IBM Global Business Services Financial Management

White Paper

Supporting IFRS Compliance

with SAP Enterprise
Resource Planning System
 IBM Global Business Services 3

IFRS – An Overview • Property plant & equipment

• Inventory
What is IFRS?
International Financial Reporting Standards (IFRS) are • Financial reporting (planning & budgeting, as well as
globally accepted accounting standards established by the statutory) and disclosures
International Accounting Standards Board (IASB) and its
interpretative body, the International Financial Reporting • Segment reporting
Interpretations Committee (IFRIC).
• Consolidation accounting/joint ventures

Many of the standards forming IFRS are known by the older
name of International Accounting Standards (IAS). IAS were
issued between 1973 and 2001 by the board of the Interna-
tional 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amended or withdrawn by the IASB. New Standards issued by
the IASB are known as IFRS. When referring collectively to
IFRS, that term includes both IAS and IFRS.
• Construction contracts/project accounting
• Share based payments/management compensation and
reporting
• Revenue recognition
• Goodwill, intangible assets, asset impairments, provisions
• Hyperinflationary accounting/FX

IFRS standards are destined to become the world’s common • Leases

financial reporting language for investors, analysts and regula-
tors. The overriding advantage to the participants of global
IFRS adoption is enhanced comparability of like entities
anywhere in the world. And for any entity, better access to
international capital, funding and investment opportunities.
The adoption of IFRS standards requires high-quality,
transparent and comparable information demanded 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:
• Government grants
• Fair value
This document is the first in a series of white papers planned
to address the IT impacts of the key topics stated above. The
focus of this paper is on handling the IFRS Fixed Assets/
Property, Plant & Equipment (PP&E) requirements, as well
as parallel reporting needs for companies using SAP as their
ERP system.
4 Supporting IFRS Compliance with SAP Enterprise Resource Planning System

Compliance Data • Do ledgers and business systems

contain the necessary data and if
Requirements availability so, how are they provided?
• How will the new • Which processes must be
reporting Proces
changed to capture and report
requirements be redesign new data?
applied?
• What additional Systems scalability • How many adjustments are
necessary to meet the additional
information will be & architecture
requirements arising from IFRS?
required?
IFRS Organization • Is there a sufficient number of
suitable and trained employees
Business design working in the right position?
Implications Product design • Will profitability be sustained
• What are the wider & pricing under the new regulations?
implications on how
the business is Profitability & • What impact will the
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?

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
a far reaching impact on how you measure your business, such
as the P&L and balance sheets. It also impacts how you
manage budgeting and forecasting, product pricing, opera-
tional processes, IT systems and internal controls.
When applying the new accounting principles to meet the
reporting and disclosure requirements, organizations have
experienced significant impact on processes, systems and
people within the Finance function and in the operational
functions 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 report under IFRS and local Generally Accepted Accounting
Principles (GAAP) in parallel 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 it places an additional requirement for
critical and knowledgeable resources.

Assessing the Impact
The first step towards a successful IFRS transition is a robust
Impact Assessment phase to gain a high level understanding of
the business/accounting affects of IFRS. They will be 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 the collection of
additional data required by IFRS should commence at the
earliest stages, so that the integrity of financial results under
IFRS 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) underwent significant change.
This paper aims to provide an appreciation of certain major
IFRS impact areas, and the potential approaches for companies
using an SAP ERP application.
Parallel Reporting
IFRS transition requires parallel reporting in local GAAP and
IFRS for at least one year. Multi-GAAP accounting functional-
ity is required and needs to be implemented in the ERP
system.
There are four options available within SAP to support parallel
reporting needs: 1) Parallel ledgers using the new functionality
that supports multiple ledgers (New GL), 2) Account-based
general ledger (GL) configuration, 3) Use of special ledgers,
and 4) Parallel company codes.
Local Close SAP R/3 9classic SAP ECC 6.0
GL) (New GL)
Parallel Ledgers ü Key Differences between U.S. GAAP and IFRS - Assets
Parallel Account ü ü
Parallel Special
Purpose Ledgers
Parallel Company
Codes
SAP Recommended Approach
IBM Global Business Services 5
Considering the present environment, SAP recommends the
use of parallel ledgers provided in the New GL (SAP version
ECC 6.0 or later) or the account-based configuration for the
transactional layer, depending on the need of the client or
version of software in use.
Implementing IFRS using the New GL with parallel ledgers is
the most transparent approach. It provides an independent set
of books and is the cleanest option for clients on SAP ECC
version 6.0 or later. With this approach, the entity should
adopt IFRS as the leading ledger and use the non-leading
ledger to meet local reporting requirements.
The account-based approach is recommended when relatively few
IFRS differences exist that can be handled in one ledger. Although
it is the quickest and least expensive option to implement, it can
lead to a more complex Chart of Account (COA).
In some unique circumstances, the use of parallel company
codes and special ledgers may still be workable, but they are
not recommended from a sustainability perspective.
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.
The principal IFRS impacts include componentization of
assets, basis of valuation, depreciation, and impairment. The
following section elaborates the impacts and approaches to
address them within SAP ERP.
Componentization of assets
Physical assets may have various significant subcomponents.
Under existing local GAAPs, such assets may have been treated
as a single asset. However, under IFRS, these components
should be recognized, tracked and depreciated separately.
6 Supporting IFRS Compliance with SAP Enterprise Resource Planning System

Basis of valuation of an asset
IFRS provides an option to use either the revalued amount or
the historical cost as a basis for measurement. Revalued
amount is fair value at the date of revaluation less subsequent
accumulated 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.

The Impacts
Key Difference Impact
1 Difference in the The value of one asset could be
value of an asset different within IFRS, U.S. GAAP
due to different statutory accounts, fiscal accounts.
accounting Assets therefore may have multiple
methods under valuations.
different
accounting
standards
2 Componentization Companies must define significant
of assets components of existing assets as
individual assets. These
components must be depreciated
separately, depending on their
individual useful lives.
3 Change in asset’s If the estimate of the asset’s useful
useful life life changes, the depreciation
charge must be adjusted for the
current and future periods.
4 Change in If the depreciation method changes
depreciation due to a change in the expected
method pattern of benefits, the depreciation
charge for the current and future
periods should be adjusted.
How to address in SAP
SAP allows for multiple ‘depreciation areas’ for valuation of
assets. These deprecation areas may have different
depreciation keys (i.e., depreciation calculation rules) and
different useful lives for each individual asset. In
addition, transactions such as capitalization, retirements,
write-up, write-downs etc. may be posted differently in the
areas where needed.
Componentization can be handled through the use of
asset master records (main and sub-number, super-
numbers) to define each component uniquely. Depreciation
rules for each of the separately identified components can
be configured for its estimated useful life.
In SAP Asset Accounting, each asset is assigned to a
depreciation key (that describes the depreciation
calculation rule) and a useful life. Depreciation is calculated
automatically according to the depreciation key and
remaining useful life. One of the options for adjusting
depreciation is to change the depreciation key or the useful
life of the asset component.
SAP asset accounting allows for adjustments to the
depreciation method and adjustments to the useful life of
an asset. Changes to either of these values will affect the
depreciation calculations on a go-forward basis.

5 Updating fair value IFRS provides an option to use Fair value cannot be determined within the R/3 system.
of assets either revalued amount or historical The amounts must be determined externally at every
cost as a basis for measurement. reporting date and updated in the system.
Revalued amount is fair value at the
date of revaluation less subsequent
accumulated depreciation and
impairment losses.

Impairment of Assets
 IBM Global Business Services 7

Key Differences between U.S. 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 (dis-
counted present value of the asset’s expected future cash flows)
and fair value less costs to sell. Under U.S. 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 U.S. 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. U.S. GAAP does not prescribe any CGU concept.

The Impacts
Key Difference Impact How to address in SAP
1 Systematic Identify indications for impairment Impairments can not be determined within the SAP system.
Identification of and determining impairment loss. The amounts must be determined externally, and manually
Impairment Losses updated in SAP.
2 Accounting An impairment loss should be Depending on which asset is involved, the appropriate
Requirements for recognized whenever recoverable adjustment must be made in the applicable module
Impairment Losses amount is below carrying amount. (intangible assets in FI-AA, securities in CFM). Posting
would have to be done manually in SAP.
3 Calculation of Need to calculate the recoverable Net present value of assets is calculated on planned future
Impairment Losses amount, which is calculated from cash flows. SAP offers functionality for this purpose in
net present value of assets. Investment Management (IM).
4 Accounting Subsequent reversal of an Impairment reversal cannot be determined within the SAP
Requirements for impairment loss is required for all system. The calculation of impairment reversal amounts will
Reversal of assets (other than goodwill) under need to be performed outside the SAP system, and then
Impairment Losses IFRS. posted manually in the SAP system.
5 Calculation of Reversal of impairment loss is Need to keep track of the impairment loss recognized for an
Reversal of limited to the extent of the written asset and track written down value of the asset in order to
Impairment Losses down value of the asset. facilitate the reversal calculation. This can be managed in
SAP with the help of transaction types to track the nature of
transactions. The calculation of impairment reversal amounts
will need to be performed outside the SAP system.
6 Cash Generating Under IFRS, assets must be SAP suggests using profit centers to approximate CGUs,
Units assigned to Cash Generating Units since sales and expenses can be collected at this level.
where required. CGUs will likely be
different from the current reporting
units in use, and will need to be
defined separately.
8 Supporting IFRS Compliance with SAP Enterprise Resource Planning System
Alternative Approaches towards IFRS
Compliance
Although embedding the IFRS changes into the ERP (transac-
tional) system is the preferred option in the long-term, there
are other alternative approaches that involve managing IFRS
changes outside the ERP system.
These alternative approaches may not be optimal in the long
term, but could be considered in order to reduce complexity of
change or to meet tight timelines. The approaches are outlined
below.
Consolidation Layer Approach
An additional alternative to consider is to post IFRS adjust-
ments into the consolidation application. IFRS adjustments can
be calculated and posted directly into the consolidation tool.
Data in the transaction system would reflect local reporting, as
IFRS adjustments will not reside at this level.
Posting Local GAAP Adjustments to IFRS Approach
This approach helps adopt IFRS by making top side adjust-
ments. It is potentially cheaper and faster to implement than
the other two possible options for SAP systems, as no software
upgrades are needed.
A challenge in this approach would be to maintain the GL
Close process timing. It also requires extensive manual
compilation outside the SAP application to determine journal
entries. There would be a need for controls to pass audits and
customization of the SAP system in order to create and feed
data at an accurate granular level.
This approach entails overall high costs in order to sustain
reporting and reconciliation processes in the long term. The
quickest option, it is difficult to sustain longer term as it is
mostly manual, impacting close processes and reconciliations.

IBM IFRS and IBM Ascendant SAP Method
IBM’s Ascendant methodology augments SAP’s ASAP method-
ology with IBM intellectual capital and reusable assets. It
allows flexibility to incorporate the associated IFRS building
blocks as per the specific project needs.
IBM Global Business Services 9
Ascendant provides a full set of management tools and accel-
erators for SAP implementations. Beyond the basic require-
ments to configure, test and implement the software, Ascen-
dant 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 Supporting IFRS Compliance with SAP 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: We have teams based in over 40
countries and more than 4,100 specialized business and
technical consultants worldwide.
• Auditor independence: We are independent from audit firms,
so can help our clients throughout the project lifecycle
without being restricted by independence rules. 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: 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, of which this paper
is the first in a series on the subject of handling IFRS impacts
in SAP.
 IBM Global Business Services 11

For further information

Contact us or visit

ibm.com//gbs/finmgmt

John Ingold
Partner, Global IFRS Leader
jingold@ca.ibm.com

Siddarth Agarwal
Associate Partner, IFRS Lead
sagarwal@ca.ibm.com

Grant Rutherford
Senior Managing Consultant, IFRS Lead
grant.a.rutherford@ca.ibm.com
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