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 Those standards continue to be in force to the extent • Revenue recognitionthey are not amended or withdrawn by the IASB.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