Piggyback on IFRS Demands to Enable Financial Consolidation


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Your company has decided to be an SAP shop, but you still
have many disparate systems. You’re still using an old version
of Hyperion for financial consolidation. You see IFRS demands
in your operations globally. This session will describe a strategy
to piggyback on IFRS demands to leverage SAP consolidation
tools for financial and management consolidations, while
integrating enterprise performance management and a flexible
enterprise reference architecture to add real value to your

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Piggyback on IFRS Demands to Enable Financial Consolidation

  1. 1. SAPPHIRE ASUG, Orlando Piggyback on IFRS Demands to Enable Financial Consolidations ] Edmund Manrique and David Dixon Ed dM i d D id Di TekLink International May17, 2008 y , [ CHAVONE JACOBS ASUG INSTALLATION MEMBER MEMBER SINCE: 2003 [ COREY PEARSON [ ALLAN FISHER ASUG INSTALLATION MEMBER ASUG INSTALLATION MEMBER MEMBER SINCE: 2008 MEMBER SINCE: 2008
  2. 2. [ Abstract Your company has decided to be an SAP shop, but you still have many disparate systems. You’re still using an old version y p y g of Hyperion for financial consolidation. You see IFRS demands in your operations globally. This session will describe a strategy to piggyback on IFRS demands to leverage SAP consolidation tools for financial and management consolidations, while integrating enterprise performance management and a flexible enterprise reference architecture to add real value to your f h dd l l organization. Real Experience. Real Advantage. 2
  3. 3. [ Learning Points What is IFRS and Why Does It Matter? What are the System Impacts and Options? What are the SAP solutions to consider? Real Experience. Real Advantage. 3
  4. 4. [ IFRS Pop-Quiz What is IFRS?*: A. A I Forget Reporting Standards B. Increasingly Fuzzy Reporting Standards C. International Financial Reporting Standards te at o a a c a epo t g Sta a s D. All The Above What Does It Matter? A. It Doesn’t. B. It Throws a Big Wrench In All My Information Systems. C. Well, “It Depends” *Adapted: SAP Insider’s Special Report “An IFRS Fable: The Company That Waited Too Long” Real Experience. Real Advantage. 4
  5. 5. [ A little history... Source: http://www.theinvestmentprofessional.com/vol_2_no_1/hard-sell-timeline.html Image Credit: Mark Andresen Real Experience. Real Advantage. 5
  6. 6. [ IFRS Adoption More than 100 countries now require or permit the use of IFRSs or are converging with the International Accounting Standards Board's S d d B d' (IASB) standards. d d Require or permit IFRS Including Europe, Russia, Seeking convergence or adoption Australia, New Zealand, and China (via Hong Kong) Extended to UK public sector from 2010 Canada, India, Thailand and Korea from 2011 Malaysia and Mexico from y 2012 Taiwan expected 2012-2014 Japan expected 2016 Image Source: http://www.iasb.org/Use+around+the+world/Use+around+the+world.htm Real Experience. Real Advantage. 6
  7. 7. [ U.S. Readiness and Adoption Plans According to surveys and studies, the majority is not ready Source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx Image Source: http://www.sdn.sap.com/irj/scn/weblogs?blog=/pub/wlg/17764 Real Experience. Real Advantage. 7
  8. 8. [ What will this cost? The SEC predicts that the largest U.S. registrants that adopt IFRS early would incur about $32 million per company in additional costs for their first IFRS prepared annual reports IFRS-prepared reports. This includes both internal and external costs. KPMG estimates over half of implementation cost is IT related Image source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx Real Experience. Real Advantage. 8
  9. 9. [ Adoption versus Transition IFRS 1 (First-Time Adoption) defines the rules of first preparation and offers mandatory and optional exemptions Key concepts: Transition Date: Beginning of earliest period for which full comparative information is presented Reporting Date (a.k.a. Adoption): Closing balance sheet date for first IFRS statements (i.e. first IFRS filing) Dual Reporting: the need f comparative statements d i D lR i h d for i during transition Transition Date Year 1 Transition Date Year 2 Reporting Date (Jan 1, 2013) (Jan 1, 2014) (Dec 31, 2015) Real Experience. Real Advantage. 9
  10. 10. [ AICPA Suggested Timeline AICPA estimates an average 3-5 years is needed to implement Image source: http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf Real Experience. Real Advantage. 10
  11. 11. [ Prospective versus Retrospective Approaches Source: http://www.sdn.sap.com/irj/scn/index?rid=/library/uuid/709e7d45-3ced-2c10-c58e-f24d55e34245&overridelayout=true Real Experience. Real Advantage. 11
  12. 12. [ Learning from the European Experience Council of the European Union first mandated the conversion from national GAAP reporting to IFRS in 2002 for all members. p g Many conversions began in 2005 and additional countries later became subject to the same requirement. European companies generally h d only about t E i ll had l b t two years t to convert to IFRS. Now suffering consequences (focused on accounting and g q ( g reporting quick fixes and deferred business and operations focused solutions) Short-term trade off for complexity and cost of reporting reporting, manual entries and reconciliation in the medium and long term. European experience suggests more time is needed for a more proactive approach ti h Real Experience. Real Advantage. 12
  13. 13. [ Convergence versus Conversion FASB and IASB are currently working on a convergence project with a 2011 deadline. FASB is spending 70% of its time on convergence right now* Definitive SEC decision on whether or not U.S. companies should convert to IFRS is expected in 2011 2011. IASB IFRS 2011 2015??? Convergence Conversion D-Date (Deadline and Decision) FASB GAAP *Source: http://www.complianceweek.com/blog/whitehouse/2010/05/05/fasb-heavily-focused-on-convergence-siegel-says/ Real Experience. Real Advantage. 13
  14. 14. [ The “Latest and Greatest” News from the SEC In February, the SEC: Voted unanimously to continue to move towards IFRS but still no decision on adoption and no corresponding date set. Didn’t rule out the possibility that issuers may be permitted to choose between the use of IFRS or U.S. GAAP. Indicated that the earliest IFRS could be required is 2015. Reaffirmed that a decision will be made in 2011. Agreed to give more periodic public updates starting i O b A d i i di bli d i in October. Withdrew proposed rules that would have allowed early adoption but would reconsider it later. p Defined a work plan to study impacts and adoption readiness. AICPA praised the SEC’s “thoughtful and concrete steps” but did urge th SEC t set a d fi iti IFRS adoption d t the to t definitive d ti date. http://www.journalofaccountancy.com/Issues/2010/Apr/20102658 Real Experience. Real Advantage. 14
  15. 15. [ Financial Consolidation is itself a Convergence Project... ...and so is financial statement presentation... In 2008 the IASB published an exposure draft of a comprehensive replacement of its consolidation requirements p q In 2009 the FASB finalized one aspect of that project that amended and improved US GAAP relating to consolidation of variable interest entities and related disclosures Image Source: http://www.cfo.com/article.cfm/14457783/c_14457851 Real Experience. Real Advantage. 15
  16. 16. [ Real-Life SAP Case Study of Accounting Change Impact Example impact analysis of a FAS 167 (Amendments to FASB Interpretation 46R) which modifies ASC 810 effective for annual periods beginning after 11/15/09 Real Experience. Real Advantage. 16
  17. 17. [ Consolidation Work Plan FASB and IASB in November determined that their standards for consolidation should include objectives and principles for assessing control that would be applied co s ste t y o a consistently for all types of entities and produce globally comparable results. o e t t es a p o uce g oba y co pa ab e esu ts. Goal is for a single IFRS on consolidation replacing the IAS 27 Consolidated and Separate Financial Statements and the interpretation SIC-12 Consolidation - Special Purpose Entities that addresses the following: a revision of the definition of control and related application guidance so that a control model can be applied to all entities. enhanced disclosures about consolidated and unconsolidated entities. Plan includes the issue of the comprehensive disclosure standard in the second quarter of 2010 and a revised consolidation standard in the fourth quarter of 2010. Estimated publication date May M June J 2010 2010 2011 2011 2011 MoU M U Consolidation 2010 2010 Q3 Q4 Q1 Q2 H2+ 1 Joint Consol - Replacement of IAS 27 2 IFRS Consol - Disclosures about unconsolidated IFRS SPEs/structured entities Source: http://www.iasb.org/Current+Projects/IASB+Projects/Consolidation/Consolidation.htm Real Experience. Real Advantage. 17
  18. 18. [ Where is the value in adopting IFRS? Need to make IFRS adoption a defined value opportunity Real Experience. Real Advantage. Source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx 18
  19. 19. [ Piggyback on IFRS demands? Consider piggy-backing on IFRS initiatives to modernize your Financial Consolidation system today for these additional y y considerations: Whatever approach is taken (quick fix or long-term) the Financial Consolidation process will be impacted via IFRS (local versus group policies, tax, reporting, stakeholders and internal control in addition to IT systems). Addressing IFRS with spreadsheets or make-shift approaches Add h dh k hf h represents a compliance risk (e.g. Sarbanes-Oxley) as well creates exposure to restatement risks. Represents a one-time opportunity to “get it right” now for future needs – IFRS will not only impact statutory reporting but also planning, budgeting and management reporting. p g, g g g p g Real Experience. Real Advantage. 19
  20. 20. [ Learning Points What is IFRS and Why Does It Matter? What are the System Impacts and Options? What are the SAP solutions to consider? Real Experience. Real Advantage. 20
  21. 21. [ IFRS and US GAAP Quick Comparison 2,500 pages (IFRS) instead of 25,000+ (US GAAP) Principles-Based Instead of Rules-Based Controversy over whether or not “bright lines” are needed... IFRS GAAP Real Experience. Real Advantage. 21
  22. 22. [ IFRS Differences and Impact to Transactions Examples of how IFRS can impact your transactional and reporting systems (next slide) Real Experience. Real Advantage. Source : http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf 22
  23. 23. [ IFRS Differences and Impact to Reporting Real Experience. Real Advantage. Source : http://www.ifrs.com/pdf/10414-378_IFRS_IT_White_Paper_WEB_FINAL.pdf 23
  24. 24. [ Where to make IFRS-based adjustments? Embedded into Local Top-Side Operations Adjustments Adjustments General Sub-Ledger Consolidation Reporting Ledger Description Feeder Systems Local Subsidiary Group Ledger Reporting and Ledgers Analysis Systems Example E l FI-AA, FI-LA, HR, FI AA FI LA HR FI-GL, FI-SL, EC- FI GL FI SL EC SEM-BCS, SAP FC, SEM BCS FC SAP BW, BI, EPM, BW BI EPM Applications SD, MM, PP PCA SAP BPC XBRL, Excel Example Impact Asset components, Tax reporting, Goodwill New presentation, revenue recognition, reclassifications impairment, disclosures inventory valuation deconsolidation Solutions Additional Parallel Ledgers IFRS Starter Kit IFRS Starter Kit configuration Real Experience. Real Advantage. 24
  25. 25. [ Evaluation IFRS adjustment options General Sub-Ledger g Consolidation Ledger Led er Pros Faster close, Traceable to Less implementation , automation, better y, subsidiary, p effort and impact to data integrity, data decentralized control, upstream systems, details for control, local to group buys time and is reconciliation and reconciliation centrally control management reporting g p g Cons Additional effort and Increased Limited details, error complexity to reconciliation effort prone, increased implement (i.e. “early between sub-systems reconciliation difficulty, adoption adoption” of IFRS) and group, limited group slows financial close details for reporting Impact Long-term and Mid-term with Short-term and not sustainable longevity sustainable Real Experience. Real Advantage. 25
  26. 26. [ Dual Reporting and Cutover Impact Example Pre-Transition Phase Local GAAP Local L l GAAP Group GAAP Group GAAP G Sub-Ledger General Reporting Consolidation Ledger Transition Phase Local GAAP Group GAAP Group GAAP Sub-Ledger General Ledger Consolidation Reporting Group IFRS Group IFRS Consolidation Reporting Post-Adoption Phase ??? Local IFRS Group IFRS Local IFRS Group IFRS General Sub Ledger Sub-Ledger Consolidation Reporting Ledger L d Real Experience. Real Advantage. 26
  27. 27. [ The Account Perspective Different grouping approaches Three account ranges (common, leading and non-leading) non leading) Two account ranges (common and leading versus non-leading) Separate account ranges (requires separate value streams) Different valuations when accounts overlap Same accounting values for same mapped account Different accounting values for same mapped account US GAAP IFRS Account Value Account Value Cash and cash equivalents 20,199  Cash and bank balances 20,199 Inventories ‐ LIFO 25,364 Inventories ‐ FIFO 31,364 Prepaid expenses and other  current expenses 8,955 8 955 Finance lease receivable 198 Real Experience. Real Advantage. 27
  28. 28. [ The Valuation Perspective Dovetails with the account perspective In SAP ERP use of duplicative Special Ledger or a parallel ledger ERP, in “new” General Ledger with separate chart of accounts An alternative is to have separate legal entities (not advised). p g ( ) Legal entities can come into or go out of consolidation scope. Separated (Duplicative) versus Unified (Additive) Approaches US GAAP ‐ LIFO IFRS‐ FIFO Separated Account Inventories  Inventories Value 25,364 25 364 Value 31,364 31 364 US GAAP ‐ LIFO IFRS IFRS‐ FIFO Unified Account Value Adjustment Value Inventories  25,364 6,000 31,364 Real Experience. Real Advantage. 28
  29. 29. [ Example Reconciliation via Unified Approach Image source: http://www.aicpa.org/Research/StudiesandPapers/Pages/IFRSReadinessSurvey.aspx Real Experience. Real Advantage. 29
  30. 30. [ Separated and Unified Approaches in General Ledger Whatever option you choose in your SAP (or non-SAP) general ledger design it will impact your Consolidation design In turn, sub-ledger designs will impact general ledger SAP R/3 mySAP ERP 2004 SAP ECC 6.0 Company C Company Company Classic G Cl General L d l Ledger Codes Codes Codes Special Ledgers Special Ledgers Special Ledgers S i lL d Charts of Charts of Accounts Accounts Charts of Parallel Accounts Parallel Ledgers New General Ledger Ledgers Real Experience. Real Advantage. 30
  31. 31. [ Separated Approach in Financial Consolidation Separate valuations US GAAP - IFRS = IFRS Adjustments Different dimension (category) values ( ) l Enables separate charts of accounts and business rules Data is duplicative Copy local GAAP amounts and top-side adjustments to IFRS valuation IFRS adjustments are entered or loaded (local or top-side) Possible reconciliation challenges Image Source: SAP Real Experience. Real Advantage. 31
  32. 32. [ Unified Approach in Financial Consolidation Within same valuation US GAAP + IFRS Adjustments = IFRS Same dimension (category) value Requires account-based approach in addition to parallel values (mixed approach) Data is additive Local GAAP amounts are entered or loaded IFRS adjustments are entered or loaded (local or ( top-side) Add the two together for IFRS reporting p g Image Source: SAP Real Experience. Real Advantage. 32
  33. 33. [ Financial Consolidation Solution Design Impacts Most financial consolidation packages now are based on flexibly-designed multi-dimensional databases Image Source: SAP Hyperion Fi H i Financiali l Management while based on a relational database is multi multi- dimensionally structured (i.e. relational OLAP or ROLAP) All of SAP’s financial consolidation options are based on flexibly-defined multi-dimensional (or OLAP) database Real Experience. Real Advantage. 33
  34. 34. [ Data Model Impacts Key dimensions to consider in designing a multi-dimensional-based financial consolidation solution for IFRS dual-reporting needs are: Category (e g (e.g. Valuation or Ledger) Account (i.e. Chart ( of Accounts) Image Source: SAP Flow (e.g. Sub- Account or Transaction T T i Types) ) Audit ID (DataSource or Type of Entry) Real Experience. Real Advantage. 34
  35. 35. [ Category Dimension Considerations Used to distinguish actual data from plan data but can be used for different valuation streams Key decision is a separated approach to IFRS (different categories or a unified approach to IFRS (same category) Similar in concept to parallel ledgers in SAP ERP Real Experience. Real Advantage. 35
  36. 36. [ Account Dimension Considerations Similar to GAAP accounts but there will be IFRS differences in presentation format Example IAS1 presentation differences Impact of OCI Classification of liabilities on refinancing Image Source: SAP Real Experience. Real Advantage. 36
  37. 37. [ Flow Dimension Considerations Breaks down the account movement between opening and closing balances on balance sheet accounts g Important for tracking and handling currency translation adjustments in equity Image Source: SAP Real Experience. Real Advantage. 37
  38. 38. [ Audit ID Dimension Considerations Audit ID gives the audit trail from local to consolidated data After adoption, they would need to balance carry-forward into standard Audit IDS Image Source: SAP Real Experience. Real Advantage. 38
  39. 39. [ Financial Consolidations is Impacted No Matter What The key question is whether you can live with top-side adjustments in your existing financial consolidation system It is “pay me now” or “pay me later” at differing degrees Eventually, all systems with any relationship to financials (direct and indirect) will be impacted and need integration rework So, which solution to choose for piggy-backing on IFRS? Strategic Enterprise Management Business Consolidations (i.e. SAP NetWeaver BW-based SEM-BCS) SAP BusinessObjects Business Planning and Consolidation (formerly Outlooksoft) Version for the Microsoft platform Version for SAP NetWeaver SAP BusinessObjects Financial Consolidation (formerly Cartesis) Real Experience. Real Advantage. 39
  40. 40. [ Learning Points What is IFRS and Why Does It Matter? What are the System Impacts and Options? What are the SAP solutions to consider? Real Experience. Real Advantage. 40
  41. 41. [ EPM Starter Kits Free pre-delivered content designed to reduce implementation times by up to 80% and reduce design risk y p g Designed to be comprehensive and meet statutory compliance Reporting examples included Generic application template that still needs customizing Starter Kits Business Best Total Software Services Content Practices Solution Real Experience. Real Advantage. 41
  42. 42. [ IFRS Starter Kits Pre-configured IFRS/GAAP consolidation rules, controls, and calculations Example master data Publishable financial statements End-user documentation Manual data entry guide Consolidation processes Pre-defined Pre defined XBRL mapping Some SAP GRC content Does not yet have pre-defined data mapping pre defined and integration to SAP ERP Real Experience. Real Advantage. 42
  43. 43. [ Dual Reporting for IFRS Adoption Support* Data collection on dedicated audit IDs to differentiate between local GAAP and IFRS data entry and d d d adjustments Ability to post IFRS-specific journal entries to id if gaps i identify Several pre-built consolidation versions for simulating different scenarios i Pre-configured reports for comparing local GAAP and IFRS Complete audit trail of the differences between the two standards *Delivered for SAP BusinessObjects Financial Consolidation Only (At This Time) Real Experience. Real Advantage. 43
  44. 44. [ SEM-BCS is not “Dead” Follows the same support schedule as ECC 6.0 as part of SAP Business Suite Support until 2015 with extended support to 2017 in accordance with SAP ERP maintenance strategy with future alignment IFRS compliance and new functionality is being added and legal changes will be supported Supports Business Combinations II Image S I Source: SAP IFRS3 and IAS27 in Q3 2009 FASB 141R and 160 on or after December 15, 2008 But t th t t i direction f B t not the strategic di ti of SAP A mature product that is not being heavily invested in SAP advises net new customers to consider the other solutions No IFRS Starter Kit is available Real Experience. Real Advantage. 44
  45. 45. [ SAP BusinessObjects Planning and Consolidation Attractive alternative to top-side- adjusted spreadsheets Implementation can be simple or sophisticated as needed Budgeting, Budgeting planning and forecasting in same application as consolidation Core component of SAP strategy Available on the SAP NetWeaver Image Source: SAP technical platform IFRS Starter Ki only available i the version f the Mi S Kit l il bl in h i for h Microsoft f platform The version for SAP NetWeaver will come out later this year y Does yet not explicitly address IFRS adoption scenarios Real Experience. Real Advantage. 45
  46. 46. [ SAP BusinessObjects Financial Consolidation High performance financial consolidation application with added functionality to handle “extended” scenarios* Core component of S strategy C f SAP * Next slides explain more Based on a Microsoft platform Database can be SQL Server or Oracle Also core to SAP strategy Starter Kits support: IFRS US GAAP Image Source: SAP IFRS adoption Good reference and basis for the SAP BusinessObjects j Planning and Consolidation IFRS Starter Kits 46 Real Experience. Real Advantage.
  47. 47. [ “Extended” Example Scenarios... Highly decentralized, heterogeneous environments Lots of subsidiaries spread out of a geography with complex data preparation and submission process With diverse regional requirements with various submission methods that vary by entity or region Handling multiple source systems and databases g p y Lots of transformations and standardization of data is needed W t the ee o significant ata With t e need for s g ca t data validation prior to starting consolidation processing when the source cannot be effectively validated ff ti l lid t d Image Source: SAP Real Experience. Real Advantage. 47
  48. 48. [ ...With Sub-Consolidation Steps... With sub-consolidations, distributed scenarios become more complex thereby driving the need for a financial consolidation application with “extended” functionality extended Image Source: SAP Real Experience. Real Advantage. 48
  49. 49. [The SAP Roadmap as Reference Architecture? Note that SAP owns their roadmap – consult SAP for details (shown only as example) In grey boxes = starter kits | *= future plans ready to use Pre-defined GAAP & IFRS Dashboard/KPIs* dashboards Business Intelligence Group close process Group close process* Process Control Risk Management g embedded XBRL US GAAP & IFRS mapping reporting XBRL Publishing p pre-built group g p close controls and fi pre-configuredd US GAAP & IFRS Actual IFRS Budget* IFRS Forecast* risks monitoring consolidation Transition from GAAP to IFRS* reporting Consolidations ledger ERP and Pre-defined IFRS Local/Group Close Pre-Mapping* consolidation pre- mapping Financial Information Management Pre-built financial reporting roles & authorizations* Pre built Access Control Image Source: SAP Real Experience. Real Advantage.
  50. 50. [ Thank you for participating participating. Please remember to complete and return your evaluation form following this session. For ongoing education on this area of focus, visit the Year-Round Community page at www.asug.com/yrc Edmund Manrique 773.531.6438 [ edmund.manrique@tli-usa.com David Dixon 678.296.7418 david.dixon@tli-usa.com Real Experience. Real Advantage. 50