Supporting IFRS Compliance with SAP Enterprise Resource Planning System

Transcription

1 IBM Global Business Services White Paper Financial Management Supporting IFRS Compliance with SAP Enterprise Resource Planning System

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3 IBM Global Business Services 3 IFRS An Overview What is IFRS? International Financial Reporting Standards (IFRS) are globally accepted accounting standards established by the International Accounting Standards Board (IASB) and its interpretative body, the International Financial Reporting Interpretations Committee (IFRIC). Many of the standards forming IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In April 2001, IASB adopted all outstanding IAS issued by the IASC. Those standards continue to be in force to the extent they are not amended or withdrawn by the IASB. New Standards issued by the IASB are known as IFRS. When referring collectively to IFRS, that term includes both IAS and IFRS. IFRS standards are destined to become the world s common financial reporting language for investors, analysts and regulators. The overriding advantage to the participants of global IFRS adoption is enhanced comparability of like entities anywhere in the world. And for any entity, better access to international capital, funding and investment opportunities. The adoption of IFRS standards requires high-quality, transparent and comparable information demanded by investors, creditors, financial analysts and other users of financial statements. A broad range of potential high impact areas are summarized in the following list: Property plant & equipment Inventory Financial reporting (planning & budgeting, as well as statutory) and disclosures Segment reporting Consolidation accounting/joint ventures Construction contracts/project accounting Share based payments/management compensation and reporting Revenue recognition Goodwill, intangible assets, asset impairments, provisions Hyperinflationary accounting/fx Leases Government grants Fair value This document is the first in a series of white papers planned to address the IT impacts of the key topics stated above. The focus of this paper is on handling the IFRS Fixed Assets/ Property, Plant & Equipment (PP&E) requirements, as well as parallel reporting needs for companies using SAP as their ERP system.

4 4 Supporting IFRS Compliance with SAP Enterprise Resource Planning System IFRS Compliance Requirements How will the new reporting requirements be applied? What additional information will be required? Business Implications What are the wider implications on how the business is managed? What are the impacts on P&L and Balance sheet? Data availability Proces redesign Systems scalability & architecture Organization design Product design & pricing Profitability & solvency Regulatory reporting Do ledgers and business systems contain the necessary data and if so, how are they provided? Which processes must be changed to capture and report new data? How many adjustments are necessary to meet the additional requirements arising from IFRS? Is there a sufficient number of suitable and trained employees working in the right position? Will profitability be sustained under the new regulations? What impact will the implementation of IFRS have on the P&L and the balance sheet? What impact will IFRS have on regulatory requirements incl tax? IFRS - Beyond changing the numbers The move to IFRS is far more significant than just changing certain accounting practices in the finance organization. It has a far reaching impact on how you measure your business, such as the P&L and balance sheets. It also impacts how you manage budgeting and forecasting, product pricing, operational processes, IT systems and internal controls. When applying the new accounting principles to meet the reporting and disclosure requirements, organizations have experienced significant impact on processes, systems and people within the Finance function and in the operational functions that provide transactional information to finance. On the other hand, the adoption of new accounting principles will lead to changes in the financial results of companies and will have related tax implications. This can have ripple affects on risk reporting, management reporting, budgeting, forecasting, product pricing and employee benefits. Lastly, the adoption of IFRS will require impacted enterprises to report under IFRS and local Generally Accepted Accounting Principles (GAAP) in parallel for a period of at least one year before the final change-over date. This not only requires multi-gaap accounting and reporting capabilities in the finance systems, but it places an additional requirement for critical and knowledgeable resources.

5 IBM Global Business Services 5 Assessing the Impact The first step towards a successful IFRS transition is a robust Impact Assessment phase to gain a high level understanding of the business/accounting affects of IFRS. They will be further translated into impacts on processes, systems and data. The Impact Assessment phase should cover a reasonable level of detail, as differences that appear relatively minor could cause a significant impact. Further, addressing the collection of additional data required by IFRS should commence at the earliest stages, so that the integrity of financial results under IFRS can be assessed and improved. Based on our experience with organizations in Europe, a significant part of the IFRS conversion effort went towards IT implementation. In particular, the core accounting or enterprise resource planning (ERP) underwent significant change. This paper aims to provide an appreciation of certain major IFRS impact areas, and the potential approaches for companies using an SAP ERP application. Parallel Reporting IFRS transition requires parallel reporting in local GAAP and IFRS for at least one year. Multi-GAAP accounting functionality is required and needs to be implemented in the ERP system. There are four options available within SAP to support parallel reporting needs: 1) Parallel ledgers using the new functionality that supports multiple ledgers (New GL), 2) Account-based general ledger (GL) configuration, 3) Use of special ledgers, and 4) Parallel company codes. Local Close Parallel Ledgers SAP R/3 9classic GL) SAP ECC 6.0 (New GL) Parallel Account ü ü Parallel Special Purpose Ledgers Parallel Company Codes ü Considering the present environment, SAP recommends the use of parallel ledgers provided in the New GL (SAP version ECC 6.0 or later) or the account-based configuration for the transactional layer, depending on the need of the client or version of software in use. Implementing IFRS using the New GL with parallel ledgers is the most transparent approach. It provides an independent set of books and is the cleanest option for clients on SAP ECC version 6.0 or later. With this approach, the entity should adopt IFRS as the leading ledger and use the non-leading ledger to meet local reporting requirements. The account-based approach is recommended when relatively few IFRS differences exist that can be handled in one ledger. Although it is the quickest and least expensive option to implement, it can lead to a more complex Chart of Account (COA). In some unique circumstances, the use of parallel company codes and special ledgers may still be workable, but they are not recommended from a sustainability perspective. Property Plant and Equipment IFRS prescribes rules regarding the recognition, measurement and disclosures relating to property, plant, and equipment (often referred to as fixed assets) that would enable users of financial statements to understand the extent of an entity s investment in such assets and the movements therein. The principal IFRS impacts include componentization of assets, basis of valuation, depreciation, and impairment. The following section elaborates the impacts and approaches to address them within SAP ERP. Key Differences between U.S. GAAP and IFRS - Assets Componentization of assets Physical assets may have various significant subcomponents. Under existing local GAAPs, such assets may have been treated as a single asset. However, under IFRS, these components should be recognized, tracked and depreciated separately. SAP Recommended Approach

6 6 Supporting IFRS Compliance with SAP Enterprise Resource Planning System Basis of valuation of an asset IFRS provides an option to use either the revalued amount or the historical cost as a basis for measurement. Revalued amount is fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Under the U.S. GAAP, use of revalued amount is not permitted. Change in depreciation method based on the useful life of individual components Under IFRS, each component of a physical asset must be depreciated separately depending on its useful life. The Impacts Key Difference Impact How to address in SAP 1 Difference in the value of an asset due to different accounting methods under different accounting standards 2 Componentization of assets 3 Change in asset s useful life 4 Change in depreciation method The value of one asset could be different within IFRS, U.S. GAAP statutory accounts, fiscal accounts. Assets therefore may have multiple valuations. Companies must define significant components of existing assets as individual assets. These components must be depreciated separately, depending on their individual useful lives. If the estimate of the asset s useful life changes, the depreciation charge must be adjusted for the current and future periods. If the depreciation method changes due to a change in the expected pattern of benefits, the depreciation charge for the current and future periods should be adjusted. SAP allows for multiple depreciation areas for valuation of assets. These deprecation areas may have different depreciation keys (i.e., depreciation calculation rules) and different useful lives for each individual asset. In addition, transactions such as capitalization, retirements, write-up, write-downs etc. may be posted differently in the areas where needed. Componentization can be handled through the use of asset master records (main and sub-number, supernumbers) to define each component uniquely. Depreciation rules for each of the separately identified components can be configured for its estimated useful life. In SAP Asset Accounting, each asset is assigned to a depreciation key (that describes the depreciation calculation rule) and a useful life. Depreciation is calculated automatically according to the depreciation key and remaining useful life. One of the options for adjusting depreciation is to change the depreciation key or the useful life of the asset component. SAP asset accounting allows for adjustments to the depreciation method and adjustments to the useful life of an asset. Changes to either of these values will affect the depreciation calculations on a go-forward basis. 5 Updating fair value of assets IFRS provides an option to use either revalued amount or historical cost as a basis for measurement. Revalued amount is fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Fair value cannot be determined within the R/3 system. The amounts must be determined externally at every reporting date and updated in the system. Impairment of Assets

7 IBM Global Business Services 7 Key Differences between U.S. GAAP and IFRS Systematic Identification of Impairment Losses If there is an indication that an asset may be impaired, then the asset s recoverable amount must be calculated. [IAS 36.8] Accounting and Calculation Requirements for Impairment Losses Under IFRS, impairment is recorded when an asset s carrying amount exceeds the higher of the asset s value-in-use (discounted present value of the asset s expected future cash flows) and fair value less costs to sell. Under U.S. GAAP, impairment is recorded when an asset s carrying amount exceeds the expected future cash flows to be derived from the asset on an undiscounted basis. Accounting and Calculation of Reversal of Impairment Losses Subsequent reversal of an impairment loss is required for all assets (other than goodwill) under IFRS. Reversal is limited to the extent of the written down value of the asset, whereas under U.S. GAAP, any reversal of impairment loss is prohibited. Identifying Cash Generating Units IFRS introduces the concept of a Cash Generating Unit (CGU). The CGU is the smallest identifiable group of assets that generates cash inflows from continuing use, and is largely independent of the cash inflows from other assets or groups of assets. U.S. GAAP does not prescribe any CGU concept. The Impacts Key Difference Impact How to address in SAP 1 Systematic Identification of Impairment Losses 2 Accounting Requirements for Impairment Losses 3 Calculation of Impairment Losses 4 Accounting Requirements for Reversal of Impairment Losses 5 Calculation of Reversal of Impairment Losses 6 Cash Generating Units Identify indications for impairment and determining impairment loss. An impairment loss should be recognized whenever recoverable amount is below carrying amount. Need to calculate the recoverable amount, which is calculated from net present value of assets. Subsequent reversal of an impairment loss is required for all assets (other than goodwill) under IFRS. Reversal of impairment loss is limited to the extent of the written down value of the asset. Under IFRS, assets must be assigned to Cash Generating Units where required. CGUs will likely be different from the current reporting units in use, and will need to be defined separately. Impairments can not be determined within the SAP system. The amounts must be determined externally, and manually updated in SAP. Depending on which asset is involved, the appropriate adjustment must be made in the applicable module (intangible assets in FI-AA, securities in CFM). Posting would have to be done manually in SAP. Net present value of assets is calculated on planned future cash flows. SAP offers functionality for this purpose in Investment Management (IM). Impairment reversal cannot be determined within the SAP system. The calculation of impairment reversal amounts will need to be performed outside the SAP system, and then posted manually in the SAP system. Need to keep track of the impairment loss recognized for an asset and track written down value of the asset in order to facilitate the reversal calculation. This can be managed in SAP with the help of transaction types to track the nature of transactions. The calculation of impairment reversal amounts will need to be performed outside the SAP system. SAP suggests using profit centers to approximate CGUs, since sales and expenses can be collected at this level.

8 8 Supporting IFRS Compliance with SAP Enterprise Resource Planning System Alternative Approaches towards IFRS Compliance Although embedding the IFRS changes into the ERP (transactional) system is the preferred option in the long-term, there are other alternative approaches that involve managing IFRS changes outside the ERP system. These alternative approaches may not be optimal in the long term, but could be considered in order to reduce complexity of change or to meet tight timelines. The approaches are outlined below. Consolidation Layer Approach An additional alternative to consider is to post IFRS adjustments into the consolidation application. IFRS adjustments can be calculated and posted directly into the consolidation tool. Data in the transaction system would reflect local reporting, as IFRS adjustments will not reside at this level. Posting Local GAAP Adjustments to IFRS Approach This approach helps adopt IFRS by making top side adjustments. It is potentially cheaper and faster to implement than the other two possible options for SAP systems, as no software upgrades are needed. A challenge in this approach would be to maintain the GL Close process timing. It also requires extensive manual compilation outside the SAP application to determine journal entries. There would be a need for controls to pass audits and customization of the SAP system in order to create and feed data at an accurate granular level. This approach entails overall high costs in order to sustain reporting and reconciliation processes in the long term. The quickest option, it is difficult to sustain longer term as it is mostly manual, impacting close processes and reconciliations.

9 IBM Global Business Services 9 IBM IFRS and IBM Ascendant SAP Method IBM s Ascendant methodology augments SAP s ASAP methodology with IBM intellectual capital and reusable assets. It allows flexibility to incorporate the associated IFRS building blocks as per the specific project needs. Ascendant provides a full set of management tools and accelerators for SAP implementations. Beyond the basic requirements to configure, test and implement the software, Ascendant also provides tools and templates for key project processes such as: Documentation templates Issues and escalation management process Risk management process and templates Project change request process

10 10 Supporting IFRS Compliance with SAP Enterprise Resource Planning System How can IBM help? IBM is a Business Services Partner with unmatched breadth and depth. We bring unique benefits to our clients, which are: IBM s IFRS transformation: IBM s own IFRS transition is generally accepted as the gold standard for adoption, and our intellectual capital leverages this experience. So, IBM can offer a unique perspective to companies interested in how IFRS will impact them. Asset-based accelerators and tools: Numerous tools and accelerators to support assessment and implementation phases. IBM can leverage a toolset developed to address adoption and implementation issues during its own IFRS adoption. This allows IBM to offer much more than just a technical list of IFRS versus local GAAP differences, and it can take advantage of lessons learned. Global scale and reach: We have teams based in over 40 countries and more than 4,100 specialized business and technical consultants worldwide. Auditor independence: We are independent from audit firms, so can help our clients throughout the project lifecycle without being restricted by independence rules. We can also work effectively with your professional advisors. Flexible solutions and delivery model: We can handle a complex IFRS conversion as part of an overall Finance Transformation Program, or as a more straightforward individual program tailored around the very specific IFRS requirements. We have flexible delivery models, and leverage offshore resources to achieve higher cost efficiency and value. ERP market leader: Unrivalled strengths in technology and transformational consulting, while being the preferred partner for large ERP vendors IFRS solution. IBM also offers marketing leading ERP Points-of-View, of which this paper is the first in a series on the subject of handling IFRS impacts in SAP.

11 IBM Global Business Services 11 For further information Contact us or visit ibm.com//gbs/finmgmt John Ingold Partner, Global IFRS Leader Siddarth Agarwal Associate Partner, IFRS Lead Grant Rutherford Senior Managing Consultant, IFRS Lead

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