IFRS and your ERP

Who actually uses IFRS, and who does not

IFRS is issued by the International Accounting Standards Board and has been adopted, in whole or with local endorsement, across a large number of jurisdictions. Adoption is never automatic: each jurisdiction decides which entities must apply the standards, from which date, and whether any local modifications apply. That is why a claim to support IFRS is weaker than it sounds until you know which jurisdiction, which entity type and which reporting framework are in play.

The differences matter most when one group reports across several markets. A Saudi parent with a Canadian subsidiary and a US operating company may be preparing under three different rule sets at once, consolidating into one. The system underneath has to carry enough detail to serve all of them, because you cannot recover a measurement basis that was never recorded.

• Saudi Arabia requires IFRS as endorsed by SOCPA, which issues the endorsed standards and any additional local requirements and disclosures.
• Canada requires IFRS for publicly accountable enterprises; private enterprises may instead apply ASPE, a separate Canadian framework.
• The United States uses US GAAP, set by the FASB, for domestic filers. US GAAP is not IFRS, and the two differ in substance as well as wording.
• IFRS for SMEs is a separate, lighter standard with reduced recognition, measurement and disclosure requirements, available where a jurisdiction permits it.
• Across the wider MENA region, adoption varies by country and by entity type, so confirm the applicable framework rather than assuming a regional default.

IFRS 15: revenue is a data problem before it is a policy problem

IFRS 15 sets out a five-step model: identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate that price to the performance obligations, and recognise revenue when or as each obligation is satisfied. The steps read simply. The work is in applying them to real contracts.

The systems consequence is that revenue can no longer be a by-product of issuing an invoice. A single contract may contain several performance obligations that are satisfied at different times, some at a point in time and some over time, while billing follows a schedule negotiated for cash-flow reasons that has nothing to do with either. If the ledger only knows about the invoice, the difference between billed and recognised amounts has nowhere to live, and contract assets and contract liabilities have to be reconstructed by hand in a spreadsheet every period.

A system that supports IFRS 15 holds the contract as an object in its own right: the obligations within it, the price allocated to each, the method and evidence for measuring progress where revenue is recognised over time, variable consideration and any constraint applied to it, and the resulting schedule of recognition that posts to the general ledger on its own cadence. Skyline Nexus holds contract-level revenue schedules separately from the billing schedule, so recognised revenue, billed amounts and the resulting contract asset or liability are each traceable to the contract that produced them.

IFRS 16 leases and the data the system must hold

Under IFRS 16 a lessee generally brings leases on to the balance sheet, recognising a right-of-use asset and a corresponding lease liability, with limited exemptions available for short-term leases and leases of low-value assets. The income statement effect changes shape too: depreciation of the right-of-use asset and interest on the liability replace a straight rental expense.

That measurement cannot be produced from a rent payment posted monthly to an expense account. The system needs the commencement date, the lease term including any options whose exercise is reasonably certain, the payment schedule and its fixed and variable components, the discount rate applied, and a record of remeasurements when terms are modified or an assessment of an option changes. Each of those inputs has to survive, because the auditor will ask how the opening liability was derived and how it moved.

• Lease-by-lease register with term, payments, discount rate and classification of any exemption claimed.
• Amortisation of the liability and depreciation of the right-of-use asset, produced as schedules rather than manual journals.
• Remeasurement history, so a modified lease shows both the old and revised measurement and the reason for the change.
• Maturity analysis of lease payments to support the disclosure requirements.

IAS 16, IAS 2, IAS 21 and IAS 36 in outline

IAS 16 governs property, plant and equipment. Significant parts of an asset with different useful lives are depreciated separately, which is why componentisation is a structural requirement and not a reporting preference. The standard requires an estimate of useful life and residual value, reviewed at least annually, and a depreciation method that reflects the pattern in which the benefits of the asset are consumed. After recognition an entity chooses, by class of asset, between the cost model and the revaluation model, and the revaluation model brings its own measurement and disclosure obligations.

IAS 2 measures inventories at the lower of cost and net realisable value, with cost assigned using FIFO or a weighted average cost formula, applied consistently for inventories of a similar nature and use. LIFO is not permitted under IFRS, although it remains available under US GAAP. That single difference can change reported cost of sales and closing inventory materially, and it is one of the clearest reasons a group cannot simply assume its US costing configuration transfers to an IFRS reporting entity.

IAS 21 distinguishes functional currency, the currency of the primary economic environment in which the entity operates, from presentation currency, the currency in which the statements are presented. Transactions are recorded in the functional currency at the rate on the transaction date. At each reporting date, monetary items are retranslated at the closing rate while non-monetary items measured at historical cost are not. To do this correctly the system must retain the original transaction currency, amount and rate at line level rather than storing only a converted figure.

IAS 36 addresses impairment. In outline, an entity assesses at each reporting date whether there is any indication that an asset may be impaired, and where there is, it estimates the recoverable amount, being the higher of fair value less costs of disposal and value in use. An impairment loss arises where carrying amount exceeds recoverable amount. Certain assets, including goodwill, are tested annually irrespective of indicators. The judgements sit with the preparer; what software contributes is a reliable carrying amount to test against and a place to record the result and its reversal where permitted.

The honest part: no software is IFRS certified

There is no certification body that certifies accounting software as IFRS compliant, and no such certificate exists to be held. IFRS compliance is a property of a set of financial statements, produced by judgements the preparer makes and the auditor tests. A vendor cannot make those judgements for you, and any claim that a product is inherently compliant is describing something that does not exist.

What software genuinely does is narrower and more useful. It holds the data the standards require at the level of detail they require it. It enforces controls so that the data stays reliable: segregation of duties, closed periods, an audit trail that records who changed what and when. It produces the schedules and disclosures a preparer needs, in a form that ties back to the general ledger without manual reconstruction. Where a system fails, it usually fails at the first of these, and no amount of reporting can recover detail that was never captured.

What to ask a vendor

Ask questions that can only be answered by demonstration. Every answer below should be shown in the product with real data, not described in a slide, and each output should tie to the general ledger without a spreadsheet in between.

Skyline Nexus holds assets at component level, records every transaction in its original currency with the rate applied, and produces fixed-asset and lease schedules that an auditor can tie to the ledger. That is a statement about what the system holds and produces. The judgements remain yours, and the opinion remains that of your auditor.

• Can the fixed-asset register hold components of a single asset with separate useful lives, methods and revaluation history, and produce a register that reconciles to the ledger?
• Can revenue be scheduled at contract and performance-obligation level, independent of the billing schedule, with contract assets and liabilities falling out of that schedule?
• Can leases be held with term, payments, discount rate and remeasurement history, producing liability and right-of-use asset schedules and a maturity analysis?
• Is multi-currency recorded at transaction level, retaining original currency, amount and rate, with monetary and non-monetary items treated distinctly at reporting date?
• Can inventory costing be configured as FIFO or weighted average, with net realisable value write-downs recorded and reversible where the standard permits?
• Is there an immutable audit trail, period locking and role-based control over posting and configuration changes?
• Can the same underlying data support a different framework for a subsidiary, such as ASPE or US GAAP, without re-keying?