IFRS enabled through SAP
Blog is updated based on the review by SAP ERP IFRS expert Thomas Jordan, thanks Thomas.
By now most of you know that The specified item was not found. is going to be the go forward standard for financial reporting, and has been mandatorily adopted by 100+ countries in the world across next 2-4 years. Many are starting initiatives to build a smooth transition to IFRS. One of the things I spend my time is to present how the transition to IFRS can be managed better with SAP solutions.
IFRS transition through SAP
There are primarily two main categories /levels of IFRS transition that can be facilitated by SAP
1. At the transactional level with ERP through necessary functionality to support IFRS
2. At the consolidation/reporting level with EPM through starter kits to support IFRS
The below chart is the ‘picture say better than words’ depiction of what it is that I use to present to provide an end to end view:
While the above does not cover everything required from a IFRS perspective, it covers most of the key needs that can be covered by a solution.
Lets briefly further explore each of the above points:
At the transactional level with ERP through necessary functionality to support IFRS
1. Parallel Reporting: In most of the countries, companies need to have parallel reporting to capture local GAAP and IFRS upto transaction level. One solution to make sure financial numbers are segregated in the right way is to use parallel ledgers in New G/L, that makes extaction to reporting very simple. This is the approach everyone should ultimately aim for, though it may take a longer time to implement this concept. The below table shows different approaches available.
Parallel ledger is very apt because of the following :
– Segment reporting is required (IFRS requires it)
– Increasing number of general ledger accounts will result in loss traceability of past data
– Different fiscal years for different legal entities is a need.
2. Property Plant and Equipment (IAS 16) : This a huge volume item and major effort when someone is going to IFRS (IAS 16), but still have to maintain books as per local GAAP. IFRS prescribes a totally open approach to defining useful life/methods etc.The fixed assets rules/policy for capitalization including depreciation methods/useful lifes can be quiet cumbersome to maintain in multiple ways. With SAP ERP, you can leverage the Depreciation area functionality that would allow you to have different useful life and methods. This is a huge plus for especially huge asset intensive industries, public sector companies where fixed assets could be huge. So getting this setup in SAP ERP, would help in easier extraction of financial numbers using different GAAP/IFRS.
3. The Effects of Changes in Foreign Exchange Rates (IAS 21) : In most of the countries the treatment of effects coming from changes in exchange rates between the local currency and foreign currencies is different from the treatment prescribed by IAS 21. Using different valuation areas that depend on the distinct accounting principle makes that very easy in SAP ERP.
4. Operating Segment (Segment Reporting – IFRS 8/IAS 14) : From an IFRS perspective, this is one area where lots of countries have to deal with moving over to new reporting rules for segment reporting. Segment is a key attribute that can be captured at transaction level in SAP ERP in case that New G/L is used. This helps very easy allocation of the expenses, and even the payables/taxes associated with the transaction to the appropriate segments.
So having this supported through SAP ERP would be ideal and clear classification for IFRS.
At the consolidation/reporting level with SAP BusinessObjects EPM through starter kits to support IFRS
5. Consolidations and Reporting: Now we step away from transaction layer, into reporting and analytics layer. Per IFRS (IAS 27), consolidated financial statement is mandatory, not the case for many of the local GAAP. Also IAS 1 prescribes presentation of financial statements. These are essentially covered by SAP Business Objects EPM solutions, that mainly covers IFRS starter kits that contain:
o Predefined IFRS consolidation and other business rules (e.g. full goodwill)
o Predefined Chart of Accounts that is required as per IFRS
o Publishable financial statements as required by IFRS
o Preconfigured business process flows that would enable orchestrating the financial group closing and reporting using IFRS, from submissions, consolidation, top side adjustments to reporting
The IFRS starter kit would be on top of the SAP Business Objects EPM solutions that allows robust audit trails for top side adjustments and out of box multi-gaap reporting including IFRS.
While getting the IFRS convergence through at transaction layer should be the goal for every organization, investing into a consolidation and reporting solution would be a quick win to keep pace with the IFRS compliance and also having multiple GAAP compliance. The best part of the EPM solutions would be to have different applications to support different GAAP. The other aspect would be to manage the financial consolidation and reporting to be independent of the transaction system, given the pressure to roll out the financial results and achieve accelerated group close.
The one argument I keep getting is, why do I need a solution for managing this process, can I not continue to do it with a manual approach as I anyway have to do top side adjustments. The answer to that is – the EPM solution provides robust audit trails which are very important for top side adjustments, can manage multiple versions of the financial results before a final version gets signed off, allows managing the process efficiently through orchestration of the financial closing and has clear functionality/best practices that will ensure better compliance to IFRS. Many companies have gone in for parallel GAAP (including IFRS) using consolidation solutions. Another important aspect for consolidation solution is with respect to mergers and acquisitions. In this current world of M&As, where so many acquisitions keep happening across the globe (usually in countries that follow different GAAP), one of the first requirement is get out a consolidated financial statement post acquisition, that complies to multiple GAAP. Consolidations solutions comes in very handy in such a situation, as it would be not feasible to get the transaction system aligned very fast.
To summarize, IFRS is best enabled by SAP through its end to end solutions both from a short term as well as medium term (both consolidation/reporting as well as transactional level) approach for companies. Again the above is not very exhaustive coverage of what is required from IFRS, but SAP’s solutions would cater to most of the needs of IFRS.
We are basically looking at some eIRR based calculations for EMI Based products. Not sure whether this is supported by SAP.
CAn we have valued inputs from the Community?
At the time of writing only values from the leading ledger can update to CO via version 0. The only "parallel" valuation possible is group valuation or transfer price valuation which feeds into different CO versions. SAP Enhancement Package 5 for SAP ERP 6.0 offers a new business function "Parallel Valuation of Goods Manufactured" that will allow you to take depreciation expenses from multiple approaches into Cost Center Accounting and update activity prices on this basis. There is currently no way of updating revenues or other cost types from a non-leading ledger to CO-PA.
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HOw this will be manage in SAP ...