History of consolidation (5/5): The 2000s – Y2K and IFRS

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Once upon a time … consolidation: the 2000s – Y2K and IFRS

By Allen White, Sigma Conso co-founder & Administrator

The turn of the century (Y2K in the English-language media of the time) disappointed many journalists looking for a sensational story because the long-anticipated bug didn’t negatively affect accounting systems and the performance of consolidation software packages received high marks. Another much more critical deadline awaited listed groups in 2005: the implementation of IFRS standards. The goal was infinitely praiseworthy given that the decision removed the haziness of the 7th Directive of 1983.

By setting standards for all Member States, Europe was making consolidated accounts comparable from the standpoint of both content and form for companies in similar lines of business, regardless of the Member State they were located in. Hadn’t the United States applied the same approach throughout its states and with US GAAP for quite some time already? Was the European goal achieved after a few years of IFRS? The answer isn’t straightforward.

From a content standpoint, IFRS is voluminous, changing and interpreted making it difficult to implement uniformly across listed companies. We have often come across qualified or even very different opinions on a similar situation, sometimes from two partners of the same firm. From the standpoint of form, some States, like Belgium or France, have imposed a national publication standard for statutory accounts for many years now.

When the first consolidated accounts were published, groups found it normal to follow a recommended scheme… which didn’t exist and has never been proposed by Member States. With the advent of IFRS, each group created their own publication standards. Items that didn’t appear explicitly on a balance sheet or income statement could be put in an attached table or in a note.

It was up to the reader to find the information…

The general, overriding feeling after a few years with IFRS standards is revealed in the following comments:

  • The figures published hide a very high degree of technicality, to such an extent that consolidators sometimes wonder if external observers are able to interpret them correctly.
  • It’s very debatable how well the objective of effective rule harmonisation is being met.
  • The structure of appendices means that they are not entirely comparable.
  • An uneven skill level is found both in consolidation professionals and auditors who sometimes find it difficult to stay abreast of shifting interpretations of IFRS rules.

The advent of IFRS clearly created competition. The leaders adopted IFRS standards, leaving no other options available and, sometimes, with a feeling of duty, whereas the other, unlisted, groups in the pack wanted to retain national standards for a long time even though some of them did decide to break away. As for consolidation software packages, they adjusted to the IFRS requirements and the impact on functional changes turned out to be minor. Why? Because the move to IFRS standards, with a few exceptions, didn’t involve the mechanics of consolidation per se, but rather the content of the statutory accounts of each company in the perimeter.

During all of these years, the market maintained the confusion between IFRS as a consolidation problem and IFRS as an accounting issue. Software packages were impacted in terms of their parameters (chart of accounts, appendices), but not in their intrinsic functionality, or if so, only marginally.

Did the software evolve over the decade? The main direction taken was again based on technology changes dictated by an increasing need to produce more reliable data faster. Revisiting or developing consolidation software couldn’t be done without immediately integrating a WEB approach, with all of the accesses and portability that presupposes. Not only did the traditional consolidation bundle make way to direct access to a centralised system by each company, consolidation functions themselves become accessible from any Internet entry point, anywhere in the world and at any time.

This approach, confirmed by Cloud Computing, tends to make the location of both data and the software used to process them invisible to users, and to improve performance. By the end of the decade, consolidators could finally do their work at any time of the night or day, from anywhere, even on holidays, and on the device of their choice, including a smartphone! This was huge progress since the time of the first service bureau consolidations in the early 1980s.

Did unified consolidation finally fulfil its potential ten years later? There were clear convergences in functionality thanks to the comfort provided by tools increasingly in the public domain and also thanks to the expression of needs by groups which were becoming more uniform. Consolidation was bound to become a strategic planning tool rather than a simple photograph of the past.

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