IFRS Update and Internal Audit’s
Role in the Conversion Process
Presenters:
Tom Thelen
Nate Troup
Agenda
•
•
•
•
•
Background on IFRS and SEC Update
Overview of GAAP / IFRS differences
Information Technology Impact
Lessons learned from conversions
Internal Audit’s role in an IFRS conversion
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 2
Background on IFRS and
SEC Update
IFRS Update and Internal Audit’s Role
in the Conversion Process
Who do we have here today?
Please respond with your functional area:
1. Internal audit
2. Controller/Finance
3. Reporting
4. Other
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 4
Polling
question
#1
What is your current personal level of
understanding of IFRS and the conversion process?
1. Very knowledgeable, I will help present
2. Somewhat knowledgeable
3. Just scratching the surface
4. Haven’t opened the book
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 5
Polling
question
#2
What is your company’s level of IFRS
experience?
1. We currently report under IFRS
(e.g., subsidiary of foreign co.)
2. We are currently in the conversion process
3. We are in the diagnostic/assessment phase
4. We are thinking about it, but have not yet started any diagnostic
analysis
5. We haven’t yet started to think about it
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 6
Polling
question
#3
The new language of global capital?
• A global phenomenon – already adopted by over 12,000
companies in over 100 countries.
• Convergence with US GAAP is workable proposition – but difficult
to implement.
• A single global set of standards offers opportunities for efficiency
and cost savings.
• US companies are attracted by the idea of a principles based
approach to accounting policies.
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 7
Global IFRS reporting trends
• IFRS quickly picking up share
of Global F500 companies
• More than 100 countries have
moved to or base their local
standards on IFRS
300
US GAAP
264
IFRS
250
Other
207
188
200
196
150
116
• IFRS will become the
predominant GAAP in the near
future
100
50
29
0
2004
IFRS
Drivers
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 8
2007
• Enhances transparency/comparability
• Eases flow of capital globally, thus possible
reduction in cost of capital
• Facilitates consistent accounting and reporting
Is your company a…
1. Large accelerated filer?
2. Accelerated filer?
3. Non-accelerated filer?
4. Private?
Polling
question
#4
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 9
When will your company begin an
IFRS impact assessment/diagnostic?
1. Already have completed
2. In progress
3. Second half of 2009
4. First half of 2010
5. Later
Polling
question
#5
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 10
Who will be advising the Company on the
IFRS diagnostic and conversion?
1. Will be done internally
2. Will use our auditor
3. Will use a third-party
4. Undecided
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 11
Polling
question
#6
The SEC issues roadmap for IFRS adoption
• Open meeting on 27 August 2008
– “Roadmap” – official commission document
– Roadmap released 14 November 2008
• IFRS reporting would be phased in as follows:
– Large accelerated filers: years ending on or after 15 December 2014
– Accelerated filers: years ending on or after 15 December 2015
– Non-accelerated filers: years ending on or after 15 December 2016
• Early adoption permitted for a very select, limited group of global companies
for years ending on or after 15 December 2009
– Among the 20 largest listed companies globally (market cap) in its
industry
– IFRS reporting is more prevalent in that global industry
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 12
The SEC issues roadmap for IFRS adoption (cont’d)
• SEC will consider progress toward several milestones regarding
IFRS reporting and expects to decide in 2011 whether to proceed
with mandatory adoption of IFRS:
– Improvements in accounting standards: convergence activities
by FASB and IASB
– Accountability and funding of IASCF
– Improvement in use of interactive data (XBRL) for IFRS
– Progress on IFRS education and training in US
• Maintain 3 year income statement comparison
• Comment period for the Roadmap closed April 20, 2009
IFRS Update and Internal Audit’s Role
in the Conversion Process
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The SEC issues roadmap for IFRS adoption (cont’d)
• While most comment letters acknowledge the benefits of a single set
of accounting standards around the world, several themes have
emerged.
– Cost of Adoption is a concern
– Benefits of Adoption compared to Convergence are challenged
– IFRS really better than US GAAP?
– Specific Industry Concerns
• IAS 41 – Agriculture
• Guidance for Regulated Industries
• IASB/FASB project on insurance contracts
– IASB funding uncertainties
– What about Private companies?
– Date Certain is critical
– LIFO Inventory – impact on taxes
IFRS Update and Internal Audit’s Role
in the Conversion Process
Timing is critical
Restate
opening
balance sheet
Example timeline
Large accelerated filer
Fiscal
2009
Fiscal
2010
Fiscal
2011
Fiscal
2012
First
year of IFRS
reporting 2014
Fiscal
2013
Fiscal
2014
2012 and 2013 statements filed
under US standards
Run US GAAP and IFRS
reporting parallel
Awareness and
knowledge of IFRS
Design and implementation of process, control and systems
Impact
assessment
Modification of business operations, tax,
regulatory and HR programs
Preparation of
conversion plan
Training
New IFRS standards
Change management, project structure and governance (budget implications, resourcing)
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 15
IFRS
statements
are
published
with
comparatives
for
2012 and 2013
plus quarterly
information
Is the SEC serious about IFRS?
•
Remarks made by approved SEC Chairman Mary Schapiro at her Senate confirmation
hearing
–
Ms. Schapiro answered a variety of questions and only a few related to IFRS and the
proposed roadmap; these were her first public comments on the adoption of IFRS in
the US and consisted of just a few sentences.
–
Ms Schapiro stated that she agrees “ a single set of accounting standards used around
the world would be a very beneficial thing.” However, she also specifically commented
on (1) the need to assure the independence of the IASB, and (2) expressed concern
over the estimated transition costs to convert from US GAAP to IFRS in the current
economic environment. Both concerns were raised in the proposed roadmap and the
SEC has specifically requested constituents to comment on these issues.
–
During the confirmation hearings Ms Schapiro also indicated that the SEC should
“proceed with caution” in moving toward adoption of IFRS in the US. We believe the
intention of the roadmap process, including the specified milestones, is to proceed with
caution.
–
While Ms. Schapiro’s remarks raised no new concerns, we cannot know how this may
or may not impact the timing, or overall discussion, of IFRS adoption in the US.
–
What does remain clear is the SEC will strongly consider constituent responses and
that it is important for companies to carefully study the proposed Roadmap and, where
appropriate, provide comments.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Why consider early adoption?
• Systems
– An entity that is considering systems conversion and/or
restructuring of shared services network may want to incorporate
IFRS and new general ledger account systems at the same time to
reduce parallel reporting.
• Organization structure
– A company that already has several/significant foreign operations
using IFRS may want to make reporting consistent.
• Peer group
– If the company’s peer group uses IFRS, even if the company is
outside largest 20% of that group.
• IPO
– A new public company may want to avoid a costly change from US
GAAP to IFRS in near future.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Short term action steps — anticipate
eventual IFRS conversion
• Determine your company’s conversion date based on the
proposed conversion timetable.
– Consider whether you might elect to adopt earlier (e.g., if SEC
approves mandatory conversion in 2011, then why wait until 2014)
• Perform a “diagnostic” to determine scope and breadth of
conversion.
• Identify a skilled project management team.
• Begin to understand the implications and choices under IFRS 1
“First-time adoption of IFRS.”
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Potential benefits from IFRS adoption
• Fresh look at processes and policies
• One basis of accounting
– Simplify statutory reporting
– Cost reduction and strengthen controls
• Consistency of global accounting policies and procedures
• Improved comparability across borders and within global industries
• Influence the interpretation of IFRS
• Standardization of practices across countries
• Shared service center deployment
• Global ERP implementations
• Streamlined merger and acquisition activity
• IFRS is picking the best standards from all sources worldwide
• Benchmarking with key competitors
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Overview of GAAP / IFRS
Differences
IFRS Update and Internal Audit’s Role
in the Conversion Process
Property, plant and equipment
– componentization
Guidance
– US GAAP ARB 43 IFRS: IAS 16
Key GAAP differences
– Component depreciation required. Under US GAAP componentization is
permitted but not required
– Original parts must be identified and de-recognized before replacement
parts can be capitalized
Practical implications
– Detailed review of significant assets to determine whether any significant
parts with different useful lives
– Review long term capital expenditure forecasts to identify replacement
trends – often good indicator of component parts
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Revenue recognition
Guidance
– US GAAP: SAB 104 IFRS: IAS 18
Key GAAP differences
– Long term contract accounting is permitted under IFRS if certain criteria is
met – stage of completion, when revenues and costs can be measured
reliably and it is probable that the economic benefits will flow to the
Company, early recognition prohibited under US GAAP
– Recognition of revenue is permitted when revenues can be reliably
measured compared to US GAAP standard of a “fixed and determinable”
price
Practical implications
– Consider implications of long term contract accounting for long term service
agreements
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Impairment
Guidance
– US GAAP: FAS 142, 144 IFRS: IAS 36
Key GAAP differences
– 1 step approach under IFRS, 2 step approach under US GAAP resulting in more impairments
recognized under IFRS.
– Under IFRS an impairment loss is calculated by comparing the carrying value of an asset to it’s
recoverable amount (higher of value in use and fair value less costs to sell). Under US GAAP the
carrying value is compared to fair value (generally discounted cash flow).
– IFRS requires that impairment losses are reversed when circumstances reverse including:
• Property, plant and equipment impairments
• Investment impairments
• Excludes goodwill
Practical implications
– Consider appropriateness of Cash Generating Unit’s
– Consider existing impairment models
– Consider potential changes to systems and processes
– Perform impairment testing under IFRS including mandatory impairment review at the date of
transition
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Lease accounting
Guidance
– US GAAP: FAS 13
IFRS: IAS 17
Key GAAP differences
– No bright-time capital lease tests under IFRS
– Differences may exist in the recognition of gains or losses under sale-lease back transactions
Practical implications
– Review operating leases which were close to the bright line tests under US GAAP to determine
whether they should be classified as finance leases under IFRS.
– There is no 25% test to determine whether to consider the land and building separately under a
lease which contains both elements
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Provisions
Guidance
– US GAAP: FAS 5, FAS 146 IFRS: IAS 37
Key GAAP differences
– Contingent liabilities are recorded when they can be estimated and in US GAAP when an
obligation is probable (generally defined as “likely to occur”) and under IFRS when and
obligation is “more likely than not”.
– US GAAP allows provisions to be discounted only when the amount of the liability and the timing
of the future cash are fixed and determinable (generally greater than one year). IFRS requires
provisions to be recorded at their present value where the effect of the time value of money is
material.
– Restructuring costs under IFRS are typically recognized earlier than under US GAAP as they are
analyzed as an exit plan as a whole, rather than individual cost components of the plan.
– Onerous contracts are recognized upon cease-use date in US GAAP and when a present
obligation exists under IFRS.
Practical implications
– Earlier recognition of provisions under IFRS for restructuring activities and contingencies and a
higher likelihood of discounting provisions under IFRS.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Share-based payments
Guidance
– US GAAP: FAS 123(R) IFRS: IFRS 2, IFRIC 11
Key GAAP differences
– Shares granted to non-employee directors measured based on the fair value of
services granted
– Recognition of compensation expense on accelerated basis with each individual
tranche measured separately
– Entities electing “net settlement” of equity compensation for withholding taxes may
be required to treat the estimated tax withholding portion as a cash settled share
based payment transaction. Cash settled transactions could result in liability
accounting
Practical implications
– Accelerated expense under IFRS 2 under existing share based payment program
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Business combinations
Guidance
• US GAAP: FAS 141 (R) IFRS: IFRS 3 (R)
Key GAAP differences
• Revised guidance from both the FASB and the IASB have significantly converged
accounting and reporting standards for business combinations.
– Effective dates
• US GAAP: fiscal years beginning after 15 December 2008
• IFRS: fiscal years beginning after 1 July 2009 (early adoption allowed)
– Remaining differences
• Treatment of contingent assets and liabilities
• Measurement of non-controlling interest in an acquiree
• Definitions of control and fair value
Practical implications
• IFRS election – grandfather all business combinations from a date no later than the
date of transition to IFRS
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Consolidation
Guidance
• US GAAP: ARB 51, FAS 94, FIN 46 (R)
IFRS: IAS 27
Key GAAP differences
– No VIE rules under IFRS
– IFRS focus is on control:
– Ability to govern the financial and operating policies
– Includes concept of “de facto” control
– Substance over form rules for SPEs
Practical implications
• High effort involved in reviewing existing arrangements, agreements and investment
relationships. Will require involvement of legal team.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Interim reporting
Guidance
• US GAAP: APB 28
IFRS: IAS 34
Key GAAP differences
• Each interim period is viewed as a discrete reporting period under IFRS
compared to an integral part of the annual period under US GAAP
•
A cost must meet the definition of an asset or represent an existing
obligation at period end to be recognized
•
Exception is income taxes which are calculated using the annual effective
tax rate
Practical implications
• Effort involved in reviewing discrete aspects of quarterly items for proper
inclusion in quarterly financial statements
IFRS Update and Internal Audit’s Role
in the Conversion Process
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IFRS 1 – First-time adoption of IFRS
Key GAAP differences
• Not applicable
Accounting policy choices/areas of significant divergence in
interpretation:
• General rule under IFRS is to apply IFRS fully retrospectively
• 12 available elections
• 3 mandatory exceptions
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 30
IFRS 1 – First-time adoption of IFRS (cont.)
Key elections available (those with limited applicability/uptake have been excluded)
• Election to grandfather in previous GAAP business combination accounting before the date
of transition
• Allowed short-cut method to determining an IFRS decommissioning liability on transition
• Allowance to use facts and circumstances in existence at the date of transition when
considering IFRIC 4
• Option to recognize all actuarial gains and losses on transition
• Election to set cumulative translation reserves to zero
• Option to re-measure property, plant and equipment to a deemed cost at transition
• Option to reduce bifurcation requirements under IFRS for compound instruments on
transition
• Option to re-designate some financial instruments on transition
• Some allowed exemptions from applying IFRS 2 Share Based Payments before transition
Mandatory exemptions
• De-recognition rules to be applied from 1 January 2004
• Apply hedge accounting from date of transition
• Estimates should not change from those estimates applied under previous GAAP
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 31
Accounting for income taxes
Significant differences and convergence
Deferred taxes recorded in
connection with equity-settled,
share-based compensation
transactions
IFRS requirements
US GAAP requirements
Under IFRS, if the estimated
deduction from taxable profits related
to equity-settled, share-based
compensation is less than or equal to
the cumulative share-based
compensation expense, the
recognition of the deferred taxes
arising is recorded in earnings. If the
estimated deduction from taxable
profits exceeds the cumulative
expense, the excess tax benefits
received should be recognized directly
in equity. The estimated deduction
from taxable profits is remeasured at
each reporting date.
Under US GAAP, a deferred tax asset
is recognized for the amount of tax
benefit corresponding to
compensation expense recorded,
subject to certain limitations. If the
ultimate actual tax deduction exceeds
cumulative compensation expense,
the excess benefit (known as windfall
tax benefit) is credited directly to
shareholders equity. If the tax
deduction is less than the deferred tax
asset recorded as the book
compensation cost is recorded, the
shortfall is recorded as a direct charge
to shareholders equity to the extent of
prior windfall tax benefits, and as a
charge to the tax provision thereafter.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Accounting for income taxes
Significant differences and convergence (cont.)
IFRS requirements
US GAAP requirements
Tax basis
► Tax
basis of an asset (or liability) is
determined by the tax consequences of
selling it (or settling it) for its carrying
amount at the reporting date
► Measurement of the tax basis is an amount
determined by tax law
► If an entity plans to recover the asset
without tax consequence, a basis difference
is not a temporary difference
Question of fact under tax law
If uncertain, determine in accordance with
FIN 48 standards
Uncertain tax positions
► Recognition:
Two-step process: recognition and
measurement
Recognized benefit when more likely than not
to be sustained based on technical merits
Amount recognized is based on largest
amount that is greater than 50% likely to be
realized upon ultimate settlement
Detection risk not included in analysis
an entity has a “stand ready”
obligation to pay tax, the amount of which is
uncertain
► No
recognition threshold: review and
measure all uncertain tax positions
► Measurement:
use probability weighted
average of expected outcomes
► Should
► Explicit
not use detection risk
that remeasurement is only to be
done based on new information and not a
new interpretation of the facts
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Accounting for income taxes
Significant differences and convergence (cont.)
Deferred taxes with
respect to intercompany
sales of assets
IFRS requirements
US GAAP requirements
Under IFRS, the tax impact of intercompany
transactions are reflected at the time of the transaction,
including any deferred tax impact.
Under US GAAP, the buyer is prohibited from
recognizing deferred taxes, and the seller’s rate
is used. In addition, any tax paid on the
intercompany sale in effect is treated as a
prepaid tax asset, to be recognized only when
the asset subject to sale is sold outside the
group, amortized, depreciated or written off.
Any pre sale existing deferred tax asset or
liability of the seller remains.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Information Technology
Impact
IFRS Update and Internal Audit’s Role
in the Conversion Process
Technology impacts will be dependent upon
accounting and process decisions
Accounting treatments
•
Business processes
•
Supporting technology
•
•
Changes in information systems will be dictated by
•
the extent to which selected accounting treatments vary from your
company’s current practices;
•
the degree to which your company decides to address these
accounting differences using manual processing entries and “topsided” adjustments; and
•
the identification of specific transactions that are best captured at
the source and embedded into the information systems supporting
those activities.
European companies that used manual workarounds and “top sided”
accounting entries to meet short IFRS deadlines are now redesigning
processes and augmenting their systems to eliminate the inefficiencies
these workarounds created.
Accounting and financial reporting changes only represent approx. 2030% of conversion efforts.
Changes to technology are generally about 50% of the cost of
conversion. This cost varies by company.
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 36
Many areas of information technology may be
impacted by IFRS. Examples include:
•
•
Systems architecture
Applications
Reports
Data
•
•
•
•
Key financial and operational reports will need to be modified and new ones developed
Many spreadsheets and other end-user computing sources will require review and
modification
•
•
Data input screens may need to be created or modified to capture additional requirements
Data interfaces and middleware may need to be modified to support new data
requirements.
Historical data will need to be readied for IFRS, new data obtained and master data
redefined.
•
•
IT systems
and processes
Chart of accounts may be redesigned to accommodate multi-purpose reporting
ERP applications will require reconfiguration and, in some cases, it may be prudent to
upgrade to new releases.
Consolidation systems and/or allocation tools will need to be modified
Front office and supporting applications (those that post financial transactions) may need
to be modified to provide key data and metrics.
•
•
Business warehouse structures may need to be redesigned to account for new data and
changes in consolidation entities.
Systems security controls have to be re-validated and may need to be modified as
organization structure changes because of consolidation.
Technical systems architectures (e.g. storage sizing, systems performance) may require
modifications.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Potentially involving an extended set of
applications
Trace data back to its source
Source
systems
Core financial
Systems
Journal entries &
operational data
Transactional
systems (e.g.
inventory,
purchasing)
●
●
●
•
●
Sub-ledgers
Consolidation
systems
•
Management
reporting and
analytics
Financial reporting
•
•
Data warehouse
•
•
Benefits
•
Spreadsheets
Disclosures
Business intelligence
•
IFRS Update and Internal Audit’s Role
in the Conversion Process
Tax
Regulatory reporting
•
Impacts throughout data flows
Page 38
•
Budgeting/planning
•
Financial investment
valuation systems
GL balances
& summary
information
General ledger
•
Real estate
●
Chart of accounts
•
Fixed assets
●
Consolidation &
management
reporting
systems
Spreadsheets
Key challenges for an IT organization
•
•
•
•
•
•
Requirements may evolve during implementation
– IFRS is a principles-based set of standards, providing options in some cases, and it is up to each
organization to interpret accounting policy
– Convergence is occurring to some extent between IFRS and US GAAP
Manual adjustments at consolidation level will not be sustainable, requiring changes at the transactional
level, which may impact systems throughout the organization.
– Understanding of the detailed end-to-end flow of data to/from the general ledger will be key
Organizations must capture additional data to comply with new accounting policies and meet additional
disclosure requirements
Parallel accounting and reporting will be required:
– Need to run parallel accounting for prior year comparisons (historical data required)
– Need for parallel reporting and valuations for US GAAP/IFRS in transitory periods and to meet
potentially competing regulatory requirements
Spreadsheets and related end-user tools embedded in manual processes are significantly impacted by
IFRS. Information Technology should assist in this effort.
These challenges imply broad implications, for example:
– Implementation will require a cross-functional team – accounting, tax, IT and IT audit
– A strong emphasis on program and organization change management will be required
– New closing process may be required to account for additional information
– Business processes will need to be redesigned in conjunction with technical changes.
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Lessons learned from
Conversions
IFRS Update and Internal Audit’s Role
in the Conversion Process
Lessons learned
• Expect 2-3 years to effectively implement and begin reporting on IFRS
– It is important to clearly understand the scope and complexity of the technology
effort early.
– Conversion is a large job and may require significant effort.
• Establish robust program management at the outset
• IT costs are a significant cost of the IFRS conversion (generally in excess of 50%)
• IFRS can be supported by technology vendors in various ways. Converting to IFRS by
itself should not generally drive technology upgrades, but it may be an important
factor.
• IFRS is being implemented across the world according to different timetables. A global
strategy and a flexible systems design can minimize the need for rework/
reimplementation.
• Business and IT professionals with IFRS technical knowledge are needed to have the
ability to interpret and translate the accounting requirements into IT changes
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Lessons learned — Conversion insights
Project set-up lessons learned
– Have a clear understanding of the strategy for conversion and the project objectives
• Perform gap analysis between IFRS and US GAAP (diagnostic)
– Provide leadership from the top
– Evaluate the effect of IFRS through the eyes of the business and understand drivers for
conversion
– Establish robust program management at the outset
Teaming lessons learned
– Ensure there is a dedicated team to drive the project forward and provide adequate
management and sponsorship of external advisor
– Assess resources and project needs to determine level, if any, of outside assistance needed
– Involve all departments affected by the conversion early on in the process (e.g., Tax,
Technology, Investor Relations, HR, Sales and Marketing) to make sure conversion is
embedded in the business
– Ensure conversion team IFRS conversion experience
– Ensure external advisors and auditors are joined up and ensure auditor involvement throughout
the process
IFRS Update and Internal Audit’s Role
in the Conversion Process
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Lessons learned — Conversion insights (cont’d)
Communication lessons learned
– Make sure the communication links have been established with all key stakeholders
– Engage with external auditors at all key stages of the process and formally document
agreements on significant accounting judgements
– Ensure the audit committee fully understands the extent of the changes
– Make sure there are no surprises for the analysts
Execution lessons learned
– Expect two to three years to effectively implement and begin reporting on IFRS
– Ensure timely training for all employees
– Europeans reported internal and external conversion costs of five to ten basis points as a
percentage of revenue
– SOX 404 will be an additional consideration for US filers (e.g., significant closing adjustments
could indicate control weakness)
– Parallel reporting is required for comparative years
– Key performance criteria for incentive compensation may be affected by conversion, whereby
modification of the existing pay plans could have significant tax consequences
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in the Conversion Process
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Internal Audit’s role in an
IFRS Conversion
IFRS Update and Internal Audit’s Role
in the Conversion Process
To what extent has internal audit been
involved with internal IFRS planning/
scoping meetings with finance/tax/IT?
1. Hold regular project team meetings
2. Participated in three or more substantive meetings
3. Participated in one or two substantive meetings
4. Yet to be included in any discussion
Polling
question
#7
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 45
Has internal audit/finance presented IFRS
to the audit committee?
1. Joint presentation has been made
2. Finance only presentation has been made
3. Internal audit presentation has been made
4. IFRS has not yet been discussed with the audit committee
Polling
question
#8
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 46
Elements impacting Internal Audit’s role
• Scope
– How will IFRS really impact my Company?
– Where can/should IA play a role?
• Risk focus
• IA role, responsibilities, activities
• Potential impacts on IA role, planning and resources
• Lessons learned from 404
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 47
Scope of IFRS conversion –
more than a change in accounting policy
•
Covenant renegotiation
• Valuation of earn outs
• Demand for valuations
• Impact of consolidation of SPEs
• Clients’ appetite for existing
structured financial products
• Viability of transactions due to
treatment on own balance sheet
• Ability to assess client suitability
and credit
Policies and procedures
Finance function efficiency
• Finance and Operations
transformation
•
Not just Finance
• Front Office, research,
credit
• Non-executives
Access to knowledge and
tools
•
•
•
•
•
Business
and
franchise
•
Management
information
Key performance indicators
• Management reporting
• Underlying infrastructure
• Reconciliation to reported
results
• IFRS alignment
Employee
benefits
IFRS Update and Internal Audit’s Role
in the Conversion Process
Financial
instruments
Oversight
and project
managemen
t
Investor
relations
Share based payments
Pension arrangements and
funding
• Retirement benefit costs
Alignment of remuneration
and bonuses
•
•
•
Complex project
management
• Audit Committee
involvement
Non-executive understanding
and oversight
• Resources and budgets
•
•
• Early education
Underlying business
performance
Volatility of earnings and
equity
• Hedging strategies
Re-benchmarking relative
to global peer group
•
•
• Fair value
Debt vs. equity
• Review of hedging
strategies
• Hedging documentation
Day One profit recognition
• Observability of market
prices
• Embedded derivatives
• Reserving policies
• SPEs
Tax
planning
Business
impact
of IFRS
Processes
and
systems
Impact of accounting on
taxation considered
irrelevant by IASB
Impact on tax strategies
• Data collection
• Structured products
• Inland Revenue
•
Training
and
knowledge
•
Page 48
•
Control
environment
•
• Fragmented
processes/systems
resulting from IFRS
tactical solutions
• Data capture
• Hedging
• Loan provisions
Segmental reporting
Financial Statements
presentation
•
Scope of IFRS conversion –
more than a change in accounting policy
Policies and procedures
Finance function efficiency
• Finance and Operations
transformation
•
Not just Finance
• Front Office, research,
credit
• Non-executives
Access to knowledge and
tools
•
•
Covenant renegotiation
• Valuation of earn outs
• Demand for valuations
• Impact of consolidation of SPEs
• Clients’ appetite for existing
structured financial products
• Viability of transactions due to
treatment on own balance sheet
• Ability to assess client suitability
and credit
•
•
•
Control
environment
Training
and
knowledge
Business
and
franchise
Processes
•
Impact of accounting on
taxation considered
irrelevant by IASB
Impact on tax strategies
• Data collection
• Structured products
• Inland Revenue
•
Business
impact
of IFRS
Oversight and
• Fair value
Debt vs. equity
• Review of hedging
strategies
• Hedging documentation
Day One profit recognition
• Observability of market
prices
• Embedded derivatives
• Reserving policies
• SPEs
•
Tax
planning
Financial
instruments
Natural role for
Internal Audit
Fragmented
project
and
processes/systems
management
• Complex project
systems
resulting from IFRS
management
tactical solutions
• Audit Committee
• Data capture
involvement
Management
• Hedging
Investor
• Non-executive understanding
information
• Loan provisions
relations
and oversight
• Segmental reporting
Employee
• Resources and budgets
• Financial Statements
benefits
• Early education
presentation
• Underlying business
• Key performance indicators
• Share based payments
performance
• Management reporting
• Pension arrangements and
• Volatility of earnings and
• Underlying infrastructure
funding
equity
• Reconciliation to reported
• Retirement benefit costs
• Hedging strategies
results
• Alignment of remuneration
Natural role for
• Re-benchmarking relative
• IFRS alignment
and bonuses
to global peer group
Internal Audit
•
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 49
IFRS implementation key Risk Areas
Key Risk Areas:
Financial Reporting and Disclosures
Financial and Business Processes and Controls
(including SOX key controls)
Management Reporting
IT Systems
Conversion Project Management
Overall Change Management
* Risk/impact assessment across each of these risk areas will vary between
companies and should be assessed individually.
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 50
Overall roles and responsibilities
Internal Audit





The “eyes and ears” of the Audit Committee / Board of Directors
Assess the overall project governance (e.g., risk assessment of the conversion)
On-going monitoring of the project benchmarks, deliverables and meeting of expectations
Business Process Advisors
Conduct on-going business process, pre-implementation and post-implementation reviews to evaluate aspects of
the convergence implementation (i.e., controls around key business process and systems changes)
IFRS project team
Appointed by management to:
 Manage budget,
resources and timelines
 Ensure compliance to
IFRS standards
 Coordinate all aspects of
the conversion (people,
process, technology)
across business units
Management


Implement and manage
the conversion process
by active supervision and
communication with the
IFRS Project Team
Project Sponsorship
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 51
Audit Committee
Ensure that Management:
 Is sensitive to the
issues/timelines and has
the appropriate resources
and skills to conduct an
IFRS conversion
 Has considered reporting
implications and impacts
on all areas of the
business
 Has a conversion plan to
meet the requirements,
including appropriate
controls required to
manage through the period
of change and maintain
reporting integrity
 Ongoing monitoring
External auditors

Communicate with
management and internal
audit on risk impacts
associated with changes to
impacted processes and
internal controls

Measure success from a
financial reporting
perspective
Recommended activities for Internal Audit
Business process





Process risk and control
advisor on key processes
(FSCP, JE, Budget,
OBS)
Measure inherent risk
(likelihood, impact) of
business process
changes
Measure control
effectiveness in light of
business process
addition, deletions,
changes (residual risk)
Audit IT systems
changes and ability to
effectively automate and
control IT-dependent
areas
Assist with due diligence
around IFRS financial
numbers and data
conversion



Identify and monitor IFRS
conversion program risks
(PMO, timelines, costs,
etc.)
Monitor conversion
program efficiency and
effectiveness
(milestones, change
control, cost)
Evaluate IFRS team
preparation, readiness
and training
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 52
Risk
management
Conversion program
monitoring







Be the “eyes and ears”
of the Audit Committee
Monitor changes to
overall company risk
profile
Re-prioritize audit focus,
as appropriate
Communicate audit plan
focus, changes to Audit
Committee
Collaborate and
coordinate with other
risk management
functions
Monitor IFRS conversion
impacts on Internal
Controls (SOX) program
Monitor IFRS conversion
program impacts on
ongoing major company
programs and
implementations
Communication
and education



Educate the Audit
Committee on risk and
control impacts of IFRS
conversion
Collaborate with BU
management and process
owners on risk and
control activities pre- and
post-conversion
Educate internal audit
practitioners on IFRS
influenced process
changes and audit
implications
(documentation, testing,
reporting)
IFRS conversion and Internal Audit focus
Diagnostic
A
S
S
E
S
S
I
M
P
R
O
V
E
M
O
N
I
T
O
R
Design
and planning
Implementation
Post
implementation
Business process
risk assessment
refresh
Business process
risk assessment
(including IT)
Conversion program
risk assessment
Process controls consultation
(Pre-Implementation)
New and existing controls
Program risk
awareness and
monitoring
Process improvement
recommendations
Program risk
monitoring
Real-time controls testing on new and existing
processes (including IT)
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 53
Solution
development
Potential impacts on Internal Audit
With the shift in focus to IFRS related activities, how will IA resources and
the annual plan be affected?
IA resources
IA focus/role
► Assess
the impact of IFRS
implementation on the
organization.
► What
will Internal audit’s
role be in the IFRS
conversion process?
► How
will Internal Audit be
relevant in this major
business endeavor while
maintaining its
independence?
► How
will Internal Audit
assess and monitor key
implementation risks?
► What
reporting protocols
will exist around Internal
Audit’s work?
► Does
IA have the necessary allocation of resources to
assist in the conversion program and test the IFRSrelated changes?
► Are
the necessary skills resident in IA to test new
processes and controls as well as test the efficiency
and effectiveness of the conversion project?
► risk assessment skills (measurement, judgment,
prioritization);
► process risk and control identification and testing;
► basic IFRS principles-based accounting
insights/financial impacts
► And,
are the necessary skills, profiles and
competencies developed to assist with the recruiting
and/or retooling of needed practitioners?
► Does
the IA function have access to “leading
practices” in their role as “business advisor” to the
IFRS project on the whole and to process controls
specifically?
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 54
IA annual plan
► What,
if any, projects will
need to be deferred from the
internal audit plan in order to
properly assist/test IFRSrelated processes and
controls?
► What
risks does change in
the IA plan introduce/pose for
the organization?
► What
impact on IA key
performance indicators will be
anticipated?
IFRS risk assessment
What are the key risks of an IFRS conversion project?
Execution
Planning
Vision and direction

Unresolved or uncertain
strategy from the IFRS
diagnostic

Project planning
function not completed
in adequate detail

Unidentified transition
issues impact critical
deliverables

Lack of clear project scope
and requirements



No assessment on
business impact or priority
Skills/resources in
place inadequate for
project needs
Poor communication
between project team
and end users


Poorly defined critical
success factors
Unrealistic and
incomplete timelines
Insufficient business unit
involvement

Accounting policies
selected not compliant
with IFRS rules

Conversion project
interdependencies not
recognized

Inadequate risk
assessment and
determination of project
risks

Financial reporting
disclosure requirements
inaccurately or not
completely identified


Unclear governance and
oversight

Lack of management
support
Business acceptance

Ineffective deployment
strategy

Lack of business impact
of IFRS

Unresolved problems and
disputes

Incomplete operating and
maintenance information

Insufficient user
satisfaction

Scale and volume of
defects

No project close-out

Global sourcing conflicts
Measuring and monitoring

Ineffective project management systems

Lack of control in change order process

Insufficient project monitoring and reporting


Lack of continuity in project staff
Ineffective decision making and resolution of
issues

Poor quality management and assurance plans

Poor communication with stakeholders

Changing design and scope
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 55
IFRS risk assessment
Internal Audit should remain objective in IFRS conversion implementations.
They should conduct a focused risk assessment during the project.
Vision and
direction

Evaluate the alignment
of the conversion
project strategy with
the business strategy

Ascertain integrity of
and adherence to
project governance
and control processes

Determine the
effectiveness of
program management
support

Evaluate effectiveness
of identification of
risks in time to make
informed decisions
and avoid potential
accounting errors
Business
acceptance
Execution
Planning

Evaluate effectiveness
of the program’s
performance towards
objectives and risk
identification and
management process

Assess the monitoring
of implementation of
the program, including
time/cost

Evaluate effectiveness
of program
management systems

Assess effectiveness of
stakeholder
expectations
management

Evaluate adequacy of
change management
process and program
change control
procedures
Measuring and monitoring



Assess the degree of focus, visibility, transparency, and disclosure at all
levels
Ascertain how the stated benefits of the program are monitored
Review outputs, work products or results within the program.
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 56
IFRS conversion – Lessons learned from 404
•
Assess the “real” impact of IFRS conversion early in the process.
•
Internal audit’s role in the IFRS conversion process should be clearly defined from the
beginning.
•
What value and relevance will internal audit bring to the implementation process:
assurance, advisory support, monitoring, validation?
•
How can internal audit help drive an effective implementation while maintaining its
independence and overall enterprise risk focus?
•
How can Internal Audit help management avoid temporary work arounds that result in
re-work and increased cost?
•
How can internal audit help drive value and cost savings opportunities presented by the
IFRS implementation?
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 57
Key questions
• Internal Audit should be focusing on the following key questions when assessing the
IFRS Conversion project. These are key questions which should also be the focus for
Audit Committees.
Conversion project considerations
• What will converting to IFRS mean for the company?
• Has the Project Team identified the key areas that need
to be addressed during the conversion?
• Has the Project Team/management considered the
European Union conversion experience?
• How does management plan to approach the
conversion to IFRS?
• What is the timeline for the IFRS conversion project,
what resources will be required and how much will it
cost?
Non-financial reporting considerations
• Other than financial reporting, which other business
areas is management addressing which impact the
conversion?
• Can the company’s current IT systems handle the
business’ revised data collection requirements under
IFRS?
• What IFRS training programs are management
planning to provide to finance personnel?
Financial reporting considerations
• How will converting to IFRS impact external financial
reporting?
• What will be the impact on management reporting?
• How will management address the need for 2012/2013
comparative financial information prepared under both
US GAAP and IFRS?
• What are our competitors and industry peers doing?
• Has the Project Team/management considered if
publicly accountable enterprises be required to apply
IFRS throughout their group structures?
• How will IFRS impact tax reporting and tax filings?
Other considerations
• Has management identified the most significant risks
associated with converting to IFRS?
• Is the Project team/management taking advantage of
the opportunities presented by the conversion to IFRS?
• How will converting to IFRS impact stakeholders, and
what should be done to manage the expectations of
capital markets?
• How should we use a third party advisor?
• What is the role of our independent auditor?
• Other than financial reporting integrity, what are the
other implications for boards of directors?
IFRS Update and Internal Audit’s Role
in the Conversion Process
Page 58
Thank you!
IFRS Update and Internal Audit’s Role
in the Conversion Process