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IND-AS: Impact On IT Systems

Published on Tue, Jul 07,2015 | 21:09, Updated at Tue, Jul 07 at 21:09Source : Moneycontrol.com 

By: Sanjeev Singhal, Partner in a member firm of EY Global

ERP /IT applications are rule based to meet the transaction recording / accounting, processing and reporting requirements. Under the current regime , these applications are tailored / configured  to meet the combined  requirements under the Indian GAAP and the Companies Act,2013. With MCA’s announcement  for adoption of Ind-AS w.e.f April 2016 to Ind-AS ,the current rule based configurations (system design) are required to undergo changes to meet the transaction recording, processing and reporting requirements under the Ind AS.

Changes may be far beyond the normal accounting changes considering the reporting requirement changes per Ind-AS. An insight into the impact of Ind-AS on IT systems and the way forward has been presented below.  

Depending upon the industry specific Ind-AS compliance, IT impact will vary for different business process areas. Few of the high impact areas where modifications to transaction modules required are identified as below :

.    Consolidation
.    Property ,plant and equipment -Component Accounting for assets and other key changes
.    Revenue Recognition
.    Financial Instruments
.    Reporting and transactional modules, etc.

Consolidation As per Ind-AS
Multiple Ledger/Set of Books

ERP application is required to be enabled to support multi GAAP transaction processing and reporting. Existence of multiple accounting books / ledgers is required for Ind-AS compliance

•    Consolidated Ledger/Stand alone books (SOB) (Ind-AS)
•    Standalone Ledger/SOB (Ind-AS GAAP) for Entity 1
•    Standalone Ledger/SOB (US GAAP/Local GAAP) for Entity 2

Parallel existence of multiple ledgers is required to support Local GAAP as well as Ind-AS for Consolidation.

Multiple ledgers will be required to be enabled for the earlier comparative reporting period also for reporting under the Indian GAAP.

PPE (Property Plant and Equipment)-Component Accounting and other changes required

Ind-AS mandates  component accounting for identifiable components. Identifiable components of the existing asset might have to be retired from the existing assets. All new assets are to be capitalized as per component approach only. Besides component accounting, following requirements will impact IT systems:

.    Spare parts, stand by equipment and servicing equipment are required to be treated as items of PPE when they meet the recognition criteria.

.    Units of Production depreciation method (or depreciation based on most appropriate useful life estimate)  is permitted by Ind-AS and accordingly for  eligible entities , new depreciation method will be required to be setup in the system.

.    Ind-AS has introduced an additional class  of asset i.e. ‘Non current Assets held for sale'. Accordingly  such assets which are considered as Fixed Assets under various asset classes are now required to reclassified .No depreciation and impairment will be applicable for assets belonging to this class.

.    Change for amortization of intangibles based on useful life

.    Appropriate asset classes, depreciation methods and accounting codes  are required to be enabled in the application for capturing the above requirements.

Revenue Recognition -Credit Awards, Service Components

Total Revenue from sale transaction may include

1)    Revenue from award credit (Customer Loyalty Program)
2)    Identifiable service component

Revenue may required to be deferred as below:

1)Revenue attributable to award services is required to be recognized when  award credits are redeemed.
2) Revenue attributable to service components is required to be recognized over the period during which service is performed.

Similarly, when a financing element is present in a contract, the transaction price may need to be segregated into revenue from contract and the financing component.
Revenue deferment and recognition capabilities are required to be enabled in the ERP applications to meet the revenue recognition requirements of Ind-AS

Financial Instruments
Requirement as per Ind-AS

Requirement as per Ind-AS
•    Financial Instruments to be classified differently under Ind-AS
•    Fair value revaluation for financial instruments
•    Valuation for Loans and receivables at amortized cost basis using the effective interest method

This will have the following impact on IT systems
•    Regroupings in Chart of Accounts / reports
•    Revaluation routines to be deployed in system
•    Change in amortization routines / accounting in system

Reporting and Transactional Modules
Changes are envisaged to the ERP application s  to meet the reporting requirements:

.    Modification to chart of Accounts
.    Changes/modifications as per Ind-AS groupings
.    Additional reports required during the transition period
.    Enhanced disclosure requirements that will require more data capture points

Accordingly, suitable provision is required for capturing accounting codes in Chart of Accounts Structure .

Thus, Information technology (IT) is likely to play a substantial role in the process of converting to Ind-AS. It is advisable not to underestimate the time and effort the conversion process will require, or the inherent potential risks. A well-planned process is critical for converting successfully while controlling costs, maintaining reporting integrity, and avoiding potential financial restatements or other surprises.

The adoption of Ind-AS requires changes in the recognition, measurement and disclosure of many items in the financial statements. Both financial and business systems need to deliver the information required for compliance with Ind-AS. Accordingly, IT systems will need to be modified so that the financial data produced conform to Ind-AS. It is important to note that such changes are not restricted to IT modules relating to general ledger entries or sub-ledger entries, but also affect applications such as asset management systems, financial instruments and payroll systems. Our experience with global IFRS conversions has shown there are four main drivers that determine the scale of an IT project.

The main driver for system- and IT-related changes is how the new accounting standards are to be applied. The impact will be influenced by the existing financial reporting processes and the industry in which an entity operates. For example, the new reporting requirements regarding property, plant and equipment will likely be far more difficult to implement if an entity operates in a capital-intensive industry. Similarly, an entity with significant assets/ liabilities, requiring the use of fair values, would need to specifically focus on the computation of fair values. When an active market does not exist for the measurement of fair value, the entity will have to use other more complex valuation techniques. In such an event, IT systems need to be able to capture the data required for such valuations.

An entity’s finance team needs to work closely with its IT team to understand the system-related impact of Ind-AS requirements. Conducting a diagnostic impact assessment at the beginning of a project will help to identify the differences between existing accounting policies and practices and those required under Ind-AS. It is recommended that the IT department takes part in this assessment to identify affected systems and required modifications early in the process. This will also help organizations to effectively implement changes to best suit their infrastructure and systems.

System changes from Ind-AS are generally classified into three main types:

•    Data changes: As discussed above, Ind-AS can create additional data requirements. Fixed assets must be broken down by significant components, which may require the creation of new asset types and definitions of the useful life of each asset. Separate master data can be maintained to track useful lives, depreciation rates and amounts, which requires extensive data conversion and mapping of historical data.
•    System configuration/parameter changes: Ind-AS may change existing system configurations and routines, e.g., identification of multiple element contracts.
•    Reporting changes: Ind-AS differences will have an impact on reporting tools and reports. For example, the manner in which revenue is determined under Ind-AS for contracts involving deferred payments may be substantially different from the existing practice in India. This difference will have a substantial impact on reports relating to revenue.

IT Organization Structure
Experience with IFRS conversion shows that the structure of an IT function may have a significant impact on the resources required to implement Ind AS. For example, if an entity has a centralized IT function, a focused IT Ind-AS project team can probably make the required system or IT process changes from a single location. However, if the IT function is decentralized across multiple locations and business units, the number of affected people, systems, business units and processes could be significant. IT personnel would also need some training to understand Ind AS requirements and their impact on IT systems.

Existing IT System Plans
Ind-AS can have a direct impact on an entity’s system plans, particularly on financial system implementations or upgrades. If an entity has other large system projects on the horizon (for example, internal financial control systems), it would be better to identify interdependencies within the Ind-AS project and manage resources appropriately.

If an entity is implementing or upgrading financial systems in parallel with the Ind-AS project, the finance team may have to make assumptions regarding functional system requirements during the design phase of the upgrade or implementation. Close co-ordination between the finance, IT and the systems implementation teams is critical.

Application Architecture
The general rule of thumb is “simpler the application architecture, easier would be the implementation”. Typically, conversion in a single-ERP environment is relatively straightforward. Experience shows that the complexity and effort increase greatly if an entity has multiple ERPs or customized applications supporting the financial processes.

To conclude, Ind-AS is not merely an accounting challenge. The impact on IT systems is also significant. The solutions lies in understanding the change, proper planning and starting early.

 
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