1IFRSKELLYDAHLBY

8/7/2019 1IFRSKELLYDAHLBY

1/29

Utilities IFRS ConferenceERP parallel reporting implications

Michael Kelly, Partner

17 September 2009


2/29

Table of contents

IFRS impacts on an information technology portfolio and

organizationIFRS considerations parallel accounting

SAP

Oracle

Page 2


3/29

IFRS impacts on the information technologyportfolio and organization

Page 3


4/29

Page 4

High conversion risk and effort; management shouldbegin addressing these items immediately

Medium conversion risk and effort; plan toaddress these issues in the next 6 -12 months

Low conversion risk and effort; plan to addressin the next 12 -24 months

Power and utilities heat map potentialIFRS impact

Financialstatementimpa

ct High

Medium

Low

HighMediumLow

Business impact

Initial assessment of priority

12

34 5

6

7

8

910 11

Heat map items Potential financialstatement impact

Potentialbusinessimpact

Initialassessment ofpriority

1 Regulatory assets High High High

2 Impairment of assets High High High

3 Componentdepreciation

Medium High High

4 Decommissioningliabilities

Medium Medium Medium

5 Derivatives andhedging Medium High Medium

6 Stock-basedcompensation

Low Low Low

7 Leases High Medium Medium

8 Taxes Medium Medium Medium

9 Consolidation High Medium High

10 First-time adoption High Medium High

11 Presentation anddisclosure

High Medium High


5/29

Many areas of information technology maybe impacted by IFRS

Applications COA may be redesigned to handle multi-purpose

reporting ERP applications will require reconfiguration and, insome cases, it may be prudent to upgrade to newreleases

Consolidation systems - allocation tools will need tobe modified

Front office and supporting applications (those thatpost financial transactions) may need to be modifiedto provide key data and metrics

Reports Key financial and operational reports will need to be

modified and new ones developed Many spreadsheets and other end-user computing

sources will require review and modificationData Data input screens may need to be created/modified

to capture additional requirements Data interfaces and middleware may need to be

modified to support new data requirements

Historical data will need to be readied for IFRS, newdata obtained and master data redefinedIT systems and processes Business warehouse structures may need to be

redesigned to account for new data and changes inconsolidation entities

Technical systems architectures (e.g., storage sizing,systems performance) may require modifications

Page 5

General Ledger

Other systemsSource

systems

Consolidationsystem

Impacts throughout the IT landscape


6/29

IFRS considerations parallel accounting

Page 6


7/29

Parallel accounting requirements

When a company first reports results under IFRS, they are required to provide two years of historicalresults in addition to the current results. In total, three years of comparative financial results will bepresented. This requirement also requires the two previous years results to be stated as if always onIFRS.

When converting to IFRS, there are a series of first-time adoption options that may create a differenceof potentially significant effects on the balance sheet. Going forward approximately 95% of thetransactions will be handled the same under US GAAP and IFRS, the remaining 5% of thetransactions/balances are treated differently. These two issues give rise to the concept of parallelreporting-

For example - fixed assets may have a different cost basis for US GAAP than for IFRS, and theassets/components may be depreciated over different useful lives-

Some transactions will be capitalized under IFRS and expensed for GAAP.

Required for both IFRS and US GAAP for a period of time (may extend beyond transition time framefor other reasons):

IAS 1 requires the establishment of an opening balance sheet retroactive to the adoption of IFRS Analysts and other stakeholders may require comparative reporting while they adjust to reporting using IFRS Contractual obligations, such as loan agreements, may require ongoing reporting using US GAAP

Ongoing considerations:

Financial Covenants KPIs and ratios used in contracts willchange potentially impacting compliance and some contractsinclude the requirement of USGAAP accounting

IRS tax compliance IRS has not commented on whatbook basis will be used for tax filings (US GAAP today).

Regulatory Each industry group will have to consider thechange that IFRS will bring and whether or not changes willbe made to regulatory reporting.

Investor Relations The differences between US GAAP andIFRS need to be explained early in the process.

Investors, Customers, Vendors The conversion is toprovide a basis for comparison to other companies stillreporting under US GAAP.

Employees to explain impact of changes in KPIs, metricsand stock based compensation.

Page 7


8/29

Parallel accounting options embedding vs. top-sided adjustments

Page 8

Subsidiary(Sub) Finance

Sub A GLSub A

Sub B

Sub C

Sub B GL

Feeder

Systems

Sub C GL

OperationalDepartments

Subsidiaries closetheir GL & Report

to HQ

You may embed at various levels for different transactions and for differentsubsidiaries with the decision being driven by the cost-benefit.

Feeder

Systems

Feeder

Systems

Embed atReportingPackage

Embed atCOA/GL

Embed atSubledger

Corporate Consolidated Results

CorporateConsolidationProcess & System

US GAAP & IFRS

Financial &ManagementReports

Consolidation Process


9/29

Overview of IT options for parallelaccounting

Page 9

Additional company codes

Create an IFRS company with its own GLby setting it up as an additional companycode (same COA may add additionalaccounts for IFRS purposes).

Pros:

Reporting is driven by companycode change company code forIFRS or GAAP reports.

Company code reporting isflexible.

Cons:

Potential doubling of existingcompany codes for IFRS to trackadjustments.

Manual process

Need to determine if posting fullvalue in IFRS company codeversus differential. If postdifferential add GAAP and IFRScompany codes together toproduce IFRS financials

If posting full values will needto post all transactions to bothcompany codes (notrecommended)

Additional / multiple ledgers

Create an IFRS ledger with its own GLby setting it up as an additional ledgertype for the existing company (sameCOA may add additional accounts forIFRS purposes).

Pros:

Facilitates the dual ledger/ dual

accounting requirement at thetransaction level.

IFRS and US GAAP are keptseparate for easier identification ofany issues in the accounts -reporting.

Cons:

Significant number of extrapostings (both manual andautomated) required.

Essentially data is entered into thesystem twice.

Possible system performanceimpact depending if significantvolume of transactions.

Significant configuration andcustomization of system may berequired.

See full / differential issue for CC

Chart of accounts

Create additional GL accounts in theexisting Chart of Accounts use of arange to represent US GAAPaccounts, common accounts andIFRS accounts.

Pros:

Does not require the creation ofadditional ledgers to account forIFRS information separately from

current GAAP. Managing the chart of accounts is

less intensive from an ITperspective than creating a newledger level.

Incremental add of new accounts

Cons:

Volume of accounts could lead totransaction going to the wrongaccount.

Account ranges may not be

feasible depending on use ofnext numbers.

Account number for IFRSaccounts lack logic to representwhat type of account it is (asset,liability, etc. dependent upondescription)

Full versus differential posting see CC comments in far right box

Full versus differential posting applies to all three scenarios impacts reporting and postingcapabilities.


10/29

Parallel accounting and SAP

Page 10


11/29

Parallel accounting options for SAP

Page 11

mySAP ERP 2004

Parallel ledgers

SAP ECC 6

Additionalcompany code

Special ledger

SAP R/3

Multiple ledgers must be simultaneously maintained for IFRS and GAAP. Variousversions of SAP were designed to support this in different ways.

Additionalcompany code/Special ledger

Chart ofAccounts

Additionalcompany code

Special ledger

Chart of accounts

Chart of accounts

Parallel ledgersNew

GL

C

lassicGL

C

lassicG

L

SAPGL

Two methods are recommended by SAP1) Account-based approach2) Parallel ledgers


12/29

Newest version of SAP provides betteroptions for IFRS conversion

Page 12

Prior versions of SAP SAP ECC 6 recommendations

Key considerations:

Migrating to new GL and parallel ledgers is a large independent effort that is recommended onlyafter migrating to ECC 6. The time to accomplish both will generally be two years (or greater) for

most organizations. In a heterogeneous SAP environment, each SAP instance will require its own conversionstrategy, design, implementation and testing.

Conversion time and effort will be significantly increased when there is a complex IT landscapeand a large number of instances.

Opportunities may arise to consider financial process transformation, master data redesign,spreadsheet elimination, upgrades and instance consolidation prior to conversion.

Special ledger Additional company code Chart of Accounts

All using GL Classic

Parallel ledgers in new GL (mostflexible option)

Chart of Accounts with new or ClassicGL

Alternative methodsAdditional company code

Special ledgerProfit center accounting


13/29

Page 13

Create additional General Ledger accounts in the currentCoA:

Different set of accounts should be created and maintained in the chart ofaccount of the leading company code, for example:

Common accounts

US GAAP accounts

IFRS Accounts

Local GAAP accounts if required

All set of accounts must balance among themselves (separate retainedearning accounts for each set of accounts)

Additional configurations should be considered (i.e.; foreign exchangevaluations, financial statements for each accounting principle, assetaccounting, validations)

US GAAP

Accounts

CommonG/L

IFRSAccounts

Local GAAP

Accounts

One Chart of Accounts

Recommended for clients where: Increased number of GL accounts is not an issue for the leading company code.

Different fiscal year variant is not required.

Migrating to parallel ledgers is not a good option

Have limited approaches to valuation

SAP options or recommendations or approaches forIFRS implementation - Option 1 - Chart of Accountsmethod

Manual postings are entered to the correspondent account.

Additional validations may be required to ensure that no incorrect cross-over posting occur (i.e.; LocalGAAP posting into IFRS accounts)

Manual reconciliations need to be considered for segment reporting. (IAS 8)

May require Report Painter/Writer or ABAP programs to develop specific accounting principle reports.


14/29

SAP options or recommendations or approaches for IFRSimplementation - Option 1 - Chart of Accounts method

Page 14

Companycode

Ref. no. Reportingstandard

Account

B/S I/S

100 1 US GAAP/IFRS PP&E Depreciation

2 US GAAP LIFOinventory

TBD

3 IFRS FIFOinventory

Cost of goodssold

US GAAP trial balance

Ref. no. 1 and 3 = IFRSTrial balance

Ref. no. 1 and 2 = USGAAP trial balance

IFRS trial balance

SAP - General Ledger system

General Ledger

GL has US GAAP, IFRS and local accountsembedded into the system assuming normalreporting processes.

US GAAPAccounts

CommonG/L

IFRSAccounts

Local GAAPAccounts

Generalledger


15/29

Use of Chart of Accounts methodPros and cons

Pros

Low initial set-up costs as the company uses their existing COA to createadditional IFRS Chart of Account values

Easy option for companies with limited IFRS impacts- e.g., single currencyoperations.

This method can be easily migrated to parallel ledgers Limited impact on data volumes (many journal entries are shared)

Cons Account number conversion may be needed if current Chart of Accounts setup

does not allow addition of parallel accounts Higher maintenance costs as transactions impacting more than one area may

need to be entered twice Separate retained earnings accounts will be needed Higher level of adjusting and reversal entries may be required High level of manual intervention will increase the propensity of error and fraud Not conducive for companies with high level of off-shore operations Limited reporting capabilities including segment reporting

Page 15


16/29

Page 16

Use of parallel ledger functionality Parallel Ledger functionality should be configured or the

IFRS ledger should be added.

Configuration of a leading ledger and various non-leading ledgers.

Accounting principles are assigned to the ledgers, andforeign currency valuations are defined to theaccounting principles.

Different asset valuations are managed throughdepreciation areas, and these are assigned to theledgers.

Segment reporting is available through the segmentfunctionality and document splitting. (IAS 8).

Manual postings still need to be included. (i.e., taxes).New G/L

MM

SDPP

FI-GL

FI-AR

FI-AP

IFRSLedger

US GAAP

LocalGAAPAllledgersareupdate

d

FI-AA

FIPostings

OnlySpecifiedLedgersare

updated

ForeignValuations

Accruals and Work In Process (WIP) is managed through valuation methods and versions, and these are assignedto the accounting principles.

Provisions and manual postings are performed simultaneously or to separate accounting principles. Only the CO-related postings in the leading ledger are transferred to CO.

Inventory valuation can be configured with an alternative valuation costing method.

Inventory differences will be issued in a report and manual entries can be posted in a different ledgers.

Automated inventory postings are managed by creating alternative valuation areas. Alternative price fields on thematerial master record are needed.

SAP options or recommendations or approaches forIFRS implementation - Option 2 - parallel ledgers


17/29

Page 17

Use of parallel ledger functionality

Profit center master data and hierarchies still apply for parallel ledger functionality. Profit center accounting is not required to be activated in the parallel ledger.

CO-PA ledger is not replaced by parallel ledger functionality (CO-PA is normallyused for segment reporting for margin analysis).

Standard reports are executed by the leading and non-leading ledger.

Data volume increases as a result of maintaining parallel ledgers1.

Recommended for clients where:

Increased number of GL accounts is an issue for the leading company code.

Different fiscal year variant is required.

mySAP ERP 2004 (support package 10) or above is the main ERP application.

Plans to upgrade or migrate in the short or long term.

(1) SAP advises that if the number of entries in the new GL total records table is lower than 10 million, thereusually are no performance problems. If the number of entries exceeds this value, SAP recommends that youupdate the ledger in separate table groups.

SAP options or recommendations or approaches forIFRS implementation - Parallel Ledger (Cont'd.)


18/29

Use of parallel ledger functionalityPros and cons

Pros Low maintenance costs as transactions with all impacting areas are auto-entered separately in each parallel

ledger Low level of manual intervention will decrease the propensity of error and fraud. Conducive for companies with complex COAs and high level of off-shore operations Easy reporting (including better segment report), good controlling features and effective monitoring capabilities Standard integration of primary ledger in real time with CO, reconciliation ledger does not need to be

maintained. (CO to FI was previously not possible) Easier reconciliation of reports at the consolidation level Low level of adjusting and reversal entries needed

Good for companies that have already upgraded to 6.0 No additional accounts (or balance sheet and P&L statement structures) Ledger groups can be used to minimize posting overhead Various fiscal year variants can be mapped Consistent with SAP future directions

Cons High initial set up costs as the company may need to upgrade to ECC 6

Migration to new GL is a long process that should occur only after fiscal year-end. It is not recommended to migrate to ECC 6 and parallel ledgers simultaneously; mitigation to both would typically

take at least two or more years. Companies are required to decide upon and configure a leading ledger - which may initially be GAAP, resulting

in a need to perform a second migration to IFRS SAP has not yet committed to a migration scenario that will change a leading ledger from GAAP to IFRS Increased data volume due to additional ledgers

Page 18


19/29

But there are still challenges with parallelledgers

Leading ledger: A leading ledger (GAAP or IFRS) must be defined. Once set, this cannotcurrently be changed (i.e. If US GAAP is set as the leading ledger today, it cannot bechanged to IFRS in 2014).

Controlling (CO) reporting: The CO module only references the leading ledger, so howare comparatives produced?

Project Systems (PS) assets: Assets are attributed to projects via the PS module. This islinked to CO and therefore the leading ledger. If the leading ledger is set to IFRS priorto 2013, how will asset depreciation for both US GAAP and IFRS be managed?

Company codes: The leading ledger is set at the instance level and will apply to allcompany codes. This may be a challenge for companies that have multiple countriesand reporting requirements under a single instance.

SAP has recently issued new patches that provides work-arounds for a few of these issues(BADI) but there are limitations.

Page 19


20/29


21/29

IFRS compliance under different Oracle E-Business Suite(EBS) versions

Page 21

11i

Other considerations

R12

Option 1: use ofadditional IFRS

company code toaccount for IFRS

transactions

Option 2: use of sub-accounts segment

dependent on naturalaccount segment

Option 4: use of newmulti-ledger

functionality to createGAAP and IFRS

ledgers

Option 3: use of MRCfunctionality to createan IFRS SOB linked

to a GAAP SOB

Parallel accounting, reconciliation and effective GAAP/IFRS reporting

Re-training issues Future upgrade considerations / complexity

Interfaces

Data management

Upgrades Business continuity / Disaster recovery plans

Changes to support organization Changes to IT and business controls

Reporting

Data cleansing and integrity

Security


22/29

Use of sub-accounts segment dependent onnatural account segment - Option 2

Page 22

Use the sub-account segment to automate postings: Use the same set of books and chart of accounts Define the sub-account segment to be dependent on the natural account segment Create sub-account segment values for GAAP and IFRS

Natural Accounts xx.xxx.xxxx.XX (XX values being GAAP & IFRS) US GAAP sub-Account xx.xxx.xxxx.GAAP IFRS Sub-Account xx.xxx.xxxx.IFRS

Define separate roll-ups for GAAP and IFRS sub-account in order to report on GAAP and IFRS separately Manual adjustments to IFRS roll-up values may be required Financial Statement Generator (FSG) reports will be need to reports of sub-account level activity Manual reconciliations need to be considered for segment reporting

Recommended for clients where: Use of sub-account functionality is not an issue Doing a COA re-structure is not an issue

Increased number of GL accounts is not an issue, one COA is used May consider upgrading to R12 in the short term


23/29

Use of sub-accounts segment dependent on naturalaccount segment - Option 2 pros and cons

Pros Lower transaction entry costs as transactions with all impacting areas will need tobe entered once with the parallel impact for IFRS and GAAP

Better reporting capabilities than Option 1 Use of the existing COA and GL

Cons Higher initial set-up cost than Option 1 as this will require a re-structuring the COAin order to use the sub-account segment functionality

High level of manual intervention for adjustments may increase the propensity oferror and fraud

High level of manual reconciliation may be required Not conducive for companies with high amounts of international operations

Page 23


24/29

Use of new IFRS ledger set, ledger and SLA to gain dualaccounting, auto adjustments and reconciliation - Option 4

Page 24

Use of new multi-ledger functionality ledgers and ledger sets Configure separate IFRS adjusting and GAAP ledgers within an IFRS Ledger set

Accounting principles assigned to the ledgers are defined to the accounting principles through configuration in theSub-Ledger Accounting (SLA) engine

SLA accounting is configured to enter GAAP transaction in the GAAP ledger and the IFRS adjustments with the GAAPtransactions in the IFRS adjustment ledger. SLA functionality should be configured to link IFRS and GAAP ledgersand therefore will be able to automated the process of reconciliation

IFRS reporting done out of the IFRS ledger and the GAAP reporting done out of the GAAP ledger; FSG will need to beconfigured

Different asset valuations are managed through depreciation areas, and these are assigned to the different ledgers

(That intelligence can be configured within the SLA engine) Provisions and adjustment postings are performed simultaneously and to separate accounting principles that

intelligence can be configured within the SLA engine)

Inventory valuation can be configured with an alternative valuation costing method that intelligence can be configuredwithin the SLA engine)

Accruals and WIP are managed through valuation methods and versions, and these are assigned to the accountingprinciples

Recommended for clients where:

R12 is already implemented An upgrade to R12 is underway


25/29


Page 25

New IFRSLedger Set

Sub Ledger

Use of NEW IFRS Ledger Set

NEW IFRS LEDGER SET

US GAAPLedger

IFRSAdj. Ledger

Sub LedgerAccountingDr Cr

Sub Ledgertransaction

GAAP REPORTING IFRS REPORTING

STDCalendar

USD($)

GAAPRules

STDCOAACCTG

Rules STDCalendar

USD($)

IFRSAdjs.

STDCOA

Purchased Planeprice: $600K

Dr Cr

Example of Transaction

GAAP REPORTING IFRS REPORTING

US GAAP IFRS

Airplane Dr. 600Payables Cr. 600

Fuselage Dr. 300Engines Dr. 200Wings Dr. 100Airplane Cr. 600


26/29


Pros Low transaction entry costs as transactions with all impacting areas will be auto-entered

separately in GAAP ledger and IFRS ledger Automation in reconciliation and adjustments and better reporting of differences Very low level of manual intervention by way of adjustments will decrease the propensity of

error and fraud. Easy reporting (including better segment report), good controlling features and effective

monitoring capabilities Good for companies in the process of upgrading to R12., (i.e. get it right and get it right the

first time) Low level of adjusting and reversal entries needed Easier reconciliation of reports at the consolidation level

Cons High initial set-up costs as the company will need to upgrade to R12, create multiple ledger

sets and ledgers. Required to configure new ledgers GAAP and IFRS account rules/principles within the SLA

engine

Page 26


27/29

What other challenges await?

Support from Oracle All support officially ended on 30 June 2008 for 11.5.9 and premiersupport will officially end on November 2010 for 11.5.10 (Source: Oracle Corporation)

All companies are expected to be on R12 by end 2011 (as even extended support for11.5.10 will end November 2011; Source: Oracle Corporation)

Cost and effort to upgrade to R12

Restructure the CoA for parallel accounting standards

Determine new posting logicConfigure method for both manual and automatic postings (including account

determination procedures) to fulfill business requirements and to be IFRS compliant

Determine reporting system and map system data, considering number of bolt-on systems

Page 27


28/29

Considering an upgrade to R12 Link toSEC Roadmap

Based on the SECs proposed Roadmap, it is expected that companies may be required to reportusing IFRS beginning in 2014 and after (based on the filing status of the company) with two years

of comparative financial information and an IFRS-compliant opening balance sheet Detailed considerations include:

Assessment of the system and process impacts on reporting and consolidation systems Determination of changes required to source systems to provide additional data (e.g.,

supplemental disclosures) Develop understanding of the impact on other strategic initiatives in your organization (e.g.,

FSCP process improvement, new ERP system roll-out, etc.) Need to implement new procedures to support business as usual IFRS reporting

US registrants need to consider the Sarbanes-Oxley Act (corporate governance) requirements forinternal control reporting, including financial reporting controls

We have seen organizations plan to combine the R12 upgrade and chart of account restructuringsimultaneously to avoid duplicate efforts during IFRS implementation:

All Oracle support for 11.5.9 officially ended on 30 June 2008 and premier support willofficially end on November 2010 for 11.5.10 (Source: Oracle Corporation)

All companies are expected to be on R12 by the end of 2011 (extended support for 11.5.10

will end November 2011 (Source: Oracle Corporation) Configure method for both manual and automatic postings (including account determination

procedures) to fulfill business requirements and to be IFRS compliant

Page 28


29/29

Break

Page 29

1IFRSKELLYDAHLBY

Documents

Transcript of 1IFRSKELLYDAHLBY