GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches

Author: Brian Lewis and Julissa Gonzalez Published: January 2013 www.eprentise.com

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches The Problem: GAAP, IFRS and Regulatory Reporting Prior to Oracle E-Business Suite (EBS) Release 12 (R12), there were no easy solutions for reporting on a different accounting basis other than that of the primary set of books. Tax and regulatory, GAAP, and IFRS reporting required a significant transformation of trial balances from the primary ledger accounting basis. You could have created an Oracle General Ledger (GL) Consolidation that allowed you to map to a different chart of accounts or currency, but it would not have included the transaction detail of the subledgers, making reconciliation a time-consuming process. Multiple Reporting Currencies (MRCs) allowed you to transact in one currency and then automatically translate to another currency for your corporate reporting, but there were no standard reports to reconcile from the primary set of books to the reporting set of books. Outside reporting tools could have been used; but again, there was a loss of transparency because the manipulations and adjustments to generate the necessary reports were maintained outside of EBS. Of the limited options available, the most commonly practiced is what is referred to a spreadsheet dump a method where the period end-trial balance is first exported into Excel and then manipulated within the spreadsheet. Yet, despite its routine usage, this method is fraught with risk. According to a PwC study, more than 90 percent of corporate spreadsheets have material errors in them.2 Worse, estimates suggest that such errors cost between $10,000 and $100,000 per error, per month. Although there are a variety of data validation tools and methods that can be applied to reduce such blunders, they tend to add to the complexity and time needed to sustain the spreadsheet. All errors aside, the real cost of using the spreadsheet dump method is in fact the staff time retaining, reviewing and revising those spreadsheets. And heres the hook it isnt one spreadsheet; it can turn into hundreds of files. There could be a multitude of dependencies between spreadsheets where a number in one is derived from another or multiple other spreadsheets. The cost of maintaining many spreadsheets can get a bit staggering. Realistically, there is no way to completely eliminate spreadsheets, but minimizing their use can reduce reporting costs and risk. So whats the alternative? The Solution: Secondary Ledgers Secondary ledgers, which were first introduced in R12, can drastically reduce the number of spreadsheets used, and will therefore lessen the amount of time and effort that goes in to setting up a consolidating ledger for routine reporting. Secondary ledgers, as stated in the Oracle Financials Implementation Guide, 2 represent the primary ledgers accounting data in another accounting representation. In other words, the secondary ledger is an optional, additional ledger that is associated with the primary ledger for an accounting setup. Secondary ledgers can be used to represent your primary ledger's accounting data in another accounting representation that differs from the primary ledger in one or more of the following ways: (1) chart of accounts; (2) accounting calendar/period type combination; (3) currency; (4) subledger accounting method; and (5) ledger processing options. To illustrate some uses for the functionality of secondary ledgers, this white paper will give examples of accounting for differences between US GAAP and IFRS, as well as the differences between GAAP and FERC (the Federal Energy Regulatory Commission). US GAAP and IFRS may require that balances and/or

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches transactions be treated differently in many instances. FERC requires that periodic balances and transactions be reported on a very different basis than GAAP. The Four Types of Secondary Ledgers You can maintain secondary ledgers at one of four levels of detail: (1) balance level; (2) journal level; (3) subledger level; and (4) adjustments only secondary ledger level. Balance Level Secondary Ledgers The balance level secondary ledger maintains primary ledger account balances in another accounting representation. This type of secondary ledger requires the use of GL Consolidation to transfer primary ledger balances to this secondary ledger. Balance level secondary ledgers are useful if no adjustments are needed to the primary ledger other than to the basis of presentation (e.g., chart of accounts, calendar end date differences, currency differences, etc.). It is important to note that there is no drill-down to journal entries or subledgers with this type of secondary ledger; therefore, there is no transparency in underlying transactions. Additionally, the balances exist at reporting period dates only, meaning that this ledger is not continuously updated, but rather is updated on a continual basis only when the balances are populated using GL Consolidation. The US GAAP and IFRS income statements below serves as an example of a case where balances may need to be presented in a different basis.

US GAAP allows a lot of leeway in the naming of account captions, but prescribes either a multi-step format or a single-step format. IFRS has certain required account captions, but does not prescribe either the multi-step or single step format. If no adjustments are required other than the format, a balance level secondary ledger might be ideal for dual US GAAP/IFRS reporting.

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches Journal Level Secondary Ledgers The journal level secondary ledger maintains journal entries and balances in an additional accounting representation. This type of secondary ledger is generated using the General Ledger Posting program. Every time you post a journal in the primary ledger, the same journal can be automatically replicated and maintained in the secondary ledger for those journal sources and categories that are set up for this behavior. Unlike balance only secondary ledgers, journal level secondary ledgers allow adjustments. In fact, you can have this secondary ledger duplicate adjustments made to the primary ledger (except on a different accounting basis), providing limited transparency and drill-down. Journal level secondary ledgers are a powerful tool when a different accounting basis is needed but with journal entry (JE) drill-down. The example below is an accounting example in FERC.

Since the costs used for rate determination are highly regulated by FERC, certain interdepartmental sales that would normally be eliminated for financial reporting may be included. Looking at the FERC accounting example above, a journal level secondary ledger could allow you to book eliminating journal entries to your primary ledger, but those same journal entries would be duplicated in such a way in the secondary ledger that it would affect the FERC reporting inclusion. Therefore, an adjustment (interdepartmental sales elimination) is made to the primary ledger. A duplicate adjustment is then made for the journal level secondary ledger (except on a different accounting basis). The result is a secondary ledger with balances that also allows drill down to underlying adjustments. Subledger Secondary Ledgers The final full accounting representation is the subledger level secondary ledger the most transparent of the secondary ledgers. The subledger level secondary ledger uses both subledger accounting and the General Ledger Posting program to create the necessary journals in both the primary, secondary, and subsidiary ledgers simultaneously. Subledger accounting creates the journal entries from subledger transactions that integrate with it. General Ledger Posting creates the journal entries for all other transactions that dont integrate with subledger accounting, including manual journal entries.

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches

The subledger level secondary ledger includes the functionality of the balance level and the JE level secondary ledgers, but then adds the subledger level. In essence, you will have both a secondary ledger with all ledger and subledger level transactions in a second accounting representation. The subledger level is one of the most powerful secondary ledgers, allowing every entry made to the respective primary ledger subledger to be duplicated in a different accounting representation in a secondary ledger subledger. It is virtually a full drill-down and allows a company to live in two different accounting bases. Adjustments Only Secondary Ledgers Balance, journal and subledger level secondary ledgers are complete accounting representations with increasing levels of drill-down. Alternatively, the adjustments only secondary ledger is a very special type of secondary ledger that is an incomplete accounting representation and instead only reflects adjustments. The adjustments can be manual adjustments or automated adjustments from subledger accounting. This type of ledger must share the same chart of accounts, accounting calendar/period type combination and currency as the associated primary ledger. To obtain a complete secondary accounting representation that includes both the transactional data and the adjustments, use ledger sets to combine the adjustments-only secondary ledger with the primary ledger when running reports. Adjustments only secondary ledgers are a very useful type of secondary ledger that allows entries to be made discretely and to be provided to management and/or auditors as a separate ledger, giving way to a very high level of transparency. It can act, in essence, as a new control level by which entries can be made by staff-level accountants, approved by line-level accounting supervisors, but then accumulated in the adjustments only secondary ledger for final high-level management approval in aggregate. To obtain a full secondary accounting representation, use ledger sets to combine the adjustments only ledger with the primary ledger for report generation. The adjustment only secondary ledger is particularly relevant when discussing audit and period-end adjustments. The example below examines the use of adjustment only secondary ledgers.

In this example, a company books its sales as invoiced in the Accounts Receivable subledger. Yet, under GAAP rules, if the company had a service commitment for a period extending beyond the close of the reporting period, then an entry would have been made to defer part of the revenue and then decrement previously deferred revenue as income over the service period.

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches

Traditionally, deferred income was booked to the primary ledger at the end of each reporting period, and then reversing entries were made at the beginning of the next reporting period to make reconciliation of sales activity and AR subledger to revenue easier. However, an adjustments only secondary ledger can eliminate the need to book and reverse those entries to the primary ledger. Instead, the adjustment is booked to the adjustment only secondary ledger. Then the adjustments are not reflected in the primary ledger and no reversing entries are required. For reporting, the adjustment ledger is combined with the primary ledger, resulting in an adjusted trial balance without disruption to processing in the primary ledger.

The adjustment only secondary ledger also gives one ledger for auditors to use and for supervisory approvers to review. This is ideal for enhancing transactional controls. The Mechanics of Setting Up a Secondary Ledger As has been demonstrated in this white paper, secondary ledgers can be used to meet contemporaneous reporting challenges in many ways. However, for the effective use of ledger sets and secondary ledgers, you need a well-designed and rationalized common chart of accounts in your primary ledgers. If your chart of accounts does not suit your business or is inconsistent between primary ledgers, then the functionality of secondary ledgers will be limited and the use of ledger sets to streamline financial reporting workflows will be impaired.

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches Once you decide to set up a secondary ledger, the first step is to define your primary ledger and assign its related secondary ledgers. The secondary ledger may have a different currency, chart of accounts, calendar and/or accounting method. To define the secondary ledger: 1. Specify the ledger attributes for the primary ledger. 2. Assign one or more secondary ledgers to each primary ledger for an accounting setup. 3. Specify the ledger attributes for one or more secondary ledgers (optional). 4. Assign one or more reporting currencies (optional). After the secondary ledger has been defined, you will need to create accounting rules to map the transactions that post to your primary ledger to transactions in your secondary ledger. The secondary ledgers assigned can only perform the accounting for the legal entities within the same accounting setup. If an additional ledger is needed to perform accounting across legal entities or ledgers in different account setups, use a ledger in an accounting setup with no legal entity assigned. This can be used for multiple purposes, such as performing management reporting or consolidation across multiple legal entities. Finally, when primary ledger entries are created, journal entries are automatically generated for all the associated secondary ledgers based on the defined mapping rules from the primary ledger to the secondary ledgers. You can use secondary ledgers for supplementary purposes, such as consolidation, statutory reporting, or adjustments for one or more legal entities within the same accounting setup. One of the most useful things about secondary ledgers is you can assign multiple ones to each primary ledger. For example, you can assign one for regulatory accounting, one for management reporting, one for IFRS reporting and one for tax reporting the options are limitless! For more information on setting up secondary ledgers, refer to the Oracle Financials Implementation Guide.

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GAAP, Regulatory and IFRS: How Secondary Ledgers Solve Financial Reporting Compliance Headaches Conclusion Recent unparalleled changes in financial reporting requirements have transformed the way companies account for key accounting transaction and balance types through reporting regulations, new GAAP pronouncements and the adoption of IFRS. For many, this meant that core financial reporting had been relegated to manual spreadsheet reconciliations, transformations and consolidations. With the introduction of secondary ledgers in Oracle E-Business Suite Release 12, companies are able to meet their varied reporting needs while excessive spreadsheet maintenance has been minimized. If there is a single global chart of accounts and a single global calendar and a single EBS instance, companies can leverage a single source of truth that includes transparency into all transactions from the primary ledger to the secondary ledgers as well as full drill-down capability to the subledgers. The result is consistency of reported information across business units and reduced effort for management reporting, maintenance and reconciliation. _____
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PWC Spreadsheet Risk Study Oracle Financials Implementation Guide

Curious? For more information, please call eprentise at 1.888.943.5363 or visit www.eprentise.com. About eprentise eprentise provides transformation software products that allow growing companies to make their Oracle E-Business Suite (EBS) systems agile enough to support changing business requirements, avoid a reimplementation and lower the total cost of ownership of enterprise resource planning (ERP). While enabling real-time access to complete, consistent and correct data across the enterprise, eprentise software is able to consolidate multiple production instances, change existing configurations such as charts of accounts and calendars, and merge, split or move sets of books, operating units, legal entities, business groups and inventory organizations.

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