Because of the complexity of the requirements of the new standards, some of these firms have decided to adopt in 2007, rather than 2005. "That gives them more time to make systems changes," says Prichard. "It has really taken the pressure off from an IS point of view."

His observations are vital in the light of a recent KPMG report stating organisations need to take a holistic approach to their IFRS convergence projects. Many organisations, the report points out, lack an adequate understanding of the significant IT issues involved in the transition.

In The information systems impact of IFRS: Complexity behind the numbers, KPMG says the main impact IFRS will have on information systems will be the need for new data, changed calculations or changes in reporting. IS systems may need to be modified, remapped or reconfigured to facilitate these changes.

One of the core impacts of IFRS is more disclosure of information. Prichard says the complexity of the IT changes will depend on the accounting issues affecting the company.

"Areas where existing IT systems often don't capture the data they need to comply with the new accounting standards include hedging, impairment testing, employee leave provisions and tax."

"No matter when you adopt IFRS, the mechanics of the transition mean that you will have one financial year where you are required to keep two sets of numbers - one under the old rules and one under IFRS. This will be a significant one-off challenge for the IT and accounting teams in many organisations," says Prichard.

He notes: "Without exaggeration, a lot of medium sized New Zealand corporates have previously had their hedging information in a scrapbook or at the very best, a spreadsheet." Very few, he says, would have always had a treasury system.

He observes New Zealand enterprises affected by the new accounting standards are more aware now of the need to prepare for the transition. "If you asked me 12 months ago, I would have said no."

He says it is a "sensible decision" for medium sized New Zealand companies to choose to be late adopters. "If you have more time, take more time. You can take other people's experiences and learn from them."

But there could be problems for some New Zealand entities that think they are not ready yet and find out their parent companies are now moving quickly to the new rules.

"We have definitely seen a lot of database, spreadsheet and workarounds in the transition period. For people saying, I just don't have time at the moment for systems modification, the danger of course is they become embedded and never make the system change," says Prichard.

The battle for resources

Resource availability is key, says Prichard, as there would be high demand for people who have knowledge of the new international accounting standards and systems people experienced on the changes needed.

"The obvious good advice is for information systems people to be involved early in the project, particularly in the decision about time frames. These are big projects, you have to spend time on them."

The finance team, he says, may decide it can handle the changeover. But if they don't talk to the IS people, there may be another ongoing IS project, and this may mean they should move more slowly or adopt later.

Prichard says it is important for finance and IS to work together, or with an outsourcing specialist, to determine whether the current systems can cope through modification. Prichard says one option being explored by many medium-sized businesses is to outsource their systems requirements in the treasury area instead of the more costly option of buying a treasury system. Richard Eaddy, managing director of ETOS, which provides these outsourcing services, says there has been an uptake for such services for the past year.

Eaddy echoes the advise of Prichard that companies should now investigate what their requirements would be under IFRS, and whether their own systems can manage or otherwise.

Ed Saul, former chief information officer of Tower and now a consultant for IT strategy, concurs on the need for early involvement of IT in the shift towards the new systems.

He cites, for instance, his experience in the financial services area, where compliance ranks high on the agenda. This means that any changes to accounting rules must be implemented to meet legislative deadlines.

"To achieve this, it is obviously necessary for IT to be brought into the picture as early as possible so that planning for the appropriate systems changes can get underway early, leaving sufficient time for implementation and testing. In fact, 'compliance' is usually viewed as being 'higher priority' than other strategic projects and sometimes there will be resource contention with compliance projects - that causes the strategic initiatives to be put on hold. The bottom line is that we must run a 'compliant' business," says Saul.

Toyota Financial Services (TFS) is one of the late adopters in New Zealand, and will shift to the standard for the 2007 to 2008 financial year.

Glenn Armishaw, TFS development group manager, says the company is currently preparing the systems for the transition to the new standards.

"At present, we are completing our gap analysis in terms of changes required between the existing NZ standards and those of NZIFRS," he states. "We have already done quite a lot of work in our systems - particularly in terms of recognising the different components of our loans - issues such as the handling of loan fees and commissions, etc, which has probably been underway nine to 12 months."

He says one of the reasons for the deferment was TFS had to take care of other compliance issues such as the CCCF ACT.

While IFRS adoption has not cropped up in his talks with IS director colleagues, it has been discussed widely at the CFO level both within TFS globally and among New Zealand organisations. He observes, "It appears to be quite a challenge for many organisations."

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