How to set up an IFRS transition project?
Applying IFRS for statutory reporting is within reach once regulatory environment has been established. Scope of companies affected, as well as the expected benefits and consequences of a transition have been discussed in a previous post. Next, let’s list the phases and tasks of an implementation project. Of course such projects are unique for each company and heavily depends on the extent (if any) of their previous IFRS application experience. Nonetheless, there are some common elements and deliverables in every transition.
IFRS Readiness Test
A high-level review of accounting-reporting processes aiming to assess how prepared the company is for IFRS. It also allows an estimate on the depth of transition impact. To achieve this, we investigate which standards are relevant for the activities of the company, are there any transactions, contracts which require special attention. Accounting policies, software / ERP applied to prepare financial statements are also reviewed. This exercise, during which the external auditor of the company is also usually consulted primarily aims to map the G/L and reporting structure of the entity. Of course, IFRS literacy is also assessed. The main deliverable of this phase is a summary memo for the financial management of the company, reporting on the complexity, expected impact, as well as the draft roadmap of the IFRS implementation.
Next phase is primarily theoretical, aiming to deliver an IFRS Diagnostics report, which qualitatively descripbes IFRS-HAS adjustments, the methodology to follow in evaluating and determining these, as well as the expected tax impact – a key topic for Hungarian IFRS transition. No less important is the assessment of potential impact on management reports(calculation of KPIs) and on external reporting beyond financial statements, if any (in particular, debt covenants or ratios prescribed in commercial contracts). A Diagnostics, besides listing accounting differences, also has to refer to policy choices the company may have, in terms of both ongoing valuation and one-off transition matters. Decision on transition (in case it is optional for the company and not obligatory) must be made in this phase, for which the deliverables must establish a clear and stable ground. Together with the Diagnostics, a detailed implementation workplan is prepared, presenting tasks, deadlines and responsibles.
If previous phase was theory, then this one is practice. During this (probably the longest) phase official and internal documentation of the IFRS transition are delivered. Its objective is to elaborate the IFRS-HAS reconciliation (as adjustment items), have clear decision on accounting policy matters from the financial management, and process the necessary ERP changes. Standard documents of the transition, being deliverable in this phase are the following:
- IFRS impact assessment,including tax impacts
- IFRS accounting policy
- draft IFRS financial statement with transition note, opening balance sheet and comparative period data
Having successfully implementing IFRS the process is not over. The company has to adjust how changes in regulations are followed up. So far, monitoring domestic legal changes was enough (Magyar Közlöny, other professional periodicals); once IFRS is adopted, it must also be considered that changes in IFRS will not cause any official change in Hungarian legislation, however – in case EU endorsed it – these are obligatory. Monitoring, identifying , integrating these into the entity’s accounting policy must be ensured, as well as keeping IFRS literacy of the financial team on the necessary level.