For companies reporting under International Financial Reporting Standard (IFRS) and public companies reporting under U.S. GAAP with fiscal years ending December 31, the rubber is about to hit the road.
All of these companies worldwide must be prepared to implement the new accounting standard on revenue (IFRS 15 for IFRS, ASC 606 for U.S. GAAP). Regulators want detailed disclosures on the expected impact of the IFRS 15/ASC 606 in the notes to the 2017 full year financials. The numbers in the first interim report, which may be due as early as April 2018, must be based on the new standard.
The big question on everyone’s mind is, “Are we ready?”
Strictly speaking, “ready” means being able to determine and disclose required numbers and explanations by the deadlines set by regulators, and ensuring that these numbers are materially complete and correct. But in practical terms, “readiness” appears to be a relative term. In my talks with my fellow chief accountants working in various industries around the world, it’s clear that everyone’s done something to prepare – but the continuum is vast, indeed.
Varied Levels of Readiness
A few companies are lucky enough to say that the new standard does not bring significant changes to their accounting numbers and processes. Of those not part of this small group, some have invested heavily in automation to maximize efficiency and effectiveness and minimize risk. They are ready for long-term compliance with processes that limit the strain on their already overtaxed finance team. Others have pieced together a patchwork of systems, manual processes and controls to get to IFRS 15/ASC 606 numbers, minimize errors and declare readiness. This may be all they can do, given the time and resources available to them. And it may get them through the first few quarters, if all goes well. But that’s a big gamble.
As someone who is intimately familiar with the new standards, I would suggest that manual, piecemeal approaches are not only risky. They are also not sustainable – especially as new requirements come into play and increase the challenge. For example, new leasing standards come into effect January 1, 2019.
Sustainability is vital for two reasons: First, IFRS and U.S. GAAP requirements are complex, here to stay, and can have significant business ramifications. Even accidental misstatements can result in costly shareholder lawsuits, stock hits, and damage to brand reputation. Second, accounting functions are expected to work efficiently, and manual processes are often the biggest enemy to efficiency and cost containment.
Ideally, companies that cannot immediately move to sustainable processes should take a two-step approach, with the initial step focused on achieving compliance using interim processes. These processes are subsequently replaced during the second step by more efficient, automated processes. This approach works only if the second step does not drift out of focus over time, of course.
An Opportunity for Your Company to Run Better, Smarter
By using the right information technology, accounting teams can make compliance sustainable — and help their firms run better and smarter. To do this, chief accountants need to view the impacts of the new accounting standards as more of a business change, not just an accounting change, and proactively identify what can be improved upon.
This is what we’ve done at SAP. As a company with a December 31 year-end financial cycle that reports quarterly, along with countless other firms, SAP is not just looking at what has changed due to the new standards. Rather, we’ve used the new accounting standards as a catalyst for reconsidering all processes in the respective accounting areas — even those processes that are not affected — and making improvements to benefit the entire business.
For example, we have been striving for comprehensive use of the new revenue and lease accounting functionalities that SAP solutions offer, as well as expanding our use of treasury functionalities to cope with the new requirements for financial instruments accounting. And we’re leveraging new technologies like machine learning to further streamline core finance processes.
Want to learn more? Check out this new video where I talk about
how SAP is turning the challenges of compliance into
opportunities to improve our business.
Christoph Huetten is senior vice president and chief accounting officer at SAP