How Banks can successfully comply with IFRS - A Case Study 

Listed companies in the UK have now published their first year consolidated group accounts under IFRS rather than UK GAAP, but the evidence suggests the challenges are far from over. The majority of companies have yet to move their subsidiaries to IFRS accounting rules and there is a continuing need to embed IFRS throughout the business and systems. Ensuring that the right IT systems are in place is crucial to enabling successful reporting under IFRS. As AIM listed companies in the UK and organisations within the public sector look to comply with IFRS over the coming months, there are a number of examples of best practice from across Europe that should be taken into account when planning new IFRS implementations.

Case Study

DekaBank, one of Germany's biggest financial institutions, is one such example. Historically, DekaBank's business rules had been hard-coded in their IT systems, which meant that changes, such as the new IFRS rules, were difficult to implement. As a result, DekaBank implemented a new business rule management system in order to allow the business users from the fund reporting division to have direct access to the reporting process templates, rather than waiting for the IT team to change software code. The new process allowed 2,800 new rules to be implemented within four weeks by only four users from the business department, reducing the time-to-market for new IFRS rules by over 50%.

In addition, the bank was able to increase the number of reporting templates it offers its clients from one to three (banking, insurance, industries). As a result, DekaBank can provide customised reports allowing the bank to more closely tailor the template to meet customer needs and thereby improve customer service.

The scope of the project focused on:

• Implementation of new extensions to DekaBank's core funds-accountancy system with the IFRS accounting standards.
• Implementation of a core rule-based system for the aggregation of IFRS positions and also the flexible preparation of target investor reports.
• Strict separation between the funds-accountancy system, the aggregation of IFRS positions and the preparation of customised reports and their distribution.

DekaBank is an example of how a European investment bank has successfully approached its IT implementation to enable IFRS compliance. In general, however, the introduction of IFRS is placing a strain on European banks, which now have to centralise multiple GAAP numbers from different countries into a single consolidated view for their managed account customers. Indeed, the majority of European investment banks now find themselves managing multiple accounting schemes including IFRS, but also national GAAPs and US GAAP if they trade with the US. Given that the majority of these investment banks will be operating in multiple locations and with multiple entities and products, it's easy to appreciate the scale of the compliance mountain that they have on their hands.

On the whole, Europe's investment banks have been using multiple legacy IT systems to deal with the regulatory demands of today's banking environment. They have, however, come up against the challenge that their IT systems are not sufficiently flexible or scalable to manage the complex requirements or keep up with the regular changes that need to be made to IT infrastructure in order to ensure compliance.

Compliance Issues

Compliance with IFRS, as with many other pieces of legislation, has to involve aiming for a more integrated organisation with unified and centralised processes, as well as flexible IT systems that can handle changing requirements. An important part of this process is ensuring that business rules are not embedded in legacy systems and mainframes, which do not allow businesses to manage, track and make the frequent changes to their rules required by IFRS.

One way of approaching the compliance dilemma is to ensure that two separate processes - the accounting and the reporting processes - are working optimally. The accounting process is about transforming business events into accounting events and postings stored in a general ledger. In the case of ING and Dresdner Bank, they use business rules as accounting rules to validate, unify events, apply accounting treatments and generate multi-GAAP postings. The posting rules take into account the GAAP-specific aspects to produce accounting entries from the accounting events. This can be achieved by first producing accounting events for IFRS and then letting the posting rules produce deltas for the national GAAPs. Second, the reporting process extracts the relevant information from the general ledger for a given institutional customer. The bank defines the reporting rules to produce exactly the type of report that is required for these customers.

One of the reasons why investment banks have tended to struggle with IFRS compliance, and part of the reason to separate accounting and reporting, is the fact that there is room for interpretation within the regulation when it is incorporated in local law - termed national discretion. As a result, it is vital that an audit trail database forms part of any IT architecture. It is used to store the necessary information in order to be able to understand how events were processed. The actual information stored in the audit trail database is the result of design, knowing that there is a trade-off between the usefulness and the amount of the stored information and the cost of storing it.

If banks ensure they have the right IT infrastructure in place, they will find that they can not only comply more easily with IFRS, but can also realise knock-on business efficiency benefits. Perhaps compliance isn't such a bad thing.

Article by Geoff Round, IFRS Consultant