1. IBM Global Business Services Financial Management
White Paper
Supporting IFRS Compliance with
Oracle E-Business Enterprise
Resource Planning System
2.
3. IBM Global Business Services 3
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 of the standards forming part of IFRS are known by the
older name of International Accounting Standards (IAS). IAS
were issued between 1973 and 2001 by the board of the
International Accounting Standards Committee (IASC). In
April 2001, IASB adopted all outstanding IAS issued by the
IASC. Those standards continue to be in force to the extent
they are not amended or withdrawn by the IASB. The new
standards issued by the IASB are known as IFRS. The term
IFRS, used collectively, refers to both IAS and IFRS.
IFRS standards are destined to become the world’s common
financial reporting language for investors, analysts and regula-
tors. The overriding advantages to the participants of global
IFRS adoption is to permit better comparability of like entities
anywhere in the world, as well as better access to international
capital, funding and investment opportunities.
The adoption of IFRS standards requires high-quality,
transparent and comparable information, and is welcomed by
investors, creditors, financial analysts and other users of
financial statements. A broad range of potential high impact
areas are summarized in the following 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
•
Hyperinflationary accounting/FX
•
Leases
•
Government grants
•
Fair value
•
This document is the first in a series of multiple white papers
planned to address the IT impacts of the key topics stated
above. The focus of this paper is on handling the IFRS
property, plant & equipment (PP&E) requirements, as well as
parallel reporting needs for companies using Oracle
E-Business Suite as their ERP system.
4. 4 Supporting IFRS Compliance with Oracle E-Business Enterprise Resource Planning System
IFRS - Beyond changing the numbers
The move to IFRS is far more significant than just changing
certain accounting practices in the finance organization. It has
far reaching impact on how you measure your business, such as
the P&L and balance sheets. It also impacts how you manage
your business (budgeting and forecasting, product pricing,
operational processes, IT systems and internal controls).
In order to apply the new accounting principles and to meet
the reporting and disclosure requirements, organizations have
experienced significant impact on processes, systems and
people within the finance function, and in operational func-
tions that provide transactional information to finance.
On the other hand, the adoption of new accounting principles
will lead to changes in the financial results of companies and
will have related tax implications. This can have ripple affects
on risk reporting, management reporting, budgeting, forecast-
ing, product pricing and employee benefits.
Lastly, the adoption of IFRS will require impacted enterprises
to perform parallel reporting in IFRS and the existing
Generally Accepted Accounting Principles (GAAP) for a
period of at least one year before the final change-over date.
This not only requires multi-GAAP accounting and reporting
capabilities in the finance systems, but places an additional
requirement for critical and knowledgeable resources.
Process redesign
Systems scalability
& architecture
Organization design
Product design &
pricing
Regulatory
Reporting
• Do ledgers and business systems
contain the necessary data and if
so, how are they provided?
• How many adjustments are
necessary to meet the additional
requirements arising from IFRS?
• Is there a sufficient number of
suitable and trained employees
working in the right position?
• Will profitability be sustained
under the new regulations?
• What impact will IFRS have on
regulatory requirements incl. tax?
• Which processes must be
changed to capture and report
new data?
Compliance
Requirements
• How will the new
reporting
requirements be
applied?
• What additional
information will be
required?
• What are the wider
implications on how
the business is
managed?
• What are the impacts
on P&L and Balance
sheet?
Profitability &
Solvency
• What impact will the
implementation of IFRS have on
the P&L and the balance sheet?
IFRS
Business
Implications
Data availability
5. IBM Global Business Services 5
Assessing the Impact
The first step towards a successful IFRS transition is a robust
impact assessment phase for a high level understanding of the
accounting affects of IFRS, which are further translated into
impacts on processes, systems and data. The impact assessment
phase should cover a reasonable level of detail, as differences
that appear relatively minor could cause a significant impact.
Further, addressing collection of additional data as required by
IFRS should commence at the earliest, so that integrity of
IFRS numbers can be assessed and improved.
Based on our experience with organizations in Europe, a
significant part of the IFRS conversion effort went towards IT
implementation. In particular, the core accounting or enter-
prise resource planning (ERP) systems underwent significant
change. This paper aims to provide an appreciation of certain
major IFRS impact areas, and the potential approaches for
companies using Oracle E-Business Suite.
Parallel Reporting
IFRS transition requires parallel reporting in local GAAP and
IFRS for at least one year. Multi-GAAP accounting functionality
is required and needs to be implemented in the ERP system.
Oracle E-Business Suite supports this transitional requirement
of parallel reporting per IFRS standards, and local GAAP rules
through various ledger related features, such as the global
consolidation system or sub-ledger accounting approaches.
The descriptions highlighted below are two of the more
common ways that Oracle E-Business Suite can be configured
to meet the need of parallel reporting as required under IFRS
standards.
Global Consolidation System Approach
This is a general ledger specific method to achieve parallel
reporting requirement both in local GAAP and IFRS. For an
organization currently using Oracle E-Business and where the
sub-ledgers and the general ledger (GL) are local GAAP
compliant, a consolidated ledger needs to be created for IFRS
reporting. Any IFRS adjustments are posted as journal entries
into the consolidated GL. Standard functionality, such as
allocations and recurring journals, can be utilized to create and
post journals directly into the consolidation GL. Since the IFRS
GL is different from the original local GAAP GL, the IFRS
adjustments will only be applicable to the consolidation GL.
This approach is perhaps the easiest way to handle the IFRS
adjustments. Most organizations who currently handle multiple
GAAP requirements will be familiar with this approach.
However, since IFRS has some fundamental differences
compared to most countries’ GAAPs, the calculations and
adjustments could be tedious and time consuming and may
have to be manually done. Organizations that are time
constrained to move to IFRS reporting may use this as an
interim solution before making more extensive system changes
required by IFRS.
Sub-Ledger Accounting Approach
Oracle introduced a new functionality called sub-ledger
accounting in Oracle E-Business Suite R12. The functionality
enables building specific rules and implementing conditions in
sub-ledgers such as payables, receivables, and assets.
Using this functionality, it is easier to map between the local
GAAP sub-ledgers and the IFRS sub-ledgers and facilitate
6. 6 Supporting IFRS Compliance with Oracle E-Business Enterprise Resource Planning System
parallel reporting to meet both requirements. As the rules are
built at the time of the configuration of the system, this
approach will automate the process of parallel reporting to a
major extent.
Each of the parallel sub-ledgers will automatically pass the
accounting data to the respective GL. As such, during the
period close, the requirement to post GAAP adjustment entries
will be vastly reduced.
Since the sub-ledger accounting functionality is not available
in releases prior to R12, organizations on earlier versions of
the Oracle applications may have to either upgrade to R12 or
use the global consolidation system approach until they are
able to upgrade.
Property Plant and Equipment
IFRS prescribes rules regarding the recognition, measurement
and disclosures relating to property, plant and equipment
(often referred to as fixed assets) that would enable users of
financial statements to understand the extent of an entity’s
investment in such assets and the movements therein.
Key Differences between U.S. GAAP and IFRS
Componentization of assets
Physical assets may have various significant subcomponents.
Under existing local GAAPs, such assets have been treated as a
single asset. However; under IFRS, these components should
be recognized, tracked and depreciated separately.
Basis of valuation of an asset
IFRS provides an option to use either revalued amount or
historical cost as a basis for measurement. Revalued amount is
fair value at the date of revaluation less subsequent accumu-
lated depreciation and impairment losses. Under the U.S.
GAAP, use of revalued amount is not permitted.
Change in depreciation method based on the useful life of
individual components
Under IFRS, each component of a physical asset must be
depreciated separately depending on its useful life.
7. IBM Global Business Services 7
The Impact
# Key Difference Impact How to address in Oracle
1 Difference in the value of an
asset due to different
accounting methods under
different accounting
standards
The value of one asset could be different
within IFRS, US-GAAP statutory accounts,
fiscal accounts. Assets therefore may have
multiple valuations.
Multiple tax books or corporate books (primary asset book) can
be defined to track asset cost differently based on different
accounting conventions.
2 Componentization of assets Companies must define significant
components of existing assets as individual
assets. These components must be
depreciated separately, depending on their
individual useful lives.
Componentization can be handled through multiple ways in
Oracle Assets. These are some of the options available:
• Parent-child assets: This functionality in Oracle Assets can be
used to define each component uniquely and as a part of the
parent asset. Depreciation rules for each of the separately
identified components can be configured for its estimated useful
life.
• Tax books - to report on local GAAP where the corporate book
(primary asset book) will cater to IFRS standards
• Asset key flex-field – utilizing multiple segments including
dependent segments
• Multiple corporate books – utilize multiple corporate books
rather than multiple tax books to split out the assets
Each of the above options has their own pro and cons and the
final solution will depend on each organization’s unique
requirements.
3 Change in asset’s useful life If the estimate of the asset's useful life
changes, the depreciation charge must be
adjusted for the current and future periods.
Oracle allows increasing or decreasing the life of an asset after the
depreciation process is executed. Accordingly, the depreciation
will be adjusted for the current and future periods.
4 Change in depreciation
method
If the depreciation method changes due to a
change in the expected pattern of benefits,
the depreciation charge for the current and
future periods should be adjusted.
Oracle allows changing the depreciation method. This can be
done at the asset category level. Accordingly, the depreciation
will be adjusted for the current and future periods.
5 Updating fair value of assets IFRS provides an option to use either
revalued amount or historical cost as a
basis for measurement. Revalued amount is
fair value at the date of revaluation less
subsequent accumulated depreciation and
impairment losses.
Fair value cannot be determined within the Oracle system. The
amounts must be determined externally at every reporting date
and updated in the system.
8. 8 Supporting IFRS Compliance with Oracle E-Business Enterprise Resource Planning System
Impairment of Assets
Key Differences between US GAAP and IFRS
Systematic Identification of Impairment Losses
If there is an indication that an asset may be impaired, then the
asset’s recoverable amount must be calculated. [IAS 36.8]
Accounting and Calculation Requirements for Impairment
Losses
Under IFRS, impairment is recorded when an asset’s carrying
amount exceeds the higher of the asset’s value-in-use (discounted
present value of the asset’s expected future cash flows) and fair
value less costs to sell. Under US GAAP, impairment is recorded
when an asset’s carrying amount exceeds the expected future cash
flows to be derived from the asset on an undiscounted basis.
Accounting and Calculation of Reversal of Impairment
Losses
Subsequent reversal of an impairment loss is required for all
assets (other than goodwill) under IFRS. Reversal is limited to
the extent of the written down value of the asset, whereas under
US GAAP, any reversal of impairment loss is prohibited.
Identifying Cash Generating Units
IFRS introduces the concept of a cash generating unit (CGU).
The CGU is the smallest identifiable group of assets that
generates cash inflows from continuing use, and is largely
independent of the cash inflows from other assets or groups of
assets. US GAAP does not prescribe any CGU concept.
The Impact
# Key Difference Impact How to address in Oracle
1 Systematic identification and
calculation of impairment
losses
Identify indications for impairment and
determining impairment loss.
• Impairment losses or expense is the difference between carrying
amount and net selling price.
• Carrying amount is the calculation of Cost – (accumulated
depreciation + current period depreciation) – previous
impairment expense.
• The net selling price and fair value are entered when processing
the impairment, and they will then be kept in the system until the
impairment is deleted. The carrying amount is calculated and
always maintained in the system.
• Oracle also provides functionality to upload impairment losses
calculated outside Oracle Assets.
2 Accounting requirements for
impairment losses
An impairment loss should be recognized
whenever recoverable amount is below
carrying amount.
Oracle provides the necessary fields to capture impairment.
Impairment accounts can be set up in assets to account for the
impairment losses.
3 Accounting requirements for
reversal of impairment losses
Subsequent reversal of an impairment loss
is required for all assets (other than goodwill)
under IFRS.
Oracle provides a functionality to roll back any impairment losses.
There are certain limitations to this functionality, especially when
the impairment is in posted status.
4 Cash generating units Under IFRS, assets must be assigned to
cash generating units where required.
CGUs will likely be different from the current
reporting units in use, and will need to be
defined separately.
Assignment of assets to CGUs is standard functionality in Oracle.
Assets can be assigned to CGUs individually or as a group.
9. IBM Global Business Services 9
IBM’s Methodology
IBM’s Oracle implementation methodology augments Oracle’s
AIM (Application Implementation Methodology) with IBM
intellectual capital and reusable assets. It allows flexibility to
incorporate the associated IFRS building blocks as per the
specific project needs.
The methodology provides a full set of management tools and
accelerators for Oracle implementations. Beyond the basic
requirements to configure, test and implement the Oracle
E-Business Suite, IBM’s methodology also provides tools and
templates for key project processes such as:
Documentation templates
•
Issues and escalation management process
•
Risk management process and templates
•
Project change request process
•
10. 10 Supporting IFRS Compliance with Oracle E-Business Enterprise Resource Planning System
How can IBM help?
IBM is a Business Services Partner with unmatched breadth
and depth. We bring unique benefits to our clients, which are:
IBM’s IFRS transformation: IBM’s own IFRS transition is
•
generally accepted as the gold standard for adoption, and our
intellectual capital leverages this experience. So, IBM can offer
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 offer much more than just a
technical list of IFRS versus local GAAP differences, and it
can take advantage of lessons learned.
Global scale and reach: Teams based in over 40 countries and
•
more than 4,100 specialized business and technical consultants
worldwide
Auditor independence: Independence from audit firms means
•
no restrictions by independence rules throughout the project
lifecycle. We can also work effectively with your professional
advisors.
Flexible solutions and delivery model: We can handle a
•
complex IFRS conversion as part of an overall finance
transformation program, or as a more straightforward
individual program tailored around the very specific IFRS
requirements. We have flexible delivery models, and leverage
offshore resources to achieve higher cost efficiency and value.
ERP market leader: IBM offers unrivalled strengths in
•
technology and transformational consulting, while being the
preferred partner for large ERP vendors’ IFRS solution.
IBM also offers marketing leading ERP points-of-view. This
paper is the first in a series on the subject of handling IFRS
impacts in Oracle E-Business Suite.
11. IBM Global Business Services 11
For more information
Please contact your IBM representative or visit:
ibm.com/gbs
