What is the real challenge with IFRS
Thomas Jordan / IMS Financials
September 2014
Can your CIO spell IFRS?
http://www.cfo.com/article.cfm/12051569
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Agenda
•
•
•
•
•
What does IFRS mean?
Parallel accounting is the challenge
How to implement parallel accounting
Experiences
Some Customer Questions
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What does IFRS mean?
What does IAS / IFRS mean?
IAS stands for “International Accounting Standards“
IFRS stands for “International Financial Reporting Standards”
IFRS is the new name to be used from 2003 on.
These standards are issued by the IASB (International Accounting Standards Board /
London).
The aim of IFRS is to produce internationally comparable financial statements.
With IFRS, regulations concerning financial statements will no longer be set using the usual
legislative procedures.
The chief principle behind IFRS is the "true and fair view"
There are fundamental differences between how IFRS deals with the valuation of net assets
and the principle of the protection of creditors compared to e.g. the German Commercial
Code
Application of this principle will widen the scope of reporting considerably.
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MAP: IFRS countries
IFRS required or permitted
Seeking convergence with IASB or pursuing adoption of IFRS
Canada: Required from 1
January 2011 for all listed
entities and permitted for
private sector entities
including not-for-profit
organisations
Russia: Required for banking
institutions and some other
securities issuers; permitted for other
companies
EU: All member states of the EU
are required to use IFRSs as
adopted by the EU for listed
companies since 2005
China: Substantially
converged national
standards
Korea:
required from
2012
US: Allowed for foreign issuers
in the US since 2007
Mexico :
required from
2012
Brazil: Required for
consolidated
financial statements
of banks and listed
companies from 31
December 2010 and
for individual
company accounts
progressively since
January 2008
Argentina:
Required for fiscal
years beginning on
or after 1 January
2011
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Turkey: Required
for listed entities
since 2008
Colombia
required from
2015
India: India is
converging with
IFRSs over a period
beginning 1 April
2011
South Africa:
Required for listed
entities since 2005
Japan: Permitted
from 2010 for a
number of
international
companies; decision
about mandatory
adoption by 2016
expected around
2012
Australia: Required
for all private sector
reporting entities
and as the basis for
public sector
reporting since 2005
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IAS / IFRS Regulations (I)
IAS 1
Presentation of Financial Statements
IAS 2
Inventories
IAS 7
Statement of Cash Flows
IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10
Events After the Balance Sheet Date
IAS 11
Construction Contracts *
IAS 12
Income Taxes
IAS 16
Property, Plant and Equipment
IAS 17
Leases *
IAS 18
Revenue *
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IAS / IFRS Regulations (II)
IAS 19
Employee Benefits
IAS 20
Accounting for Government Grants and Disclosures of Government Assistance
IAS 21
The Effects of Changes in Foreign Exchange Rates
IAS 23
Borrowing Costs
IAS 24
Related Party Disclosures
IAS 26
Accounting and Reporting by Retirement Benefit Plans
IAS 27* [Consolidated and] Separate Financial Statements
IAS 28* Investments in Associates (and Joint Ventures)
IAS 29
Financial Reporting in Hyperinflationary Economies
IAS 31
Interests in Joint Ventures
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IAS / IFRS Regulations (III)
IAS 32
Financial Instruments: Presentation
IAS 33
Earnings per Share
IAS 34
Interim Financial Reporting
IAS 36
Impairment of Assets
IAS 37
Provisions, Contingent Liabilities and Contingent Assets
IAS 38
Intangible Assets
IAS 39
Financial Instruments: Recognition and Measurement *
IAS 40
Investment Property
IAS 41
Agriculture
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IAS / IFRS Regulations (IV)
IFRS 1
First-time Adoption of International Financial Reporting Standards
IFRS 2
Share-based Payment
IFRS 3
Business Combinations
IFRS 4
Insurance Contracts
IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
IFRS 6
Exploration for and Evaluation of Mineral Resources
IFRS 7
Financial Instruments: Disclosures
IFRS 8
Operating Segments
IFRS 9* Financial Instruments
IFRS 10 Consolidated Financial Statements
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IAS / IFRS Regulations (V)
IFRS 11 Joint Arrangements
IFRS 12 Disclosures of Interests with Other Entities
IFRS 13 Fair value measurement
IFRS 14 Regulatory Deferral Account (mandatory from 01 January 2016)
IFRS 15 Revenue from Contracts with Customers (mandatory from 01 January 2017)
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Probable Timeline New IFRS Standards
IASB / FASB
H1
Revenue Recognition
effective
H2
H1
2015
H2
H1
2014
H2
H1
2013
Leasing
effective?
Comparable preyears SEC Filing
2016
Customer action
Leasing
H2
Comparable preyears SEC Filing
2017
Customer action
Revenue Recognition
RevRec
Standard published
H2
H1
Start of parallel
posting new RevRec
Start of parallel
posting new Leasing?
Business Decisions and
IT implementation
Business Decisions and
IT implementation
Comments to
be sent
Leasing
ED is published
Analysis of business
impact Leasing ***
Analysis of business
impact Rev Rec
Knowledge acquisition
Revenue Recognition
Knowledge acquisition
Leasing
***) New leasing standard will require a right-of-use asset for each leased object; possibly huge impact on leasing contracts; hits customer as a lessee
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Parallel accounting is the
challenge
Parallel Accounting is the Challenge
Most of the countries worldwide require the financial statement according to the local GAAP
and according to IFRS as well.
That fact leads directly to the question of parallel accounting (valuation).
Aim of the Game:
•
•
•
Figure out the differences between local GAAP and IFRS
Figure out which of these differences are affecting the company
Try to minimize the differences
To decide about the leading valuation is one of the most import questions in an IFRS
implementation project!
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Parallel Accounting is the Challenge
Important Differences between IFRS & US-GAAP
Topic
IFRS
US-GAAP
Business Combinations
IFRS 3
FAS 141, 142
Fixed assets
IAS 16
ARB 43
Employee Benefits
IAS 19
FAS 87, 88, 106, 112, 132
Consolidated Financial Statements
IAS 27, SIC 12
ARB 51, FAS 94, FIN 46
Associates
IAS 28
APB 18, FAS 94
Impairment
IAS 36
FAS 142, 144
Provisions
IAS 37, IFRIC 1
FAS 5, 143, 146, FIN 14
Intangible Assets
IAS 38
FAS 2, 86, 142, SOP 93-7, 98-1, 98-5
Financial Instruments
IAS 39, IFRS 7
FAS 107, 115, 133
Investment Property
IAS 40
FAS 13, 66, 67
Agriculture
IAS 41
SOP 85-3
Source: zfbf Zeitschrift für betriebswirtschaftliche Forschung / Schmalenbachs Business Review
Jahrgang 60 / Dezember 2008
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Classification of differences
Differences between local GAAP and IFRS can be classified as:
•
Fully related to operational accounting
Examples:
• IAS 21 The Effects of Changes in Foreign Exchange Rates
•
•
Partially related to operational accounting
Example:
•
•
IAS 19 Employee Benefits
Related to consolidation
Example:
•
•
IAS 16 Property, Plant and Equipment
IFRS 3 Business Combinations
Not related to operational accounting
Example:
• IAS 10 Events after the blance sheet date
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How to implement parallel
accounting
Alternatives of implementing parallel accounting
Local Close
SAP R/3
(Classic GL)
Parallel ledgers
SAP ERP
(New GL)
X
Parallel accounts
X
X
Parallel special purpose ledgers
X
-
Parallel company codes
X
X
Recommended approaches
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Parallel GL Accounts
Pure
Local GAAP
Accounts
Pure IFRS
Accounts
Common
Accounts
Items with significant valuation differences are posted to different accounts. Each valuation
has its own set of “pure” accounts.
Common accounts are used where no material valuation differences occur.
It is advisable to have clearly discernable account number ranges or distinguishing digits or
letters to distinguish among sets of accounts.
Since each set must be in balance, extra care must be taken to ensure correct account
determination: establish an accounting guideline!
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Parallel G/L Accounts
Options for creating charts of accounts
Prefix: Alphanumeric or
Account Number
Suffix
numeric
A
0
xxxxxx Common accounts
0
B
1
xxxxxx IFRS accounts
1
C
2
xxxxxx Local accounts
2
A prefix is added to all account numbers. Chart of accounts is
converted using the chart of accounts conversion service.
IFRS Reporting
0 common accounts and
1 IFRS accounts
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Local Reporting
0 common accounts and
2 local accounts
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Parallel Ledgers (International Company)
• International accounting principle for example IFRS is primary valuation
represented by the leading ledger.
• Local GAAP books are maintained in an additional non-leading ledger
• Non-leading ledgers can use a different fiscal year variant. (For restrictions on
this, see SAP Note 844029).
• Same Accounts are used for all ledgers
Example:
0L
Leading Ledger
(IFRS)
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Z1
Non-Leading
Ledger 1
(ColGAAP)
Z2
Non-Leading
Ledger 2
(Tax - DIAN)
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Parallel Ledgers (Local Company)
• Local GAAP can also be the leading valuation represented by the leading ledger.
• IFRS books are maintained in an additional non-leading ledger -> IFRS is only used for
presentation purposes
• Non-leading ledgers can use a different fiscal year variant. (For restrictions on
this, see SAP Note 844029).
• Same Accounts are used for all ledgers
Example:
0L
Leading Ledger
Local GAAP
(ColGAAP)
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Z1
Non-Leading
Ledger 1
(IFRS)
Z2
Non-Leading
Ledger 2
(Tax - DIAN)
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Parallel Ledgers
If no ledger group is specified during document entry: Posting is done to all defined GL ledgers
Specifying a ledger group during document entry: Posting is done to specific ledgers
© 2014 SAP AG. All rights reserved.
Ledger
Group
Ledgers
blank
0L, Z1, Z2
0L
0L
Z1
Z1
Z2
Z2
G1
0L, Z1
G2
0L, Z2
G3
Z1, Z2
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Approach and Valuation - Same approach and valuation
Same approach and valuation
=> One posting to common accounts or in all ledgers
Example: Incoming invoice for external activities
Expenses: Ext. Activities
1) 1000
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Tax
Payables
1160 1)
1)
160
One common
posting
24
Approach and Valuation - Same approach different valuation
Same approach but different valuation
=> separate posting to local and IFRS accounts or ledgers
Example: Depreciation or reserves for pensions
Expenses: Pensions
Local Valuation
2) 1000
Expenses: Pensions
IFRS
3)
500
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Accruals
Local Valuation
1000 2)
Two complete
postings,
separately for
each valuation
Accruals
IFRS
500 3)
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Approach and Valuation - Different Approaches
Different approaches
=> Only one posting to local or IFRS accounts or ledgers
Example: Posting only relevant for IFRS: Financial Leasing
Posting only relevant for local GAAP: Provisions for expenses
Financial Leasing
Depreciation
1) 1000
Expense
1) 2000
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Financial Leasing
1000 1)
Only one
posting
Provision for Expenses
2000 1)
Only one
posting
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Parallel Accounting in Financial Accounting
Depiction of parallel accounting is required for the following topics:
•
•
•
•
•
•
•
Value adjustments
List of terms / Reclassifications
Foreign currency valuation
Securities (CFM)
Provisions
Accruals
Depriciation
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Summary
• The implementation of IAS/IFRS and the parallel valuation is not a push-button project!
• IFRS valuation is not necessarily the leading valuation
• The IAS/IFRS project is a worldwide project!
• Because the IAS/IFRS are not static, the adoption of new or changed IAS/IFRS will be an
ongoing process!
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General Experiences
Experiences
IFRS implementation itself is not the big challenge but implementation of parallel accounting
1. Figure out how many accounting principles have to be implemented and which is the
leading one
•
•
•
Local GAAP / IFRS
Local GAAP / IFRS / Local Taxes (DIAN)
…
Have in mind whether an additional accounting principle is expected to be implemented in
near future.
Find out which accounting principle should be the leading one.
In most of he cases it makes sense for internationally operating companies to choose the
international principle as the leading one because mainly the leading principle is directly
posted to CO!
Especially in Colombia it can be the right choice to implement local GAAP as the leading
accounting principle.
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Experiences
IFRS implementation itself is not the big challenge but implementation of parallel accounting
2. Figure out the differences between local GAAP and IFRS that are hitting the customer
Approach:
a) Figure out the basic differences between Local GAAP and IFRS
b) Figure out which differences are hitting the customer
Some basic differences may not hit the specific customer because they are industry
specific (IFRS 4 Insurance Contracts) and therefore irrelevant for the customer
c) Minimize the remaining differences
Often it is possible to minimize differences by using the same approach for the competing
accounting principles
Example:
Stock valuation -> IFRS allows moving average and FIFO
US-GAAP allows LIFO, FIFO and moving average
-> Check whether a valuation with FIFO is possible for the customer
Remark: For US based companies very often componentization of assets is a specific issue
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Experiences
IFRS implementation itself is not the big challenge but implementation of parallel accounting
3. Choose the right solution - Ledger solution vs. Account solution
Rule of thumb:
Accounting
principles
Differences
Big
Differences
Small
2
Ledger solution
Account solution
>2
Ledger solution
Ledger solution
It is possible to migrate from an account solution to a ledger solution by standard migration
tools (Migration Scenario 8)
There is currently no way to migrate from a ledger solution to an account solution
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Experiences
IFRS implementation itself is not the big challenge but implementation of parallel accounting
4. Have in mind: IFRS is still changing
Currently IASB and FASB are still working on “big” standards.
Both standards will be valid for IFRS and US-GAAP
Topic
Exposure
Draft
Standard
from
Revenue
Recognition
Replacement
IAS 11, IAS 18
Available
Re Exposure
Draft
available
Standard
expected
H2/2013
2017
Leases
Amendments
IAS17
2010/Q3
Re-Exposure
Draft
expected in
H2/2013
2017?
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Comment
Most important joined project of IASB and FASB, will completely change
the existing world of revenue recognition.
SAP Components: FI, MM, SD, CRM
The new standard will change the accounting on the lessee side
significantly.
It is also expected that leasing of real estate objects will change.
SAP Components: FI
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Some Customer Questions (I)
1. Are all the SAP solutions ready for IFRS (Examples: MM. HCM, budget,etc)?
Basically all SAP solutions are IFRS ready. There are no issues known for example in HCM or in MM.
In most of the cases in that such doubts arise, the root cause is parallel accounting and not IFRS itself.
2. Some companies are migrating to new GL without using the Migration Cockpit .
What is SAP recommending?
Regarding migration our recommendation is absolutely clear:
Use the Migration Cockpit for all kinds of migration because that ensures that at the end of the
migration the customer will have consistent data in the system.
3. What’s about standard reports regarding IFRS?
IFRS is not a reporting issue but a question of valuation. Therefore there are no special IFRS reports
necessary. Standard reports will deliver the right values according to the accounting principle (IFRS,
ColGAAP) for that they are run.
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Some Customer Questions (II)
4. Due to the transition period some companies have IFRS as leading valuation and others
Colombian GAAP.
What would be the recommendations in the transition period and when IFRS is 100%
operative.an in case that a switch of the leading valuation is necessary later?
1. Basically there is no rule that says IFRS has to be the leading valuation!
In Colombia there are several customers for that there is no need to have IFRS leading
because it is only needed for reporting to authorities and that can also be done from a nonleading ledger.
2. The basic question is: With which figures does the customer wants to drive the company and
from when on.
3. To be prepared for a possible switch of leading valuation, new FI-AA should be implemented.
Available for ECC 6.17 EHP 7 through business function FIN_AA_PARALLEL_VAL.
The new functionality will bring more flexibility for parallel valuation and more transparency and
simplicity:
•
•
•
•
No more fixed link between leading ledger and depreciation area 01.
No more delta areas for subsequent depreciation areas (other valuation).
See more information on SAP Service Portal http://service.sap.com/rkt-erp -> SAP
Business Suite -> SAP-ERP -> SAP EHP 7 for SAP ERP 6.0 -> FI: Financial and
Management Accounting).
See also SAP Note 1847996 – “Preparing the change of the leading valuation in ERP”.
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35
Some Customer Questions (III)
5. Does ECC 6.0 support the IFRS Taxonomy supported?
1. Currently there is no legal requirement known, that forces an IFRS preparer to transmit data
electronically based on the IFRS Taxonomy.
2. Because of missing requirements currently there is no support of IFRS Taxonomy out of ECC.
3. As a development request is created and send to SAP via a local SAP User Group the decision
process can be started.
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36
How SAP can help
Beside of Services offered by AGS SAP offers a bundle of services that support IFRS
implementation projects:
Some examples:
•
•
•
•
•
•
Currency conversion
Implementation of an additional company code currency
Chart of Account conversion
Merge of CO-Areas
Migration Services
…
Contact: slo.consulting@sap.com
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37
How SAP can help
© 2014 SAP AG. All rights reserved.
38
Thank You!
Muchas Gracias!
Contact information:
Thomas Jordan
IMS Financials
E: thomas.jordan@sap.com
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