The Victorian-era Imperial Hotel in Chestertown, Maryland, is partly owned by its de facto finance chief, Judith O'Dell, and her husband. Like many small-business owners, O'Dell uses the off-the-shelf software package QuickBooks to manage the Imperial's finances.

O'Dell, it should be noted, is no finance neophyte. In addition to her hotel duties, she also runs O'Dell Valuation Consulting LLC, a tax and accounting services firm, and is chair of the Financial Accounting Standards Board's Private Company Financial Reporting Committee.

Therefore, the findings of an accounting experiment she conducted earlier this year will be of interest to many finance executives.

Adhering to the financial statement presentation rules laid out in a proposal issued by FASB, which require the direct method of cash-flow accounting, O'Dell assessed whether her software application was up to the task. The direct method requires more disaggregation of entries, while the more accepted indirect method divides cash flows into two large buckets: cash received from customers and cash paid to employees, suppliers, and vendors.

The result? "I couldn't do it," she says. "I could not extract the information and the detail required for the direct method, so I had to [manually] plug in the numbers." O'Dell believes that many of the dozen or so rulemaking projects FASB aims to finish by next year will cause similar problems for a range of software systems.

Ironically, the Big Bang switch from generally accepted accounting principles to international financial reporting standards may pose far less of an IT challenge, because software vendors have already modified their applications for companies operating in countries where that switch has taken place.

In contrast, individual FASB rule proposals on revenue recognition, lease accounting, and a host of other issues may pose far greater technical difficulties. FASB officials say the board is fully aware of the possible IT implications of its proposals, and communicates regularly with software vendors and other stakeholders about how to head off potential obstacles.

So far no one is reaching for the panic button. Vendors across the spectrum, from enterprise resource planning (ERP) giants SAP and Oracle to integrated financial reporting vendors such as NetSuite to more specialized vendors like International Decision Systems, which makes lease-accounting software, say they will take the rule changes in stride and upgrade their systems when rules are finalized.

Nevertheless, software vendors have asked FASB to consider a "cost containment" measure that would cluster compliance deadlines for major rule changes, so companies that need to modify software systems can do so all at once, rather than piecemeal as various effective dates kick in.

In a report from FASB, the board has acknowledged software vendors' concern that the less uniform a company's accounting and reporting systems are, "the more difficult and costly it could be to implement the proposed requirements." Here is a look at four of the more prominent IT problems companies will face as the rulemaking proceeds.

Financial Statement Presentation: A Direct Hit
While lenders and analysts are big fans of the direct cash-flow method being prescribed by FASB's financial statement presentation project, "it's a nightmare for preparers," asserts O'Dell. The project fundamentally changes the way information is presented on the balance sheet, income statement, and cash-flow statement by separating a company's business activities from its financing or funding activities.

"We don't collect this type of information [required by the direct method]," noted David Bond, senior vice president of finance and control for Safeway, at a recent conference. Fellow panelist Steve Whaley, controller for Wal-Mart Stores, agreed: "That's not the way our ERP system is set up to do things."

Jay Hanson, national director of accounting with McGladrey & Pullen and a member of FASB's Emerging Issues Task Force, calls the direct cash-flow method one of the "poster children" for the difficulties preparers will face with the financial statement presentation project. The method requires companies to start with the net income number, and add or subtract working-capital items to get down to cash flow from operations. It also requires companies to add lines that break down items into such categories as cash received from customers, cash paid to customers, and cash paid to employees.

The only way to track "real" direct cash flows is to devise a system that captures data that likely exists at the lowest levels of an organization but is not currently being extracted. From an IT perspective, that means unearthing data that can be used to support accounting-treatment judgments and fair-value estimates, testing its integrity, and building a "formal disciplined process" around reporting the data, says Steve Hobbs, a managing director with consulting and internal-audit firm Protiviti.

Lease Accounting: A Capital Idea
The right-to-use concept written into FASB's lease rule proposal (Topic 840) essentially eliminates operating leases for equipment and real estate rentals that extend beyond 12 months. If the rules are issued in their current form, companies that lease property or equipment will have to capitalize affected operating leases and bring the associated assets and liabilities back onto balance sheets.

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