This first series of four blogs is dedicated to handling IFRS adoption for consolidated statements. They provide an overview of a new SAP "How-to guide" called "IFRS Adoption in Consolidated Statements using SAP® BusinessObjectsTM Financial Consolidation, star.... The objective is to bring practical guidance to end-users in order to manage successfully all the issues raised by the adoption of IFRSs and to get the maximum benefit from SAP® BusinessObjectsTM Financial Consolidation. The blogs will cover:
In IFRS Adoption In Consolidated Statements – Part 1, we explained that IFRS adoption can be achieved through either a transition approach or a convergence approach. Whatever approach is chosen, we will focus in this second blog on the issues raised by the application of the retrospective method in the financial reporting systems.
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Financial and non-financial indicators
The indicator is a key entry point in a financial reporting system. Indicators are grouped together into a chart of accounts and reflect all of the financial and non-financial information to be published for legal or management purposes.
When comparing local GAAP and IFRS, the following questions are critical:
Local GAAP and IFRS requirements can cause much critical mapping work, following situations may occur:
This can be illustrated in the chart below:
After having performed the analysis, we have to choose between the following solutions:
Consolidated financial statements
The financial reporting system must enable the entity to publish:
When applying IFRS1, it is mandatory to publish financial statements according to IAS 1 "Presentation of financial statements". The main requirements are as follows:
Local GAAP financial statements may differ from IFRS requirements, both on data indicators and on publication format.
Consolidation scope
The consolidation scope groups together all entities that must be included in the consolidated financial statements. This consolidation scope can change depending on the consistency of the previous-GAAP requirements to those in IAS 27 "Consolidated and Separate Financial Statements". The financial reporting system must enable the entity to manage at least two versions of the consolidation scope for the transition period in order to produce sets of consolidated financial statements for the local GAAP and the IFRS.
Adjustments
When applying IFRS 1, lots of adjustments are required to move from local GAAP to IFRS with four mandatory exceptions and sixteen optional exemptions. These adjustments should be recognized directly in retained earnings or, if appropriate, in another category of equity at the date of transition to IFRS.
The types of adjustments required by IFRS 1 are:
Support of local GAAP and IFRS consolidation data
The entity will have to maintain consolidated data during the transition period of one or more years according to the different standards.
To produce two sets of consolidated data on a same period, two main approaches can be envisaged:
The amount is entered for "Standard 1" and then "Standard 2 adjustment" is posted. The sum of the two amounts produces the "Standard 2 value".
Using two reporting frameworks at the same time creates timing issues:
Reconcilable Results
In order to comply with IFRS 1, the financial reporting system must enable comparison between each reporting standard during the dual reporting period and propose audit trails to improve the understanding of the changes.An entity shall explain how the transition from GAAP to IFRS affected its reported financial position, financial performance and cash flows (IFRS 1 §23).
Managing an IFRS transition in the financial reporting system implies being able to move from the local GAAP to IFRS at one date. As we have seen in the Blog 1 examples, at the end of the year 2010 the entity will have to manage and publish a local GAAP set of consolidated data. At the end of the year 2011, the entity will have to manage and publish an IFRS set of consolidated data with 2010 IFRS comparative data.
The financial reporting system must be able to manage this change safely. IFRS adoption will involve the whole organization at both corporate and subsidiary levels (financial accounting, management accounting, tax, IT, and auditors) and can require software and hardware upgrades. This is a huge project for the entity. Implementing a new financial reporting system enabling clients a smooth transition to IFRS at the lowest cost is key.
Subsequent IFRS Adoption In Consolidated Statements – Part 3 will explain how SAP solutions can ease the IFRS transition.
Acknowledgements to Fabienne Rojo, Patricia Meteil-Dutartre and Laetitia Lamoureux from the EPM SK&I team for their high contribution to the "How-to guide" paper.
Your comments about the contents are very welcome. Let us know what you wish to write about.
International Financial Reporting Standards (IFRS)
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