Tuesday, August 3, 2010

Six Myths About the Indian IFRS Transition

Six Myths About the Indian IFRS Transition

  1.  We have a comfortable transition deadline

  2.  IFRS is limited to changes in accounting procedure

  3.  We can rely solely on auditors and consultants

  4.  Transition won't be very expensive

  5.  Accountants are the only constituency we need to train

  6.   We'll get it right the first time


MYTH 1
WE HAVE A COMFORTABLE TRANSITION DEADLINE
«      Ninety-five percent of companies in Australia and in the European Union took more than a year to the complete IFRS transition, with 40% taking more than two years. The ICAI requirement to publish 2010 comparative numbers in IFRS leaves Indian companies only eight months to be IFRS–ready.

«      In other countries, regulators released final interpretations two to three years in advance of IFRS deadline and provided step-by-step transition road maps for companies. In India, with just eight months to go, ICAI is yet to finalize the standard—increasing the confusion around standard interpretation.


«      Indian companies must begin assessing the impact of IFRS and start planning immediately, dedicating full-time resources to the project. Companies that delay the effort expose themselves to several risks including restatement, cost overrun, reputational damage, and market risk.
MYTH 2
IFRS IS LIMITED TO CHANGES IN ACCOUNTING PROCEDURES
«      Senior management at many companies view IFRS as a Finance priority because of the required changes in accounting practices. However, the impact of IFRS is truly cross-functional, spanning divisions and business units.

«      HR, Sales, Procurement, Legal, IT, and individual business unit (BU) owners often need to redesign key processes to accommodate IFRS. Critical third-party contracts, debt covenants, and key leadership metrics will change with the change in accounting policies.


«      Finance must convince stakeholders of cross-functional impact and enlist transition support. Companies that actively involved impacted functions and BUs early had 55% greater transition effectiveness than companies that did not, with Finance spending 90% less time on transition.
MYTH 3
WE CAN RELY SOLELY ON AUDITORS AND CONSULTANTS
«      While many companies believe that auditors and consultants can take on much of the transition load, a vast majority of adopters used consultants in only a minor way during the transition—mainly to identify accounting changes. The nature of transition activities requires most work to be done in house by the internal Finance team.

«      Given the need to have internal staff lead the transition team and efforts, companies need to invest in training the IFRS project team very early in the process.

«      At a very early stage, companies must determine the level of external support needed in different transition stages and auditor intervention/sign-off points. Not doing so can result in unnecessary consulting spend and mid-cycle corrections to the project plan.
MYTH 4
TRANSITION WON'T BE VERY EXPENSIVE
«      The IFRS transition is expected to cost Indian firms between Rs. 30 lakh and 1 crore1, with an average of 16 internal and three external full-time staff dedicated to the transition.
«      Fifty percent of adopters had to implement entirely new IT systems to accommodate IFRS; only 20% of companies did not implement systems changes

«      Costs such as auditor fees, systems changes, and reporting costs tend to overrun at the last minute. Companies can avoid this through robust planning, auditor sign-off on every accounting change, systems testing, and reporting dry runs.
MYTH 5
ACCOUNTANTS ARE THE ONLY CONSTITUENCY WE NEED TO TRAIN
«      Once companies realize the impact of IFRS on non-accounting functions, coordinating firm wide training for functional and BU staff becomes a daunting, costly task.

«      Sixty-five percent of controllers found it more difficult to train non-accounting staff and spent a quarter of IFRS training time on functions outside Finance.

«      Companies cannot save time and resources by using the same training modules for all constituencies, or learnings will be inapplicable and easily forgotten. The level and scope of training needs to be tailored to meet different segments' needs.
MYTH 6
WE'LL GET IT RIGHT THE FIRST TIME
«      Companies that undertake the transition without extensive project planning have 25% less effective transitions. These companies are also much more likely to face auditor sign-off conflicts, restatements, and stock price falls as they come closer to the deadline.

«      Not conducting internal and external reporting test runs has often caused companies to discover system bugs, process failures, and accounting errors too close to deadline to be fixed in time.

«      Given the scale of its impact across functions, companies must approach adoption from a project management perspective to increase the likelihood of having a successful transition.

Regards,
Shalini Haridoss Nair

Source : IFRSEXECUTIVEBOARD
             CORPORATEEXECUTIVEBOARD


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