What firms need to know about IFRS compliance in ERP system

07:30 | 20/07/2020
The incorporation of compliance with the International Financial Reporting Standards (IFRS) in the Enterprise Resource Planning (ERP) system implementation will greatly benefit enterprises in terms of operation management as well as investment efficiency. ERP is a system that integrates all economic activities of an enterprise on one platform, and by doing that, systemises all business processes and information across the organisation.
what firms need to know about ifrs compliance in erp system
By Bui Van Trinh - Partner in charge of IFRS Convergence Advisory Deloitte Vietnam

The implementation of an ERP system could offer the finance and accounting team the opportunity to revise or modify the way their economic transactions are being recognised, evaluated, and measured.

In other words, the enterprises can choose to adopt IFRS in parallel with Vietnamese accounting standards (VAS) in their ERP system implementation. This way, they can claim their compliance with IFRS or the Ministry of Finance’s (MoF) Decision No.345/QD-BTC dated March 16 on IFRS convergence in Vietnam.

Multiple-ledger system

Current ERP solutions allow enterprises to comply with multiple accounting standards such as VAS and IFRS, and the concepts of primary and secondary ledgers or dual ledger systems are also common.

The selection of accounting principles for primary and secondary ledgers does not necessarily reduce the degree of compliance with the selected accounting principle, but it is rather a way the ERP system is set up to assist its users. Which accounting principle to apply to the primary ledger should depend on the usage frequency of reports generated from it.

Many foreign-invested enterprises tend to choose IFRS over VAS for their primary ledger simply because of their need to send monthly reports under IFRS to their parent company, whilst only obligated to report once a year in Vietnam per VAS.

First-year choice

IFRS 1 provides guidance on the first-time convergence for enterprises that wish to choose IFRS as their accounting principle. According to this standard, the enterprises need to decide when their first year to implement IFRS is, based on their desired convergence journey and the requirements under Decision 345. Once this decision is made, the enterprises will begin to build their detailed plan and integrate it into their ERP.

Accounting policy decision

IFRS is a set of principle-based standards, thus it will provide the opportunity for enterprises to choose the most suitable accounting policy, for example, to calculate their fixed assets’ depreciation or record the value of their investment property.

Nevertheless, the enterprises need to thoroughly evaluate the differences between IFRS and VAS to make a sound decision. Referring to compliant accounting policy being applied in the industry may bring invaluable insights into this process.

The accounting policy will provide principles for the recognition and measurement, as well as the presentation and disclosure of the enterprises’ economic transactions. They will also be fundamental for the design and modification of processes in an ERP project.

Process modification

The business process is a document describing from start to end all economic activities of an enterprise. The starting and ending point could be a point of time or an event, for instance, the procurement process starts when a purchase order is created and ends when all payments to the supplier are made.

Along with changing the processes to ensure compliance with the selected accounting policy, the finance and accounting teams also need to take part in the evaluation of such compliance of other business processes, such as sales and returns of goods, or asset procurement. This is a necessary step to ensure absolute compliance with the selected accounting principle.

Chart of Accounts design

The Chart of Accounts (COA) is a hub where all economic transactions of an enterprise are recorded, and also a source from which all information is extracted to assist the decision-making process of many departments, such as actual revenue compared to planned revenue.

The COA needs to be redesigned to not only ensure compliance with VAS and IFRS but also to meet the management requirements of the sales department, production department, and so on.

A well-designed COA will considerably contribute to the extraction of data and the creation of useful reports from it, which in turn leads to timely and prompt decision-making.

The COA must be completed at the same time as the consolidation of all processes for the configuration of the new system. Meanwhile, the finance and accounting team continues to build the prior year’s balance following selected accounting policy under IFRS, in preparation for its input into the system in the next phase.

With more than two years of experience in ERP system implementation and as a compliance advisor, I could see how much attention being paid to these projects by business leaders, which is also one of the most essential elements for the IFRS convergence process.

For enterprises that are in the progress of implementing their ERP system, there might be more complicated matters to take into consideration before modifying or extending the scope of their projects.

IFRS Readiness Survey

Decision 345 is aimed to increase the transparency and efficiency of financial information and improve corporate accountability in information disclosure.

Accordingly, in phase 1 (voluntary application 2022-2025), the following enterprises that have the need and sufficient resources will notify the MoF before voluntarily applying IFRS to prepare the consolidated financial statements: the parent company of a large-scale state-owned enterprise or with loans financed by international financial institutions; parent company that is a listed company; large-scale public enterprise which is a parent company but not yet listed; and other parent companies.

Enterprises with 100-per-cent foreign direct investment that are subsidiaries of foreign parent companies and have the need and sufficient resources will notify the MoF before voluntarily applying IFRS to prepare separate financial statements.

Starting from 2025, upon the assessment results of phase 1, the need and readiness of the enterprises, and specific circumstantial information, the MoF will decide on the plan and timeline of compulsory IFRS convergence in the preparation of consolidated and separate financial statements. With the aspiration to learn about the readiness in general and the challenges that enterprises will face in their IFRS adoption following Decision 345, the Ho Chi Minh Stock Exchange with the support of Deloitte Vietnam is conducting a survey on the readiness to apply IFRS at enterprises.

“In order to have an overview of the readiness and challenges the enterprises are facing on their journey to adopt IFRS following Decision 345/QD-BTC, the Ho Chi Minh City Stock Exchange with the support of Deloitte Vietnam co-conduct the readiness assessment on IFRS adoption survey, designed exclusively for the C-Suite level of enterprises in Vietnam. This pulse survey is available from now till July 31, 2020. Complete the survey: https://deloi.tt/32fuHJn”.

By Bui Van Trinh

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