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Automatization of the preparation of the notes disclosures taking the example of IFRS 7

Automatization of preparation of notes disclosures

The requirements regarding capital market-oriented reporting in accordance with IFRS have increased steadily in recent years.

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Ralph Schilling

Partner, Finance Advisory, Head of Finance and Treasury Management

KPMG AG Wirtschaftsprüfungsgesellschaft

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notes disclosures

The higher complexity places a higher burden on the preparers, auditors and readers of financial statements, who must prepare, audit and assess more extensive information at the same time. A major step towards the automated processing of corporate reporting was taken on the recipient side with the introduction of the European Single Electronic Format (ESEF) on 1 January 2020. However this format requirement also poses an additional challenge for reporting entities that will no longer be able to meet the increasing requirements of the standard setter and the legislator if they do not catch up on the automatization of the financial statements preparation.

The preparation of the IFRS notes in particular has become an extremely time-consuming process whose result is characterized by the manual aggregation of data from various pre-systems. This implies a high amount of manual adjustments with an increased error potential. It also gives rise to specific challenges regarding the internal and external verifiability of these data, whereby the compliance of the company in question cannot be definitively ensured resp. conceals an additional risk. The notes should thus be prepared as far as possible as part of an automated process that can be verified beforehand, largely prevents manual interventions and hence minimizes the potential for error.

Regarding IFRS 7, three topic areas that are frequently characterized by manual time-consuming processes and thus carry a high automatization potential can be identified: 

  • Exposure calculation/Sensitivity analysis
  • Liquidity analysis
  • Hedge accounting

Exposure calculation/Sensitivity analysis

The starting point of the sensitivity analysis according to IFRS 7.40 is always the calculation of the net risk exposure. Regarding currencies, this requires a group-wide aggregation of all foreign currency positions, their net presentation and delimitation with respect to their effect on equity, on the one hand, and on profit or loss, on the other hand. Generally, several systems are involved in this process and a high amount of manual corrections and adjustments is necessary. A corresponding error potential is preprogrammed in this respect. The lack of transparency within these processes also conceals risks both for the reporting entity and for the auditor. 

Liquidity analysis

The liquidity analysis is also characterized by a hotchpotch of data. According to IFRS 7.39 it must include all the undiscounted cash flows from derivative and non-derivative financial liabilities. Besides derivatives, this includes in particular bonds, promissory note loans, bank credits as well as other financing instruments, but also trade payables. Whereas the latter are usually extracted from a company’s ERP, derivatives are generally maintained in TMS (Treasury Management System). Bonds and debt securities are maintained in other IT modules. Here again, significant quantities of data are regularly processed in Excel-based solutions that are prone to error and characterized by manual interventions.

Hedge accounting

Since the introduction of IFRS 9, according to IFRS 7.23B the average rates of the hedging transactions designated in the hedge accounting must be indicated in the notes on hedge accounting. These appear regularly in TMS at individual transaction level, but to this end an aggregation per risk type, currency and timing is necessary, which also requires manual interventions. Here again, automated solutions would allow to streamline processes and reduce manual errors.  

Conclusion

It is impossible to say whether the complexity of IFRS reporting will be reduced in the future. Consequently, given the increasing requirements, the automatization of the notes disclosures should be pushed forward, whereby IFRS 7 in particular brings significant automatization potentials. 

In this regard, KPMG’s Finance and Treasury Management offers – in collaboration with KPMG Lighthouse – a cloud-based platform, the KPMG Sofy Suite, in which data from existing pre-systems can be entered, processed purposefully and assessed. In this respect, the KPMG Sofy Suite functions like an App that can be used by many decentralized entities and key contacts within a group of companies. 

With this combination of practicality and technique, KPMG is ideally positioned and is at your disposal to discuss this topic. 

Source: KPMG Corporate Treasury News, Edition 103, July/August 2020

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