IFRS Adoption In Consolidated Statements Part 3
This first series of four blogs is dedicated to handling IFRS adoption for consolidated statements. They provide an overview of a new SAP “How-to guide” called “IFRS Adoption in Consolidated Statements using SAP® BusinessObjectsTM Financial Consolidation, starter kit for IFRS“. The objective is to bring practical guidance to end-users in order to manage successfully all the issues raised by the adoption of IFRSs and to get the maximum benefit from SAP® BusinessObjectsTM Financial Consolidation. The blogs will cover:
- IFRS Adoption In Consolidated Statements – Part 1: Approaches in IFRS adoption
- IFRS Adoption In Consolidated Statements – Part 2: Operating issues to deal with in financial reporting systems.
- Blog #3: How to face the challenge – The starter kit for IFRS as a starting point – this blog
- IFRS Adoption In Consolidated Statements – Part 4: How to face the challenge – Key implementation templates
In the previous blogs (IFRS Adoption In Consolidated Statements – Part 1 and IFRS Adoption In Consolidated Statements – Part 2), the retrospective method was described, along with the main issues to handle in financial reporting systems. We will now focus on the solutions proposed by SAP.
To find out more about Starter Kits & Innovations materials, go to the Starter kit for SAP BusinessObjects solutions Wiki
How to face the challenge – The starter kit for IFRS as a starting point
The starter kit for IFRS as a basis
Chart of accounts
The chart of accounts delivered in the IFRS starter kit offers:
- Balance sheet accounts split between current, non current and also by gross values, amortization and depreciation, impairment.
- Income statement accounts classified by function.
Furthermore, the chart of accounts is built in a way that makes it possible to map accounts with IFRS taxonomy items (XBRL).
The use of the flow dimension permits a full and consistent explanation of the changes between the opening and the closing balances on balance sheet accounts. Flow also helps to automatically produce the statement of cash flows and the statement of changes in equity.
In order to ensure the audit trail, each amount stored in the database is traced by an audit ID.
For example, at the consolidated level, the entity shows a contribution of 10 000 CU at the end of the period. The audit IDs in the starter kit enable the Consolidation department to audit and understand the breaking down of the amount.
The consolidated amount, 10 000 CU, comes from 12 000 CU in the local books, increased by 200 CU from a central adjustment, and reduced by an intercompany elimination of 2 200 CU.
In summary, the audit IDs explain the transition from local to consolidated data.
Automated consolidation rules
The starter kit for IFRS provides a set of consolidation rules that automate the posting of entries and accelerate the consolidation process. The rules facilitate:
- Intercompany elimination (internal provision, internal gains and losses on disposal of assets, reciprocal accounts, internal dividends)
- Goodwill recognition and impairment
- Elimination of investments in subsidiaries
- Currency translation adjustment
- Calculation of non controlling interests
- Shares of net equity in associates
The scope changes managed in the product rely on the consolidation engine, the consolidation scope and the automated rules. Cases handled are:
- Incoming entity
- Change in consolidation method/rate
- Internal merger (at the beginning of the year/during the year)
- Outgoing entity (at the beginning of the year/ during the year)
Data collection “Package manager view”
Local data can be collected in data entry schedules according to IFRS or the local GAAP on audit ID “PACK01”. Package data entry folders are:
- Balance (Income statement, assets, equity & liabilities)
- Securities and shareholdings
- Flow analysis
- Intercompany breakdown
Reports “Report navigator view”
The starter kit for IFRS contains prebuilt reports that comply with IFRS (IAS1 revised and IAS7):
- Statement of financial position
- Income statement
- Statement of other comprehensive income
- Statement of comprehensive income
- Statement of cash flows
- Statement of changes in equity
Templates regarding segment information (IFRS 8), and several working reports classified by folders.
In SAP® BusinessObjectsTM Financial Consolidation with the starter kit for IFRS, the company can decide either to set up a unified reporting model or a two separate reporting model, depending on the requirements. The principles and consequences are explained in the next section.
Unified reporting vs. separate reporting
A single reporting model enables the entity to produce financial statements compliant with several standards in one application. In SAP® BusinessObjectsTM Financial Consolidation, this option is carried out in a single category (Actual).
Data is managed interdependently:
- Local GAAP amounts are entered/loaded,
- IFRS adjustment are entered/loaded
- Local GAAP and IFRS adjustments are retrieved to get an IFRS valuation.
Local GAAP + IFRS adjustment = IFRS
The chart below illustrates the process that can be handled from the source system to SAP® BusinessObjectsTM Financial Consolidation.
A separate reporting model uses two categories: one dedicated to local GAAP, and the other one to IFRS. This model is based on a parallel approach, explained in blog 2, where data is not stored together in the database:
- Local GAAP amounts are entered/loaded in the local GAAP category,
- IFRS amounts are entered/loaded in the IFRS category,
- Local GAAP consolidated data is reconciled with IFRS consolidated data.
IFRS – Local GAAP = IFRS adjustments
In a separate reporting model, configurations can be drastically different from one category to the other (e.g.: chart of accounts) and can lead to difficulties in reconciling local GAAP data and IFRS data. If the entity decides to implement two separate categories, we recommend loading data in the IFRS category as follows:
- Copy local GAAP amounts from the local GAAP category into the IFRS category.
- Load/enter IFRS adjustments into the IFRS category
The chart below illustrates the recommended separate reporting process:
Warning: This approach implies that configurations of the two categories are perfectly aligned with a common chart of accounts.
When it comes to make a choice and even if both models are convenient, we recommend the unified reporting model for the following reasons:
- It is the most used solution with our SAP BusinessObjects European Union clients.
- The implementation time is shorter and easier,
- The operating process is faster and less risky,
- The reconciliation stage is easier to implement.
The Next Blog
In the IFRS Adoption In Consolidated Statements – Part 4, we will give practical guidance on how to implement an efficient and simple project based on the starter kit for IFRS. We will also provide a link to the “How to guide” including more charts and a complete illustration of the operating process to handle the IFRS adoption with SAP® BusinessObjectsTM Financial Consolidation, starter kit for IFRS.
Acknowledgements to Fabienne Rojo, Patricia Meteil-Dutartre and Laetitia Lamoureux from the EPM SK&I team for their high contribution to the “How-to guide” paper.
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International Financial Reporting Standards (IFRS)