Piggyback on IFRS Demands to Enable Financial Consolidation

SAPPHIRE ASUG, Orlando

Piggyback on IFRS Demands to Enable
Financial Consolidations ]
Edmund Manrique and David Dixon
Ed dM i d D id Di
TekLink International
May17, 2008
y ,

[ CHAVONE JACOBS
ASUG INSTALLATION MEMBER
MEMBER SINCE: 2003

[ COREY PEARSON
[ ALLAN FISHER ASUG INSTALLATION MEMBER
ASUG INSTALLATION MEMBER MEMBER SINCE: 2008
MEMBER SINCE: 2008

[ Abstract
Your company has decided to be an SAP shop, but you still
have many disparate systems. You’re still using an old version
y p y g
of Hyperion for financial consolidation. You see IFRS demands
in your operations globally. This session will describe a strategy
to piggyback on IFRS demands to leverage SAP consolidation
tools for financial and management consolidations, while
integrating enterprise performance management and a flexible
enterprise reference architecture to add real value to your
f h dd l l
organization.

Real Experience. Real Advantage. 2

[ Learning Points
What is IFRS and Why Does It Matter?
What are the System Impacts and Options?
What are the SAP solutions to consider?


[ IFRS Pop-Quiz
What is IFRS?*:
A.
A I Forget Reporting Standards
B. Increasingly Fuzzy Reporting Standards
C. International Financial Reporting Standards
te at o a a c a epo t g Sta a s
D. All The Above
What Does It Matter?
A. It Doesn’t.
B. It Throws a Big Wrench In All My Information Systems.
C. Well, “It Depends”

*Adapted: SAP Insider’s Special Report “An IFRS Fable: The Company That Waited Too Long”

[ A little history...

Source: http://www.theinvestmentprofessional.com/vol_2_no_1/hard-sell-timeline.html
Image Credit: Mark Andresen

[ IFRS Adoption
More than 100 countries now require or permit the use of
IFRSs or are converging with the International Accounting
Standards Board's
S d d B d' (IASB) standards. d d
Require or permit IFRS
Including Europe, Russia, Seeking convergence or adoption

Australia, New Zealand,
and China (via Hong Kong)
Extended to UK public
sector from 2010
Canada, India, Thailand and
Korea from 2011
Malaysia and Mexico from
y
2012
Taiwan expected 2012-2014
Japan expected 2016
Image Source: http://www.iasb.org/Use+around+the+world/Use+around+the+world.htm

[ U.S. Readiness and Adoption Plans
According to surveys and studies, the majority is not ready

Source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx
Image Source: http://www.sdn.sap.com/irj/scn/weblogs?blog=/pub/wlg/17764


[ What will this cost?
The SEC predicts that the largest U.S. registrants that adopt
IFRS early would incur about $32 million per company in
additional costs for their first IFRS prepared annual reports
IFRS-prepared reports.
This includes both internal and external costs.
KPMG estimates over half of implementation cost is IT related

Image source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx

[ Adoption versus Transition
IFRS 1 (First-Time Adoption) defines the rules of first
preparation and offers mandatory and optional exemptions
Key concepts:
Transition Date: Beginning of earliest period for which full
comparative information is presented
Reporting Date (a.k.a. Adoption): Closing balance sheet date for
first IFRS statements (i.e. first IFRS filing)
Dual Reporting: the need f comparative statements d i
D lR i h d for i during
transition
Transition Date Year 1 Transition Date Year 2 Reporting Date
(Jan 1, 2013) (Jan 1, 2014) (Dec 31, 2015)


[ AICPA Suggested Timeline
AICPA estimates an average 3-5 years is needed to implement

Image source: http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf

[ Prospective versus Retrospective Approaches

Source:
http://www.sdn.sap.com/irj/scn/index?rid=/library/uuid/709e7d45-3ced-2c10-c58e-f24d55e34245&overridelayout=true


[ Learning from the European Experience
Council of the European Union first mandated the conversion
from national GAAP reporting to IFRS in 2002 for all members.
p g
Many conversions began in 2005 and additional countries later
became subject to the same requirement.
European companies generally h d only about t
E i ll had l b t two years t
to
convert to IFRS.
Now suffering consequences (focused on accounting and
g q ( g
reporting quick fixes and deferred business and operations
focused solutions)
Short-term trade off for complexity and cost of reporting
reporting,
manual entries and reconciliation in the medium and long term.
European experience suggests more time is needed for a more
proactive approach
ti h


[ Convergence versus Conversion
FASB and IASB are currently working on a convergence
project with a 2011 deadline.
FASB is spending 70% of its time on convergence right now*
Definitive SEC decision on whether or not U.S. companies
should convert to IFRS is expected in 2011
2011.
IASB IFRS
2011 2015???
Convergence Conversion

D-Date
(Deadline and Decision)
FASB GAAP
*Source: http://www.complianceweek.com/blog/whitehouse/2010/05/05/fasb-heavily-focused-on-convergence-siegel-says/


[ The “Latest and Greatest” News from the SEC
In February, the SEC:
Voted unanimously to continue to move towards IFRS but still
no decision on adoption and no corresponding date set.
Didn’t rule out the possibility that issuers may be permitted to
choose between the use of IFRS or U.S. GAAP.
Indicated that the earliest IFRS could be required is 2015.
Reaffirmed that a decision will be made in 2011.
Agreed to give more periodic public updates starting i O b
A d i i di bli d i in October.
Withdrew proposed rules that would have allowed early
adoption but would reconsider it later.
p
Defined a work plan to study impacts and adoption readiness.
AICPA praised the SEC’s “thoughtful and concrete steps” but
did urge th SEC t set a d fi iti IFRS adoption d t
the to t definitive d ti date.
http://www.journalofaccountancy.com/Issues/2010/Apr/20102658

[ Financial Consolidation is itself a Convergence Project...
...and so is financial statement presentation...
In 2008 the IASB published an exposure draft of a comprehensive
replacement of its consolidation requirements
p q
In 2009 the FASB finalized one aspect of that project that amended and
improved US GAAP relating to consolidation of variable interest entities
and related disclosures

Image Source: http://www.cfo.com/article.cfm/14457783/c_14457851

[ Real-Life SAP Case Study of Accounting Change Impact
Example impact analysis of a FAS 167 (Amendments to FASB Interpretation 46R)
which modifies ASC 810 effective for annual periods beginning after 11/15/09


[ Consolidation Work Plan
FASB and IASB in November determined that their standards for consolidation
should include objectives and principles for assessing control that would be applied
co s ste t y o a
consistently for all types of entities and produce globally comparable results.
o e t t es a p o uce g oba y co pa ab e esu ts.
Goal is for a single IFRS on consolidation replacing the IAS 27 Consolidated and
Separate Financial Statements and the interpretation SIC-12 Consolidation - Special
Purpose Entities that addresses the following:
a revision of the definition of control and related application guidance so that a control
model can be applied to all entities.
enhanced disclosures about consolidated and unconsolidated entities.
Plan includes the issue of the comprehensive disclosure standard in the second
quarter of 2010 and a revised consolidation standard in the fourth quarter of 2010.
Estimated publication date
May
M June
J 2010 2010 2011 2011 2011 MoU
M U
Consolidation 2010 2010 Q3 Q4 Q1 Q2 H2+ 1
Joint

Consol - Replacement of IAS 27 2 IFRS
Consol - Disclosures about unconsolidated
IFRS
SPEs/structured entities

Source: http://www.iasb.org/Current+Projects/IASB+Projects/Consolidation/Consolidation.htm

[ Where is the value in adopting IFRS?
Need to make IFRS adoption a defined value opportunity

Real Experience. Real Advantage. Source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx 18

[ Piggyback on IFRS demands?
Consider piggy-backing on IFRS initiatives to modernize your
Financial Consolidation system today for these additional
y y
considerations:
Whatever approach is taken (quick fix or long-term) the Financial
Consolidation process will be impacted via IFRS (local versus
group policies, tax, reporting, stakeholders and internal control
in addition to IT systems).
Addressing IFRS with spreadsheets or make-shift approaches
Add h dh k hf h
represents a compliance risk (e.g. Sarbanes-Oxley) as well
creates exposure to restatement risks.
Represents a one-time opportunity to “get it right” now for
future needs – IFRS will not only impact statutory reporting but
also planning, budgeting and management reporting.
p g, g g g p g


[ Learning Points


[ IFRS and US GAAP Quick Comparison
2,500 pages (IFRS) instead of 25,000+ (US GAAP)
Principles-Based Instead of Rules-Based
Controversy over whether or not “bright lines” are needed...

IFRS GAAP


[ IFRS Differences and Impact to Transactions
Examples of how IFRS can impact your transactional and
reporting systems (next slide)

Real Experience. Real Advantage. Source : http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf 22

[ IFRS Differences and Impact to Reporting

Real Experience. Real Advantage. Source : http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf 23

[ Where to make IFRS-based adjustments?
Embedded into Local Top-Side
Operations Adjustments Adjustments

General
Sub-Ledger Consolidation Reporting
Ledger

Description Feeder Systems Local Subsidiary Group Ledger Reporting and
Ledgers Analysis Systems
Example
E l FI-AA, FI-LA, HR,
FI AA FI LA HR FI-GL, FI-SL, EC-
FI GL FI SL EC SEM-BCS, SAP FC,
SEM BCS FC SAP BW, BI, EPM,
BW BI EPM
Applications SD, MM, PP PCA SAP BPC XBRL, Excel

Example Impact Asset components, Tax reporting, Goodwill New presentation,
revenue recognition, reclassifications impairment, disclosures
inventory valuation deconsolidation
Solutions Additional Parallel Ledgers IFRS Starter Kit IFRS Starter Kit
configuration


[ Evaluation IFRS adjustment options

General
Sub-Ledger
g Consolidation
Ledger
Led er

Pros Faster close, Traceable to Less implementation
,
automation, better y,
subsidiary, p
effort and impact to
data integrity, data decentralized control, upstream systems,
details for control, local to group buys time and is
reconciliation and reconciliation centrally control
management reporting
g p g
Cons Additional effort and Increased Limited details, error
complexity to reconciliation effort prone, increased
implement (i.e. “early between sub-systems reconciliation difficulty,
adoption
adoption” of IFRS) and group, limited
group slows financial close
details for reporting
Impact Long-term and Mid-term with Short-term and not
sustainable longevity sustainable


[ Dual Reporting and Cutover Impact Example
Pre-Transition Phase
Local GAAP
Local
L l GAAP Group GAAP Group GAAP
G
Sub-Ledger General Reporting
Consolidation
Ledger

Transition Phase
Local GAAP Group GAAP Group GAAP
Sub-Ledger General
Ledger Consolidation Reporting
Group IFRS Group IFRS
Consolidation Reporting

Post-Adoption Phase ???
Local IFRS Group IFRS
Local IFRS Group IFRS
General
Sub Ledger
Sub-Ledger Consolidation Reporting
Ledger
L d


[ The Account Perspective
Different grouping approaches
Three account ranges (common, leading and non-leading)
non leading)
Two account ranges (common and leading versus non-leading)
Separate account ranges (requires separate value streams)
Different valuations when accounts overlap
Same accounting values for same mapped account
Different accounting values for same mapped account
US GAAP IFRS
Account Value Account Value
Cash and cash equivalents 20,199 Cash and bank balances 20,199
Inventories ‐ LIFO 25,364 Inventories ‐ FIFO 31,364
Prepaid expenses and other
current expenses 8,955
8 955
Finance lease receivable 198

[ The Valuation Perspective
Dovetails with the account perspective
In SAP ERP use of duplicative Special Ledger or a parallel ledger
ERP,
in “new” General Ledger with separate chart of accounts
An alternative is to have separate legal entities (not advised).
p g ( )
Legal entities can come into or go out of consolidation scope.
Separated (Duplicative) versus Unified (Additive) Approaches

US GAAP ‐ LIFO IFRS‐ FIFO
Separated Account
Inventories
Inventories
Value
25,364
25 364
Value
31,364
31 364

US GAAP ‐ LIFO IFRS IFRS‐ FIFO
Unified Account Value Adjustment Value
Inventories 25,364 6,000 31,364

[ Example Reconciliation via Unified Approach

Image source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx

[ Separated and Unified Approaches in General Ledger
Whatever option you choose in your SAP (or non-SAP)
general ledger design it will impact your Consolidation design
In turn, sub-ledger designs will impact general ledger

SAP R/3 mySAP ERP 2004 SAP ECC 6.0

Company
C Company Company
Classic G
Cl General L d
l Ledger
Codes Codes Codes

Special Ledgers Special Ledgers
Special Ledgers
S i lL d
Charts of Charts of
Accounts Accounts
Charts of Parallel
Accounts Parallel Ledgers New General Ledger
Ledgers


[ Separated Approach in Financial Consolidation
Separate valuations US GAAP - IFRS = IFRS Adjustments
Different dimension
(category) values
( ) l
Enables separate charts of
accounts and business rules
Data is duplicative
Copy local GAAP amounts
and top-side adjustments
to IFRS valuation
IFRS adjustments are
entered or loaded (local or
top-side)
Possible reconciliation
challenges
Image Source: SAP


[ Unified Approach in Financial Consolidation
Within same valuation US GAAP + IFRS Adjustments = IFRS
Same dimension (category)
value
Requires account-based
approach in addition to parallel
values (mixed approach)
Data is additive
Local GAAP amounts are
entered or loaded
IFRS adjustments are
entered or loaded (local or
(
top-side)
Add the two together for
IFRS reporting
p g Image Source:
SAP


[ Financial Consolidation Solution Design Impacts
Most financial consolidation packages now are based on flexibly-designed
multi-dimensional databases Image Source: SAP

Hyperion Fi
H i Financiali l
Management while
based on a relational
database is multi
multi-
dimensionally
structured (i.e.
relational OLAP or
ROLAP)
All of SAP’s financial
consolidation
options are based on
flexibly-defined
multi-dimensional
(or OLAP) database


[ Data Model Impacts
Key dimensions to consider in designing a multi-dimensional-based financial
consolidation solution for IFRS dual-reporting needs are:
Category (e g
(e.g.
Valuation or
Ledger)
Account (i.e. Chart
(
of Accounts) Image Source: SAP

Flow (e.g. Sub-
Account or
Transaction T
T i Types) )
Audit ID
(DataSource or
Type of Entry)


[ Category Dimension Considerations
Used to distinguish actual data from plan data but can be used
for different valuation streams
Key decision is a separated approach to IFRS (different
categories or a unified approach to IFRS (same category)
Similar in concept to parallel ledgers in SAP ERP


[ Account Dimension Considerations

Similar to GAAP accounts
but there will be IFRS
differences in presentation
format
Example IAS1 presentation
differences
Impact of OCI
Classification of liabilities
on refinancing

Image Source: SAP

[ Flow Dimension Considerations
Breaks down the account movement between opening and
closing balances on balance sheet accounts
g
Important for tracking and handling currency translation
adjustments in equity Image Source: SAP


[ Audit ID Dimension Considerations
Audit ID gives the audit trail from local to consolidated data

After adoption, they would need to balance carry-forward into
standard Audit IDS

Image Source: SAP

[ Financial Consolidations is Impacted No Matter What
The key question is whether you can live with top-side
adjustments in your existing financial consolidation system
It is “pay me now” or “pay me later” at differing degrees
Eventually, all systems with any relationship to financials (direct
and indirect) will be impacted and need integration rework
So, which solution to choose for piggy-backing on IFRS?
Strategic Enterprise Management Business Consolidations
(i.e. SAP NetWeaver BW-based SEM-BCS)
SAP BusinessObjects Business Planning and Consolidation
(formerly Outlooksoft)
Version for the Microsoft platform
Version for SAP NetWeaver
SAP BusinessObjects Financial Consolidation
(formerly Cartesis)


[ Learning Points


[ EPM Starter Kits
Free pre-delivered content designed to reduce implementation
times by up to 80% and reduce design risk
y p g
Designed to be comprehensive and meet statutory compliance
Reporting examples included
Generic application template that still needs customizing

Starter Kits
Business Best Total
Software Services
Content Practices Solution


[ IFRS Starter Kits
Pre-configured IFRS/GAAP
consolidation rules, controls,
and calculations
Example master data
Publishable financial
statements
End-user documentation
Manual data entry guide
Consolidation processes
Pre-defined
Pre defined XBRL mapping
Some SAP GRC content
Does not yet have pre-defined data mapping
pre defined
and integration to SAP ERP

[ Dual Reporting for IFRS Adoption Support*
Data collection on dedicated audit
IDs to differentiate between local
GAAP and IFRS data entry and
d d d
adjustments
Ability to post IFRS-specific journal
entries to id if gaps
i identify
Several pre-built consolidation
versions for simulating different
scenarios
i
Pre-configured reports for
comparing local GAAP and IFRS
Complete audit trail of the
differences between the two
standards

*Delivered for SAP BusinessObjects Financial Consolidation Only (At This Time)

[ SEM-BCS is not “Dead”
Follows the same support schedule as ECC 6.0 as part of SAP
Business Suite
Support until 2015 with extended support to 2017 in accordance
with SAP ERP maintenance strategy with future alignment
IFRS compliance and new functionality is being added and legal
changes will be supported
Supports Business Combinations II
Image S
I Source: SAP
IFRS3 and IAS27 in Q3 2009
FASB 141R and 160 on or after December 15, 2008
But t th t t i direction f
B t not the strategic di ti of SAP
A mature product that is not being heavily invested in
SAP advises net new customers to consider the other solutions
No IFRS Starter Kit is available

[ SAP BusinessObjects Planning and Consolidation
Attractive alternative to top-side-
adjusted spreadsheets
Implementation can be simple or
sophisticated as needed
Budgeting,
Budgeting planning and forecasting
in same application as consolidation
Core component of SAP strategy
Available on the SAP NetWeaver Image Source: SAP
technical platform
IFRS Starter Ki only available i the version f the Mi
S Kit l il bl in h i for h Microsoft f
platform
The version for SAP NetWeaver will come out later this year
y
Does yet not explicitly address IFRS adoption scenarios

[ SAP BusinessObjects Financial Consolidation
High performance financial consolidation application with
added functionality to handle “extended” scenarios*
Core component of S strategy
C f SAP * Next slides explain more

Based on a Microsoft platform
Database can be SQL Server or
Oracle
Also core to SAP strategy
Starter Kits support:
IFRS
US GAAP
Image Source: SAP
IFRS adoption
Good reference and basis for the SAP BusinessObjects
j
Planning and Consolidation IFRS Starter Kits
46
Real Experience. Real Advantage.

[ “Extended” Example Scenarios...
Highly decentralized, heterogeneous environments
Lots of subsidiaries spread out of a geography with complex data preparation and
submission process
With diverse regional requirements with various submission methods that vary by
entity or region
Handling multiple source systems and databases
g p y
Lots of transformations and
standardization of data is needed
W t the ee o significant ata
With t e need for s g ca t data
validation prior to starting
consolidation processing
when the source cannot be
effectively validated
ff ti l lid t d

Image Source: SAP


[ ...With Sub-Consolidation Steps...
With sub-consolidations, distributed scenarios become more complex
thereby driving the need for a financial consolidation application with
“extended” functionality
extended

Image Source: SAP


[The SAP Roadmap as Reference Architecture?
Note that SAP owns their roadmap – consult SAP for details (shown only as example)
In grey boxes = starter kits | *= future plans

ready to use Pre-defined GAAP & IFRS Dashboard/KPIs*
dashboards Business Intelligence

Group close process Group close process*

Process Control Risk Management
g

embedded XBRL
US GAAP & IFRS mapping
reporting
XBRL Publishing
p
pre-built group
g p
close controls and fi
pre-configuredd
US GAAP & IFRS Actual IFRS Budget* IFRS Forecast*
risks monitoring consolidation
Transition from GAAP to IFRS* reporting

Consolidations
ledger ERP and
Pre-defined IFRS Local/Group Close Pre-Mapping* consolidation pre-
mapping
Financial Information Management

Pre-built financial reporting roles & authorizations*
Pre built

Access Control
Image Source: SAP
Real Experience. Real Advantage.

[
Thank you for participating
participating.
Please remember to complete and return your
evaluation form following this session.
For ongoing education on this area of focus, visit the Year-Round
Community page at www.asug.com/yrc

Edmund Manrique
773.531.6438

[ edmund.manrique@tli-usa.com
David Dixon
678.296.7418
david.dixon@tli-usa.com


Piggyback on IFRS Demands to Enable Financial Consolidation

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