The starter kit for IFRS (International Financial Reporting Standards) is a preconfiguration of SAP® Financial Consolidation – part of SAP solutions for EPM (Enterprise Performance Management) – designed to help customers perform, validate and publish a statutory consolidation in accordance with IFRS.
As IFRS are constantly evolving, SAP EPM teams ensure that regulatory evolutions are addressed by our software in a timely fashion. To that end, a new release (SP5) of SAP Financial Consolidation starter kit is now available to help business end-users achieve their transition to IFRS11 (Joint Arrangements).
IFRS11: what does it change?
IFRS11 classifies joint arrangements into two categories (joint operations or joint ventures) whereas there were three categories under IAS 31 Interests in Joint Ventures.
In contrast with IAS31 provisions that used to be based on the legal structure of the joint arrangement, the IFRS11 new classification now ultimately depends on its substance. In other words, it is now possible to classify as a joint operation an arrangement that was previously regarded as a jointly controlled entity because of its legal form.
Moreover, classification is a key step as it determines the accounting method. Indeed, IFRS 11 does not offer any accounting choice: each type of joint arrangement (joint operation or joint venture) corresponds to one – and only one – accounting method. As regards joint ventures, the option for proportionate consolidation has been removed. Joint ventures must be accounted for using the equity method.
From proportionate consolidation to the equity method
The most frequent consequence resulting from the adoption of IFRS 11 consists in changing from proportionate consolidation to the equity method to account for joint ventures. The transition provisions are described as follows in IFRS11:
“When changing from proportionate consolidation to the equity method, an entity shall recognize its investment in the joint venture as at the beginning of the immediately preceding period. That initial investment shall be measured as the aggregate of the carrying amounts of the assets and liabilities that the entity had previously proportionately consolidated, including any goodwill arising from acquisition.” (IFRS11.C2)
Simply speaking, changing from proportionate consolidation to the equity method as part of the transition to IFRS11 has not any impact – in most cases – on the consolidated value of the joint venture.
What’s new in the starter kit for IFRS SP5?
Until the adoption of IFRS11, a change from proportionate consolidation to the equity method was not explicitly addressed by IFRS. The option chosen in the starter kit was to handle this change the same way as a change from full consolidation to the equity method.
It means that, in the starter kit SP4, this change was treated as if the proportionately consolidated entity had been disposed of, and a new equity-accounted entity had been acquired. Therefore, any goodwill or foreign currency translation reserve previously recognized in the proportionately consolidated entity were derecognized using flow F02 (old method). The goodwill or the foreign currency translation reserve were not reloaded on flow F03 (new method) because the purchase method should be applied to the new equity-accounted entity (calculation of goodwill on the basis of its assets and liabilities at the date of the change in method).
Changing from proportionate consolidation to the equity method as part of the transition to IFRS11 should have no impact on the consolidated value of the joint venture. Consequently, goodwill and accumulated other comprehensive income (such as foreign currency translation reserve) should remain unchanged except that goodwill should be reclassified within the line “Investments in associates”. This accounting treatment also applies to any change from proportionate consolidation to the equity method that takes place after the transition. Indeed, amendments to IAS 28 issued at the same time give the following clarifications:
“If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the entity continues to apply the equity method and does not remeasure the retained interest” (IAS 28.24).
Based on this, additional consolidation rules have been configured in the starter kit SP5 so that the historical value of joint ventures moving from proportionate consolidation to the equity method remain unchanged.
For more information
More information is available on http://help.sap.com/boall_en (please select Financial Consolidation from the list of products, then 10.0 from the list of releases):
- Release Notes provide detailed information about configuration changes compared with the SP4 version of the starter kit
- Transition to IFRS11 with SAP Financial Consolidation Starter kit for IFRS gives practical guidance to achieve the transition using the starter kit
(available for SP 4 and SP 5 versions)
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