The government may have deferred public sector adoption of International Financial Reporting Standards for a year, but those affected still have no time to waste if they want to get their systems and processes ready in time, as FSN contributing editor, Lesley Meall discovers.
Never underestimate the opposition. Ask any politician or sportsperson: from the seven-time world champion boxer Marco Antonio Barrera (recently thrashed by Amir Khan) to the US senator John McCain (thrashed by his running mate and his opponent). By the time you realise your mistake it can be too late to do anything about it. So it will be interesting to see how the public sector fares during the next year, as it works towards its various deadlines for the adoption of International Financial Reporting Standards. So far, it doesn’t seem to be learning from the experiences of others – in the public eye or the private sector.
“Like so many businesses before them, public sector organisations have generally been slow to respond to the demands of IFRS,” says Andy Cooper, an IFRS expert at Agresso Software, failing to recognise the amount of time it takes to collate information and generate the necessary documentation. But understanding the scale of the challenge can be difficult at arms length, because the devil in the detail only becomes apparent once the transition is underway, and some public sector bodies have yet to start the planning process, let alone start the transition.
“IFRS is a major challenge for public sector organisations,” says David Talbot, assurance partner at RSM Bentley Jennison. They need to assess the impact and plan for the transition well in advance of the impending deadlines, because it is a complex and time-consuming process, and underestimating the challenge will be a costly mistake. “We are trying to get over to people just how significant their IFRS projects can be,” he says adding: “You can spend as much time proving that things are not relevant, as adapting the things that are.”
The public sector also seems to be underestimating just how extensive the fall-out from IFRS can be. “It doesn’t just affect reporting,” says Cooper, “it also effects departmental budgets, performance targets and forecasting.” The introduction of IFRS is not simply the conversion from one financial reporting standard to another, because its impact moves beyond the finance function to all aspects of management within the business. “A common mistake made by the private sector was believing that financial regulations were just for accountants,” he adds – though even finance professionals will struggle with many of the changes.
The blind leading the blind
“Detailed guidance on public sector accounting issues has been slow coming,” says Terence Boyle, an accountant and interim manager who has worked on a number of IFRS implementations, “and this is going to make the job that little bit more difficult than it needs to be.” Talbot sites IFRS 8 Operating segments as just one of the areas where the lack of government guidance now could create major problems later. “It’s not yet clear exactly what a segment is in the public sector,” he says, so preparing for it is a challenge, and as he adds: “If the systems are not set up to generate the information required for segmental reporting, it will be a lot of effort to go back and try to collect it retrospectively.”
Though this is just one of the areas where public sector information systems will struggle to collect and collate the information demanded by IFRS. IAS 19 Employee benefits requires an entity to recognise the cost of providing employee benefits in the period in which the benefit is earned rather than when paid or payable - such as accruals for absences earned but not yet taken - and some public sector bodies are going to find this more of a challenge than others. “If organisations have modern up-to-date systems in place then they will provide the necessary information on accruals, otherwise people will have to carry out sampling exercises and then come up with estimates,” explains one consultant.
“Meeting the need for additional disclosures and notes was also a major challenge for the private sector,” adds Dennis Kirton, a COA Solutions product manager, and there is no reason to suppose that it will beany less so for public sector bodies, because the applications used to bring together management and financial information, don’t typically provide the type or amount of data the new standards require. “There are very few pre-IFRS systems that can collect all the information needed in the detail that is necessary,” agrees Boyle, and this is complicated by the abundance of inflexible legacy and proprietary systems in the public sector.
The path of least resistance
“Unwieldy systems are going to take some shifting,” observes Cooper, and although the addition of a new layer of software, in the shape of a business performance management system is one solution, he expects many public sector bodies to opt for the creation of sub-systems - using Microsoft Excel, Access and Word. “This may enable public sector organisations to achieve their initial deadlines, but it is not the most efficient or cost effective way of handling the changes required,” he asserts, because it will lead to an increase in overall costs in the medium and long term. “The public sector will have to spend in order to save,” he adds.
Whether it achieves this laudable goal remains to be seen, but there are plenty of signs that it is parting with substantial amounts of cash – in one way or another. “The transition to IFRS is not a cheap process,” says Talbot from Bentley Jennison (a top 20 firm), “but a lot of the Big Four have been charging quite significant fees, while we’ve been charging less significant fees.” This is confirmed by interim manager Terence Boyle, who argues that “The present economic climate should convince public sector finance directors to try the cost-effective option of interim managers,” as many of them come with a successful track record of installing IFRS in the private sector.
Fair enough. But while there is room for debate on where affected (or afflicted) public sector bodies can find the best service and the best value for money, there is no question about their need to make a decision, and get the ball rolling as soon as possible. “The documentation requirements alone are a major issue,” says Talbot, because even when an organisation decides that something isn’t impacted by IFRS, the auditors will want to see the rationale behind the judgement. “This isn’t always complex, but it is always time consuming,” he cautions, so the later a public sector body starts the process, the more help it is going to need, and the higher the cost will be.
