Utilizing HFM to Handle the Requirements of IFRS Chris Barbieri Edgewater Ranzal
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What is IFRS?● Stands for International Financial Reporting Standards● A global set of accounting standards developed by the International Accounting Standards Board (IASB) ● An independent accounting standards body, based in London● Intended to be a more principles-based set of standards rather than the rules-based approach of U.S. GAAP ● Principles based: telling your child to be home at a reasonable hour ● Rules based: telling her to be home at 11 p.m. and then providing for the 15 contingencies that might justify a different time● IFRS and US GAAP differ conceptually on a number of points.● As companies compete globally, the movement toward IFRS is rapidly becoming one of the most important issues for companies to address today.
Why IFRS?• Economic globalization brings increased demand for high quality, internationally comparable financial information.• Facilitate global capital flows• Bring greater clarity and consistency to financial reporting in the global marketplace.• Provide greater transparency and comparability of financial information across countries.
IFRS vs. U.S. GAAPAbout 2,000 pages of principles versus 2,000 documents of rules Source: Deloitte – Straight Talk Book No. 11
Important / Significant Differences● The way pre-operating and pre-opening costs are reported.● The fact that IFRS prohibits the use of LIFO for inventory valuation.● Borrowing costs● Fair value● Revenue recognition● Extraordinary items Source: CAMagazine.com – The Road to IFRS
Putting Principles into Action Source: Deloitte – Straight Talk Book No. 11
IFRS Statement No. 1 requires companies to include a number ofreconciliations in their first financial statements presented underIFRS, as follows:A reconciliation of the company’s equity previously reported underGAAP as of its transition date to its equity restated under IFRS atthat date;A reconciliation of the company’s equity as of the entity’s mostrecent annual financial statements under GAAP to its equityrestated under IFRS at that date; andA reconciliation of its last published US GAAP total comprehensiveincome with its restated IFRS comprehensive income for thesame period.For all three of the reconciliations required, companies mustdistinguish between GAAP differences and correction of errors.
Among Others: IAS/IFRS US GAAPFair Market -Revaluation FA & Investments Only certain FICash Flow Indirect (Favored) Direct/IndirectConsolidation Control 2 modelsJoint Ventures Proportional ok Only EquityPensions 15 differencesR&D: “Development” Dev. Capitalized Dev. ExpensedInventory No LIFO LIFO OKImpairment 1 Step, reversible 2 Step, no reversal Interest rate sensitive
How are the Statements Changing? Statement of Comprehensive Income Statement Income Balance Sheet Statement of Financial Position Statement of Retained Statement of Changes in Equity EarningsStatement of Cash Flows Statement of Cash Flow Proposed Changes by FASB & IASB
• Approximately 100 countries already require, allow or are in the process of converging their national accounting standards with IFRS.• Japan, the United States and Canada have active programs designed to achieve convergence with IFRS.• China’s Accounting Standards Committee has announced that convergence is a fundamental goal of its standard-setting program.• The Institute of Chartered Accountants of India has taken up the issue of convergence of Indian accounting standards with IFRS.• The EU gave global convergence a kick-start when the EU mandated that EU companies with securities listed on an EU exchange prepare their consolidated accounts for all fiscal years beginning on or after Jan. 1, 2005, under IFRS. (>7,000 companies)
Dates – U.S.Source: PWC – Mapping the Change ● The US Securities and Exchange Commission (SEC) recently issued its proposed roadmap for conversion from US GAAP to IFRS. ● Mandatory reporting under IFRS beginning in 2014, 2015 or 2016, depending on the size of the issuer, and provides for early adoption in 2009 by a small number of very large companies that meet certain criteria. ● With compliance beginning in 2014. The SEC says it will decide in 2011 whether to hold to that schedule. ● One of the biggest lessons learned from European companies that converted to IFRS in 2005 was that they needed more than the two years time they were given.
Early Conversion to IFRS has Appeal● Simplified reporting● Reduced operating costs● Greater transparency and comparability for investors● Improved access to capital● Plus some companies see their competitors already embracing IFRS. That’s why momentum toward IFRS adoption has been steadily building, even before it’s required.
To Adopt or not to Adopt?That is not the Question● IFRS is being driven by the globalization of capital markets. Not just by government policy.● “Every business will have a different outlook on IFRS, but no matter what your approach, know this: The full transition will take a well planned effort, requiring leadership and vision. For many companies, it will take at least three years.” Deloitte
The amount of estimated spend on IFRS varies widely within each category of company size, with some companies in the same size category expecting to spend far more than their peers. 0.800% $180.0 0.731% $160.9M 0.700% $160.0USD Spent in Millions on IFRS Conversion USD Spent in Millions on IFRS Conversion 0.600% $140.0 $131.9M $120.0 0.500% $100.0 0.400% $80.0 0.298% 0.300% $60.0 0.200% $48.5M 0.200% 0.141% $40.0 0.103% $27.1M $23.2M 0.100% $20.0 0.000% $0.0 $1 Billion to $5 Billion to $10 Billion to $20 Billion to $50 Billion US $1 Billion to $5 Billion to $10 Billion to $20 Billion to $50 Billion US $4.9 Billion US $9.9 Billion US $19.9 Billion US $49.9 Billion US or more $4.9 Billion US $9.9 Billion US $19.9 Billion US $49.9 Billion US or more Company Revenues Company Revenues Source: Accenture 2008 IFRS Survey 20Source: Accenture 2008 IFRS Survey
Stage 3 Stage 4Stage 1 Stage 2 Record Transform YourStudy Impact & Enable Top End Transactions Business & WinDetermine Strategy Reports in both GAAPS with IFRS Determine impactPerform Collect GAAP Determine changes on accounting inPreliminary Study Financial Results to business model subsystems Adjust and Configure TransformAssess Impact Consolidate Under accounting rules operations using GAAP & IFRS and set up ledgers IFRS results Report, Reconcile Process and report Report IFRSDetermine Strategy using dual results, increase and Audit Results accounting shareholder valueAll Stages: Apply Policy and Control Management Milestone 1 Milestone 2 Milestone 3 Milestone 4 Completed Preliminary IFRS Reports Produced Transactions Recorded Business Model Study in Multiple GAAPs Optimized
IFRS – The Big Impacts • Upstream systems • Additional reporting requirements in areas such as taxes, financial instruments, and fixed assets. • General ledger • Changes to the chart of accounts. During transition, general ledger reporting will likely need to accommodate ledgers for both U.S. GAAP and IFRS. • Reporting data warehouse • Changes in data models, such as valuation systems and actuarial models. • Downstream reporting • Changes to the number of consolidated entities, mapping structures, and financial statement reporting formats.
Next Steps• IFRS Gap Analysis - The first step in the journey is to conduct an IFRS diagnostic to assess the impact conversion will have on your business.• Get clear about how IFRS and U.S. GAAP differ. Determine the level of effort required to address the differences.• Evaluate the impact on accounting policy. Some areas of accounting will require new policies due to clear differences in standards. In other areas, there may or may not be differences, depending on the choices you make.• Inventory your current IFRS reporting requirements and locations.• Identify resources within your organization to assist in the IFRS effort.
Next Steps (cont’d)• Assess the impact of IFRS on your technical infrastructure. Front-end systems, general ledgers, sub-ledgers, and reporting applications may need to be evaluated.• Identify the impact on current system projects. As new projects are planned, take time to align requirements with the likely impact of IFRS• Identify stakeholder groups affected by IFRS. Assess their current level of understanding of what’s ahead.• Create a plan to address the training and communication requirements for each stakeholder group. Keep people informed through the entire journey. Take time to celebrate success.
HFM is Well Suited for IFRS Centralized data – one version of the truth Accessed via the web for global operations Supports multiple accounting standards built on single set of inputs Provides validations and controls over the process Big win for SarbOx! Accommodates multiple data sources With visibility back to source data Journals module and data audit provide full audit trail Supports financial and non-financial metrics Multiple charts of accounts Provides for alternate organizational structures Easily handle complex currency translation & consolidation rules Flexibility in writing business rules without need for programmers Twelve smart dimensions to handle high dimensional requirements Segment Reporting Cash flow Management reporting and statutory
Why HFM to Handle IFRS? (cont’d)• Out of the box intercompany elimination functionality• Dynamic reporting / Smartview• “Slice and dice” information facilitates the segmental reporting requirements in IFRS• Robust controls and audit trails that help with Sarbanes-Oxley compliance• Custom dimensions and flexible reporting facilitate GAAP “bridge” reporting
Bridge Reports Multi-GAAP reporting compares results and quantifies the differences. HFM has been used for multi- GAAP reporting for years. KPI’s can be executed on any piece of data Source: Oracle
Segment ReportingsMultidimensionality becomes particularly vital when navigatingthe complexities of segment reporting, as required by IAS 14:Segment Reporting. Source: Oracle
Impact on HFM applications Data ● Some source data will be reclassified in the ledger, such as labor components of Cost of Goods ● Direct method for cash flow Metadata ● Some accounts will be moved around Rules ● Reconsider consolidations Reports ● A bit of work here ● Greater focus on footnotes Supporting processes ● Burden on the close cycles for first year or two ● Budgets and forecasts will be impacted too
Application Design Considerations• Based on your specific IFRS requirements, how will this impact your HFM apps?• Preferred Approach - Use a custom dimension • Like a data type – start off with GAAP and adjust it to IFRS• Other options to consider are: • Create a new application • would include new accounts, new rules, new reports… • Use a new set of accounts • most of the base would be the same • may need more detailed accounts in some areas • new parent accounts would be required • Use new entities – depends on consolidation complexity
More System Considerations• New Financial Reports • New formats plus bridging statements• Adjust your XBRL reporting – new taxonomies • Disclosure Management product• Adjust your FDM apps• Know the impact of your decision on your application • The choice to build this in you customs, accounts or entities may depend more on the application you have. • Chris Barbieri, Ranzal has some great metrics to help guide your decision.
Dimension Average Record Comments Volume ed HighAccounts 2,132 14,409Entities 1,165 22,882Currencies 16 233 use only 1 currency 30%Custom1 388 19,410 use Custom 1 96%Custom2 153 15,188 use Custom 2 86%Custom3 61 26,816 use Custom 3 86%Custom4 39 11,389 use Custom 4 62%Scenarios 11 78Entity hierarchies 3 24 the equivalent of Organizations in Hyperion EnterpriseICP Accounts with Plug 41 1,223 use automated intercompany matching 56%Accounts with Line Item Detail 36 1,667 16% use this, but only 10% have more than 1 account flaggedConsolidation Rules - - use consolidation rules 28%Consolidation methods 5 10 use methods 14%OrgByPeriod use organization by period 9%ICP Members 86 1,407 track intercompany activity 81%Entities flagged for Parent Adjs 143 7,698 Allow [Parent Adj] or [Contribution Adj] journals30%Scenarios using Process Mgmt 5 53 use process management46%
Closing Remark“You’ll need plenty of runway. You’ll have to provide comparativefinancials during conversion—and deal with all the systems,process, and organizational issues surrounding the transition. Itwill take time. And it will ultimately require your signature.” Deloitte Source: Deloitte – Straight Talk Book No. 11
Special Thanks Rob Dessureault, CMA Various web sources
More Information on IFRSSource On the WebAmerican Institute of CPAs www.aicpa.orgFinancial Accounting Standards Board www.fasb.orgInternational Accounting Standards www.iasb.orgBoardInternational Federation of Accountants www.ifac.orgInternational Financial Reporting www.ifrs.comStandards ResourcesInternational Organization of Securities www.iosco.orgCommissionsSecurities and Exchange Commission www.sec.govSEC roadmap www.sec.gov/spotlight/ifrsroadmap.htmWikipedia en.wikipedia.org/wiki/IFRS
Presentations Calculation Manager: The New and Improved Application to Create Hyperion Planning Business Rules – Monday, 11:15 am, Room 102C Security and Auditing in HFM – Tuesday, 4:30pm, 101B Best Practices for Using DRM with EPMA – Wednesday, 8:30am, 103A Getting Started with Calc Manager for HFM – Wednesday, 8:30am, 101B Advanced Topics in Calc Manager for HFM – Wednesday, 9:45am, 101B Maximizing the Value of an EPM Investment with ERPi, FDM & EPMA – Wednesday, 11:15am, 101B Taking your FDM application to the next level with Advanced Scripting – Friday, 8:30am, 101B IFRS reporting within Hyperion Financial Management – Thursday, 10:30am, 101B