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IBM Global Business Services

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 o the standards orming IFRS are known by the older

name o International Accounting Standards (IAS). IAS were

issued between 1973 and 2001 by the board o the Interna-

tional Accounting Standards Committee (IASC). In April 2001,

IASB adopted all outstanding IAS issued by the IASC. Those

standards continue to be in orce to the extent they are not

amended or withdrawn by the IASB. New Standards issued by

the IASB are known as IFRS. When reerring collectively to

IFRS, that term includes both IAS and IFRS.

IFRS standards are destined to become the worlds common

nancial reporting language or investors, analysts and regula-

tors. The overriding advantage to the participants o global

IFRS adoption is enhanced comparability o like entities

anywhere in the world. And or any entity, better access to

international capital, unding and investment opportunities.

The adoption o IFRS standards requires high-quality,

transparent and comparable inormation demanded by

investors, creditors, nancial analysts and other users o

nancial statements. A broad range o potential high impact

areas are summarized in the ollowing 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

Hyperinfationary accounting/FX

Leases

Government grants

Fair value

This document is the rst in a series o white papers planned

to address the IT impacts o the key topics stated above. The

ocus o this paper is on handling the IFRS Fixed Assets/

Property, Plant & Equipment (PP&E) requirements, as well

as parallel reporting needs or companies using SAP as their

ERP system.

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Supporting IFRS Compliance with SAP Enterprise Resource Planning System

IFRS - Beyond changing the numbers

The move to IFRS is ar more signicant than just changing

certain accounting practices in the nance organization. It has

a ar reaching impact on how you measure your business, such

as the P&L and balance sheets. It also impacts how you

manage budgeting and orecasting, product pricing, opera-

tional processes, IT systems and internal controls.

When applying the new accounting principles to meet the

reporting and disclosure requirements, organizations have

experienced signicant impact on processes, systems and

people within the Finance unction and in the operationalunctions that provide transactional inormation to nance.

On the other hand, the adoption o new accounting principles

will lead to changes in the nancial results o companies and

will have related tax implications. This can have ripple aects

on risk reporting, management reporting, budgeting, orecast-

ing, product pricing and employee benets.

Lastly, the adoption o IFRS will require impacted enterprises

to report under IFRS and local Generally Accepted Accounting

Principles (GAAP) in parallel or a period o at least one year

beore the nal change-over date. This not only requires

multi-GAAP accounting and reporting capabilities in the

nance systems, but it places an additional requirement orcritical and knowledgeable resources.

How will the newreportingrequirements beapplied?

What additionalinformation will be

required?

What are the widerimplications on howthe business ismanaged?

What are the impactson P&L and Balancesheet?

Business

Implications

Compliance

Requirements

IFRS

Do ledgers and business systemscontain the necessary data and ifso, how are the rovided?

How many adjustments arenecessary to meet the additional

requirements arising from IFRS? Is there a sufficient number of

suitable and trained employeesworking in the right position?

Will profitability be sustainedunder the new regulations?

What impact will IFRS have onregulatory requirements incl tax?

Which processes must bechanged to capture and reportnew data?

What impact will theimplementation of IFRS have onthe P&L and the balance sheet?

Data

availability

Proces

redesign

Systems scalability

& architecture

Organization

design

Product design

& pricing

Profitability &

solvency

Regulatory

reporting

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Assessing the ImpactThe rst step towards a successul IFRS transition is a robust

Impact Assessment phase to gain a high level understanding o

the business/accounting aects o IFRS. They will be urther

translated into impacts on processes, systems and data. The

Impact Assessment phase should cover a reasonable level o

detail, as dierences that appear relatively minor could cause a

signicant impact. Further, addressing the collection o

additional data required by IFRS should commence at theearliest stages, so that the integrity o nancial results under

IFRS can be assessed and improved.

Based on our experience with organizations in Europe, a

signicant part o the IFRS conversion eort went towards IT

implementation. In particular, the core accounting or enter-

prise resource planning (ERP) underwent signicant change.

This paper aims to provide an appreciation o certain major

IFRS impact areas, and the potential approaches or companies

using an SAP ERP application.

Parallel Reporting

IFRS transition requires parallel reporting in local GAAP and

IFRS or at least one year. Multi-GAAP accounting unctional-

ity is required and needs to be implemented in the ERP

system.

There are our options available within SAP to support parallel

reporting needs: 1) Parallel ledgers using the new unctionality

that supports multiple ledgers (New GL), 2) Account-based

general ledger (GL) conguration, 3) Use o special ledgers,

and 4) Parallel company codes.

Local Close SAP R/3 9classic

GL)

SAP ECC 6.0

(New GL)

Parallel Ledgers

Parallel Account

Parallel Special

Purpose Ledgers

Parallel Company

Codes

Considering the present environment, SAP recommends the

use o parallel ledgers provided in the New GL (SAP version

ECC 6.0 or later) or the account-based conguration or the

transactional layer, depending on the need o the client or

version o sotware in use.

Implementing IFRS using the New GL with parallel ledgers is

the most transparent approach. It provides an independent set

o books and is the cleanest option or clients on SAP ECCversion 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 ew

IFRS dierences 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 o Account (COA).

In some unique circumstances, the use o parallel company

codes and special ledgers may still be workable, but they are

not recommended rom a sustainability perspective.

Property Plant and Equipment

IFRS prescribes rules regarding the recognition, measurement

and disclosures relating to property, plant, and equipment

(oten reerred to as xed assets) that would enable users o

nancial statements to understand the extent o an entitys

investment in such assets and the movements therein.

The principal IFRS impacts include componentization o

assets, basis o valuation, depreciation, and impairment. The

ollowing section elaborates the impacts and approaches to

address them within SAP ERP.

Key Dierences between U.S. GAAP and IFRS - Assets

Componentization of assets

Physical assets may have various signicant 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

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Basis of valuation of an asset

IFRS provides an option to use either the revalued amount or

the historical cost as a basis or measurement. Revalued

amount is air value at the date o revaluation less subsequent

accumulated depreciation and impairment losses. Under the

U.S. GAAP, use o revalued amount is not permitted.

Change in depreciation method based on the useful life of

individual components

Under IFRS, each component o a physical asset must be

depreciated separately depending on its useul lie.

The Impacts

Key Difference Impact How to address in SAP

1 Dierence in the

value o an asset

due to dierent

accounting

methods under

dierent

accounting

standards

The value o one asset could be

dierent within IFRS, U.S. GAAP

statutory accounts, scal accounts.

Assets thereore may have multiple

valuations.

SAP allows or multiple depreciation areas or valuation o

assets. These deprecation areas may have dierent

depreciation keys (i.e., depreciation calculation rules) and

dierent useul lives or each individual asset. In

addition, transactions such as capitalization, retirements,

write-up, write-downs etc. may be posted dierently in the

areas where needed.

2 Componentization

o assets

Companies must dene signicant

components o existing assets as

individual assets. These

components must be depreciatedseparately, depending on their

individual useul lives.

Componentization can be handled through the use o

asset master records (main and sub-number, super-

numbers) to dene each component uniquely. Depreciation

rules or each o the separately identied components canbe congured or its estimated useul lie.

3 Change in assets

useul lie

I the estimate o the assets useul

lie changes, the depreciation

charge must be adjusted or the

current and uture periods.

In SAP Asset Accounting, each asset is assigned to a

depreciation key (that describes the depreciation

calculation rule) and a useul lie. Depreciation is calculated

automatically according to the depreciation key and

remaining useul lie. One o the options or adjusting

depreciation is to change the depreciation key or the useul

lie o the asset component.

4 Change in

depreciation

method

I the depreciation method changes

due to a change in the expected

pattern o benets, the depreciationcharge or the current and uture

periods should be adjusted.

SAP asset accounting allows or adjustments to the

depreciation method and adjustments to the useul lie o

an asset. Changes to either o these values will aect thedepreciation calculations on a go-orward basis.

5 Updating air value

o assets

IFRS provides an option to use

either revalued amount or historical

cost as a basis or measurement.

Revalued amount is air value at the

date o 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

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Key Dierences between U.S. GAAP and IFRS

Systematic Identifcation o Impairment Losses

I there is an indication that an asset may be impaired, then the

assets recoverable amount must be calculated. [IAS 36.8]

Accounting and Calculation Requirements for

Impairment Losses

Under IFRS, impairment is recorded when an assets carrying

amount exceeds the higher o the assets value-in-use (dis-counted present value o the assets expected uture cash fows)

and air value less costs to sell. Under U.S. GAAP, impairment

is recorded when an assets carrying amount exceeds the

expected uture cash fows to be derived rom the asset on an

undiscounted basis.

Accounting and Calculation of Reversal of Impairment Losses

Subsequent reversal o an impairment loss is required or all

assets (other than goodwill) under IFRS. Reversal is limited to

the extent o the written down value o the asset, whereas

under U.S. GAAP, any reversal o impairment loss is

prohibited.

Identifying Cash Generating Units

IFRS introduces the concept o a Cash Generating Unit(CGU). The CGU is the smallest identiable group o assets

that generates cash infows rom continuing use, and is largely

independent o the cash infows rom other assets or groups o

assets. U.S. GAAP does not prescribe any CGU concept.

The Impacts

Key Difference Impact How to address in SAP

1 Systematic

Identication o

Impairment Losses

Identiy indications or impairment

and determining impairment loss.

Impairments can not be determined within the SAP system.

The amounts must be determined externally, and manually

updated in SAP.

2 Accounting

Requirements or

Impairment Losses

An impairment loss should be

recognized whenever recoverable

amount is below carrying amount.

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.

3 Calculation o

Impairment Losses

Need to calculate the recoverable

amount, which is calculated rom

net present value o assets.

Net present value o assets is calculated on planned uture

cash fows. SAP oers unctionality or this purpose in

Investment Management (IM).

4 Accounting

Requirements or

Reversal o

Impairment Losses

Subsequent reversal o an

impairment loss is required or all

assets (other than goodwill) under

IFRS.

Impairment reversal cannot be determined within the SAP

system. The calculation o impairment reversal amounts will

need to be perormed outside the SAP system, and then

posted manually in the SAP system.

5 Calculation oReversal o

Impairment Losses

Reversal o impairment loss islimited to the extent o the written

down value o the asset.

Need to keep track o the impairment loss recognized or anasset and track written down value o the asset in order to

acilitate the reversal calculation. This can be managed in

SAP with the help o transaction types to track the nature o

transactions. The calculation o impairment reversal amounts

will need to be perormed outside the SAP system.

6 Cash Generating

Units

Under IFRS, assets must be

assigned to Cash Generating Units

where required. CGUs will likely be

dierent rom the current reporting

units in use, and will need to be

dened separately.

SAP suggests using prot centers to approximate CGUs,

since sales and expenses can be collected at this level.

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Alternative Approaches towards IFRS

Compliance

Although embedding the IFRS changes into the ERP (transac-

tional) system is the preerred 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 o

change or to meet tight timelines. The approaches are outlined

below.

Consolidation Layer Approach

An additional alternative to consider is to post IFRS adjust-

ments into the consolidation application. IFRS adjustments can

be calculated and posted directly into the consolidation tool.

Data in the transaction system would refect 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 adjust-

ments. It is potentially cheaper and aster to implement than

the other two possible options or SAP systems, as no sotware

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 journalentries. There would be a need or controls to pass audits and

customization o the SAP system in order to create and eed

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 dicult to sustain longer term as it is

mostly manual, impacting close processes and reconciliations.

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IBM IFRS and IBM Ascendant SAP MethodIBMs Ascendant methodology augments SAPs ASAP method-

ology with IBM intellectual capital and reusable assets. It

allows fexibility to incorporate the associated IFRS building

blocks as per the specic project needs.

Ascendant provides a ull set o management tools and accel-

erators or SAP implementations. Beyond the basic require-

ments to congure, test and implement the sotware, Ascen-

dant also provides tools and templates or key project processes

such as:

Documentation templates

Issues and escalation management process

Risk management process and templates

Project change request process

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How can IBM help?IBM is a Business Services Partner with unmatched breadth

and depth. We bring unique benets to our clients, which are:

IBMs IFRS transormation: IBMs own IFRS transition is

generally accepted as the gold standard or adoption, and our

intellectual capital leverages this experience. So, IBM can oer

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 oer much more than just a

technical list o IFRS versus local GAAP dierences, and it

can take advantage o 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 rom audit rms,

so can help our clients throughout the project liecycle

without being restricted by independence rules. We can also

work eectively with your proessional advisors.

Flexible solutions and delivery model: We can handle a

complex IFRS conversion as part o an overall Finance

Transormation Program, or as a more straightorward

individual program tailored around the very specic IFRS

requirements. We have fexible delivery models, and leverage

oshore resources to achieve higher cost eciency and value.

ERP market leader: Unrivalled strengths in technology

and transormational consulting, while being the preerred

partner or large ERP vendors IFRS solution. IBM also oers

marketing leading ERP Points-o-View, o which this paper

is the rst in a series on the subject o handling IFRS impacts

in SAP.

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For further information

Contact us or visit

ibm.com//gbs/fnmgmt

John Ingold

Partner, Global IFRS Leader

[email protected]

Siddarth Agarwal

Associate Partner, IFRS Lead

[email protected]

Grant Rutherford

Senior Managing Consultant, IFRS Lead

[email protected]

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