Mario Matthys: ‘New IFRS has a broad scope. Companies must avoid a knowledge gap between finance and non-finance people.’
These days, financial and business people need to deal with new IFRS releases. 'IFRS is huge,' says Mario Matthys, expert practice leader Corporate Reporting at CFO Services. 'It is in constant evolution. Reporting standards are updated any time developments don't fit the fair value measurement any longer.'
Interview by Dirk van Bastelaere
'IFRS on lease is relevant for many more business departments than finance,' Mario Matthys says. 'It is meant to check if your business departments are reporting their transactions correctly, and that’s broader than finance alone.' The challenge is clear, apart from IFRS implementation, companies should avoid a knowledge gap arising between finance and non-finance people.'
What’s the state of affairs in IFRS implementations?
Mario Matthys: ‘IFRS is huge. We need figures to be comparable. IFRS rules go back to the 1970s, when countries acknowledged the fact that having different accounting frameworks did not make sense. Already then, the International Accounting Standards Committee launched the International Accounting Standards. The USA did the same with US GAAP. Since then, the importance of international financial reporting standards has only increased, because the number of stakeholders that need uniform and comparable figures also increases constantly. In every country and on all levels.
‘A financial institution that is going to give loans to companies must be able to compare one company to another. To compare credit ratings or cash generation possibilities,they need the same standards. You cannot compare Belgian GAAP to German GAAP to Dutch GAAP to Indian GAAP, because they are all different. Belgian GAAP, for instance, is tax driven. You cannot do anything with Belgian GAAP on the international markets. Private equity firms need comparable figures to know where they can invest. EBITDA under Belgian GAAP is totally different from EBITDA under IFRS. Shareholders also benefit from IFRS-driven figures, so that they can at least compare the performance of their company to international players.
‘Nowadays, a lot of companies have different sets of financial statements. They have local GAAP consolidated financials, but 80 to 90 percent of companies have IFRS or US GAAP financial statements, mandatory or non-mandatory. We see that group rules evolve towards IFRS compliance.
‘Two major evolutions are discernable. First, IFRS becomes mandatory for more and more companies. Second, an increasing number of countries are allowing IFRS as a local standard, next to the local standard. In the Netherlands you can deposit your financial statements under local GAAP or under the international standard, even if it’s not mandatory, with most companies choosing the international standard, because other parties - like their financial institution or their private equity shareholder - already request reporting under international reporting standards.’
How do Belgian companies cope in a similar situation?
Mario Matthys:‘Because Belgian GAAP is still mandatory, companies here must deposit under both standards. In a lot of European countries, you can immediately deposit under IFRS. Belgium will have to follow that evolution. I think that within now and five years, every EU member state will allow IFRS financial statements. I also expect that the local GAAPs will be maintained for tax purposes, to file your tax return, but not for international reporting anymore.’
Another trend seems to be that IFRS and US GAAP must adapt to new industries, new products and all sorts of new complexities in reporting.
Mario Matthys: ‘Absolutely. They must keep up with the changes, and make their standards as efficient as possible for investors. IFRS and US GAAP are in constant evolution. They are not static, like the local GAAPs that contain rules that were developed in the 1950s but are still valid today. That’s not the case with IFRS. IFRS will update its reporting standard any time there is a new development that doesn't fit the fair value measurement any longer.
‘This moment, for instance, we must deal with IFRS 9, IFRS 15 and IFRS 16. IFRS 9 and 15 will become mandatory this year. Leasing will become mandatory as from next year. Companies are not always prepared. Well-organized organizations are already starting projects to become compliant. They often have a clear vision of the direction they will take. They know what they need to be efficient, to become compliant. Other companies, even big ones, aren’t even thinking about compliance yet. IFRS is not on their priority list. At a certain moment, of course, they will get caught in a chaotic process to catch up for lost time.’
Employee benefits, leasing, revenue recognition
How complex are the new rules?
Mario Matthys: ‘IFRS 9, 15 and 16 aren’t that complex for finance people because they understand what IFRS is aiming at. It’s far more complex for non-finance people, for business people. So, we must avoid a knowledge gap arising between finance and non-finance people. Otherwise, the effort will be hard. New IFRS has a broad scope. In the past, it mostly involved the finance manager cum suis, but today’s fundamental changes in IFRS impact the whole company. In an implementation project we are doing now, we talked more to procurement, IT, supply chain, business than to the financial team. The information was coming from those people.'
Doesn’t that involve a big mind shift?
Mario Matthys: ‘Absolutely. It’s an evolution that cannot be stopped. Sometimes, a CFO will say: “Let’s inform the finance department.” Then I say: “The finance people will probably have heard about it. It’s more important to talk to the rest of your organization.” Will a controller know that his or her operating expenses with respect to leases and rents have changed? If they don’t understand the consequences of IFRS 16, they will be lost.’
Should the CFO drive that change?
Mario Matthys: ‘Definitely. (S)he should drive the change, but (s)he should also involve the other departments of the organization. That’s a big challenge, because people in other departments will often not understand how they are impacted by an IFRS standard. What are you controlling if you don’t know how employee benefits work, how leasing works, how revenue recognition works? You can see the change in numbers, but is the change correct? IFRS implies a change of mindset that the whole organization needs to become aware of.
‘For a presentation on the upcoming lease standard at a company, the finance manager had invited six people of his finance team. I called him back to say that IFRS 16 had a much broader scope than finance. He resent the invitation for my talk, but this time to 32 people. All the controllers were there, next to HR-people, the fleet manager, IT, procurement, supply chain, sales and marketing etc. The presence of these teams turned out to be very enlightening for the project’s kick-off and for the creation of awareness throughout the whole organization.
‘It is very important that every stakeholder is involved from the start, and that they know what IFRS precisely means. IFRS is relevant for the business. It’s not an accounting gimmick. It is meant to check if your business departments are reporting their transactions correctly, and that’s broader than finance only. IFRS on lease triggers much more business discussions than in the past.
‘IFRS standards today go a lot further to determine the real value of assets and liabilities than before. With these new rules, organizations need managers that are knowledgeable about IFRS and their consequences for all stakeholders.’