IFRS Implementation

Achieving IFRS Compliance

Succeed with SAP® Software,
Consulting, and Training
CONTENT

^ 4 Meeting the Challenges of IFRS1 ^15 Determining Organizational

Consequences
^ 5 Moving to a Single International
Standard ^16 Project Considerations for
Adopting IFRS
^ 6 Much More than a Reporting 16 Who Is Involved?
Project 16 Management Accountants
16 Tax Accountants
^ 8 An Aggressive Timetable 16 External Auditors
16 IT Department
^ 9 Assessing the Scope of 16 How Will IFRS Affect the Project
Accounting Changes Portfolio?
9 Acquisition Accounting, Joint
Ventures, and Goodwill ^17 SAP Has the Tools and Expertise
10 Property, Plant, and Equipment to Handle IFRS
Valuation 17 SAP Software – Prepared for
11 Inventory and Stock Valuations New Standards
11 Receivables, Payables and Bor- 18 SAP Services – Ensuring a
rowing Smooth Transition
12 Revenue 18 SAP Training – Pointing Out What
12 Employee Costs and Share-Based to Expect
Payments
13 Income Taxes ^19 SAP: Your Partner on the Road
13 Leasing to IFRS
14 Valuations
14 Cash-Flow Statements
Meeting the Challenges of IFRS1
An Overview
First known as International Accounting
Standards (IAS), International Financial
Reporting Standards (IFRS) were devel-
oped by the International Accounting
Standards (IAS) Committee beginning
in 1973. In 2001, the standards were
certified by the International Accounting
Standards Board (IASB) and formally
adopted by the European Union as its
single financial reporting standard.
Since then, in addition to taking effect
throughout Europe, IFRS has become
the accepted reporting standard in over
100 countries and is the single accepted
standard in 85 of them, including Hong
Kong, Singapore, Malaysia, Australia,
Pakistan, India, the Gulf Cooperation
Council of Arab States, Russia, and
South Africa.
The 2002 “Norwalk Agreement”
between the IASB and the U.S. Financial
Accounting Standards Board (FASB) has
led to a commitment that FASB rules
and IFRS standards will be made fully
compatible. The Canadian Accounting
Standards Board has already adopted a
timetable for convergence, and Canadian
companies will be required to comply
by 2011. Based on continuing conver-
gence, the U.S. SEC has announced
that U.S. companies will be allowed to
report under these new standards as
early as 2009, and compliance for all
U.S. companies could be required by
2014 assuming certain project mile-
stones are met.
1 Information on International Financial Reporting Standards (IFRS) regulations contained in this paper is taken directly from International Accounting
Standards and IFRS documents produced by the International Accounting Standards Board (see www.iasb.org). However, these citations and interpreta-
tions are both subjective and subject to change as the regulations are updated. Information here should not be relied upon in place of sound analysis by
a well-qualified and certified accountant, as well as a thorough review by your auditing firm.
4
The SEC’s current milestones are:
1. Improvements in accounting stan-
dards (such as IFRS)
2. Funding and accountability of the
International Accounting Standards
Committee Foundation
3. Improvement in the ability to use
interactive data (such as Extensible
Business Reporting Language, or
XBRL) for IFRS reporting
4. Education and training on IFRS in the
United States
5. Limited early use by eligible entities.
This milestone would give certain
U.S. issuers the option of using IFRS
for fiscal years ending on or after
December 15, 2009.
6. Anticipated timing of future rule mak-
ing by the SEC. On the basis of the
progress of milestones 1 through 4
and the experience gained from mile-
stone 5, the SEC will determine in
2011 whether to require mandatory
adoption of IFRS for all U.S. issuers.
If so, the SEC will determine the date
and approach for a mandatory transi-
tion to IFRS. Potentially, the option to
use IFRS when filing could be expand-
ed to other issuers before 2014.
7. Potential implementation of mandato-
ry use. The proposed road map will
raise many questions, including
whether the 2014 transition date to
IFRS should be sequenced. The road
map envisions a transition approach,
where large accelerated filers could
be required to comply in 2014, then
accelerated filers in 2015, and non-
accelerated filers in 2016.
A major consideration, even given a
firm set of dates, will be how the merg-
ing IFRS and U.S. and Canadian GAAP
standards will each be amended over
time. Several presently known examples
are listed in this paper, but many more
will undoubtedly appear. This suggests
that companies will want to prepare
parallel sets of consolidated financial
statements to minimize unforeseen dis-
ruptions to their businesses’ reported
financial picture. However, the effort
to maintain two sets of books for an
undetermined period of time is not
insignificant.
These aggressive commitments will
have a fundamental impact on all North
American companies, large and small.
The extensive tax, income, and balance
sheet consequences must be studied
carefully and plans implemented to
enable a smooth reporting transition
that does not distort the financial posi-
tion of a company upon first report under
the new standards. Clearly, both short
and long term, organizations, processes,
and IT systems must change.
To cope with the systemic demands
the new standards will impose, and to
avoid unpleasant surprises, companies
must prepare their infrastructures for
this change in advance. SAP can help
by providing software that already
meets the new requirements – and by
delivering the software with the tools,
training, and consulting needed to iden-
tify risks, threats, and opportunities
related to the regulations, thereby
easing the burdens of the transition.
Moving to a Single
International Standard
Challenges and Opportunities
IFRS is “principles based” and not pre-
scriptive. For this reason, unlike U.S.
and Canadian GAAP and other rules
that can have thousands of individual
requirements and specifications, IFRS
is based on a clearly stated set of prin-
ciples and can comprise a much smaller
number of stated “rules.” However, this
does not mean IFRS is any less strin-
gent or clear on how business activity
is to be treated. On the contrary, “mark
to market” and other principles are
rigorous standards that require careful
attention, documentation, and compre-
hensive financial record keeping.
To paraphrase, the objective of IFRS
statements is to provide information
about the financial position, perfor-
mance, and changes in the financial
position of an entity that will be useful
to a wide range of users in making
economic decisions. They assume an
“accrual basis” (never “cash”) and a
“going concern.” The statements are,
above all, to be understandable, relevant,
enterprise, saving time, money, and
resources, as well as improving the
information available for important
management decisions.
To cope with the systemic
demands IFRS standards
will impose, and to avoid
unpleasant surprises, com-
panies must prepare their
infrastructures for this
change in advance. SAP
reliable, and comparable. Statements
included under the regulations are:
can help by providing soft-
• Balance sheet (to be known as ware that already meets the
“statement of financial position”)
• Income statement (“statement of
new requirements – with the
comprehensive income”) tools, training, and consult-
• Statement of changes in equity
(“statement of recognized income or
ing needed to identify risks,
expense” or SORIE) threats, and opportunities
• Cash-flow statement (“statement of
cash flows”)
related to the regulations,
• Notes, including a summary of signifi- thereby easing the burdens
cant accounting policies
of the transition.
It’s clear that a comprehensive review
of regulated reports is needed to assess
the differences between current report-
ing data and processes and the new
data and processes that will be required
under IFRS. Both the scope and the
nature of the required information will
change, as will the means by which it is
recorded and managed. However, along
with these challenges also comes the
opportunity to standardize and auto-
mate financial reporting across the
5
Much More than a Reporting Project
A Chance to Reevaluate Accounting
Functions
The switch to IFRS carries the potential to greatly
affect the valuations of individual business transac-
tions, which means that companies must study the
potential need to apply the new standard wherever
these transactions occur.
Many people initially view the IFRS
changes as simply a reporting issue.
But although reporting is one aspect
of IFRS, it is by no means the central
aspect. Much more significant is the
impact the standards will have on a
company’s organization, philosophy,
and operational IT systems at both
corporate and subsidiary levels. The
switch to IFRS carries the potential
to greatly affect the valuations of indi-
vidual business transactions, which
means that companies must study
the potential need to apply the new
standard wherever these transactions
occur. One option, of course, is to post
manual adjustments in consolidation
6
software. However, consolidation soft-
ware cannot revalue inventory, perform
effectiveness tests for hedging activities,
or calculate revenue using the per-
centage-of-completion method, among
other concerns.
Major areas of treatment of significant
concern to North American standards
adopters include:
• Acquisition accounting and goodwill
(requires purchase method)
• Property, plant, and equipment valua-
tion, including depreciation (primarily
“straight line”)
• Joint ventures, associates, and other
investments (by rule at either equity
method or fair value)
• Inventory and stock (similar to U.S.
GAAP lower of cost or market, or
LOCOM, and LIFO is not allowed)
• Receivables and payables (all at fair
value, with amortized costs)
• Borrowing (amortized cost using
effective interest rate method)
• Revenue (at fair value, with specific
conditions for recognition)
• Employee costs (accruals for vaca-
tions and holidays, profit sharing,
expected bonuses, and the like)
• Share-based payment (fair value taken
as an expense or as an asset upon
first granting)
• Income taxes (taken as a liability if
unpaid upon balance sheet date, with
other deferral rules)
• Leasing (all leases to eventually be
classified as “finance leases” with all
risk or reward to lessee)
• Valuations (specifications for fair value,
amortized costs, and so forth)
If a company wants to make all these
adjustments upon first implementation,
it must still determine where it will get
the required data – which may necessi-
tate the configuration of transactional
systems. Although a consolidation tool
can perform many consolidation-specific
processes, it cannot capture transac-
tional data in any reasonable volume.
For this, companies usually have to
consider system changes at the opera-
tional level.
Understanding that IFRS requires both
accounting and reporting changes is
also important for correctly gauging
the time and resources it will take to
successfully complete the implementa-
tion project. IFRS disclosure and trans-
parency requirements not only extend
beyond present reporting obligations
of U.S. and Canadian GAAP standards,
(for example, the new “Notes” state-
ment), they also introduce “opportuni-
ties” for data collection and testing that
carry potential for making compliance
an extensive endeavor, even after the
period of parallel running is complete.
To meet all the new requirements, orga-
nizations must be prepared to augment
their existing reporting procedures and
collect all necessary information in the
proper context and under the proper
accounting treatment. Such preparation
is especially important in areas such as:
• Long-term construction contracts
(such as percentage-of-completion
methods)
• Intangible assets (such as in-house
computer software and patents)
• Financial instruments and hedge
accounting
The requirement for more and different
information may necessitate new pro-
cesses for closing a reporting period.
Companies will have to make sure that
their monthly, quarterly, and annual
closing procedures produce all of the
required information and deliver that
information on time. The use of IFRS
to harmonize internal and external
reporting may lead to organizational
changes that require previously auto­
nomous departments to work more
closely together.
In the fiscally oriented financial reporting
systems of North America, published
corporate reports and related financial
statements have generally played a lim-
ited role in company decision making.
As a result, internal reporting has tradi-
tionally been separate from external
reporting – both in terms of the data
involved and sometimes even the organi-
zations producing that data. The intro-
duction of IFRS reporting should encour-
age companies to reevaluate their
managerial and financial accounting
functions. In many cases, the introduc-
tion of IFRS may give companies an
opportunity to simplify their operations
in this regard. It can also help them
reduce costs by synchronizing the areas
involved and providing a single set of
numbers for both internal and external
decision makers – including managers,
shareholders, creditors, and analysts.
SAP has built a com-
prehensive suite of
tools, applications,
and best practices
around the topic of
IFRS adoption by
North American
organizations.
An Aggressive Timetable
Plans Should Start as Early
as Possible
Businesses converting to IFRS must
make substantial effort and investment
now in order to reap benefits in the
future. For many companies, the adop-
tion of IFRS represents a continuing
shift from a model of accounting that
is fiscally and management-oriented
to a model that is further focused on
financial markets and investors. It also
poses specific challenges related to the
statement of earnings, which can carry
significant potential impact on share
prices and investor confidence. It is
essential for business leaders to under-
stand the depth and breadth of the
changes and challenges they will face,
and they must help their organizations
take the steps necessary to address
them. These are some of the key ques-
tions in need of answers today:
• What are the candidate areas for
change? Which options for change
are to our best advantage?
• Where will the new numbers come
from? How will they be recorded and
consolidated?
• How will IFRS affect business pro-
cesses? Do we have the operational
systems to support that?
8
• How will IFRS affect the project port-
folio? How will IFRS affect the financial
portfolio?
• Will IFRS disclosures affect internal
management decisions as well as
external reporting?
• How will the impact of IFRS changes
need to be monitored and managed
over time so that reporting impacts
are smooth and orderly?
Needless to say, company decision
makers cannot answer these questions
overnight – let alone make key business
decisions based on them. But they
must begin now, and they must devote
adequate time and resources to the
task. By 2010, most North American
businesses will be using some form of
IFRS compliance in the production of
their consolidated financial statements.
Canadian firms will be reporting entirely
according to IFRS in 2011, and U.S.
firms will follow closely in collecting two
years of history in anticipation of their
deadline date in 2014. All this leaves a
very short time in which to understand
the impact of IFRS adoption, plan for
the adoption, and execute that plan.
The effect of IFRS adoption will also
reach beyond publicly traded companies.
Capital markets and financial institutions
are already reeling from present market
turbulence, and they will soon need to
demand comparable financial data from
North American organizations of all sizes
to manage their risks. These new stan-
dards will continue to set the pace for
broader change, as financial statements
become a competitive requirement for
any company seeking positive market
perception or access to capital. This is
already underway at larger international
financial institutions adhering to the re-
cently adopted Basel II Capital Accord.
These regulations require banks to rate
their customers using extensive financial
information, and an objective rating in
this process requires financial data that
is both accurate and easily compared
with data from other companies. With
IFRS being the standard for data on
companies from over 100 countries,
North American firms in search of
liquidity will likewise find that IFRS
compliance is an increasingly important
aspect of their overall financial planning.
With IFRS adoption dates already set,
companies can anticipate the dates
upon which they will need to run parallel
and “test” operations for prior-year
comparisons (two years in advance). To
ensure there is enough time to address
all the relevant issues, it is widely recom-
mended that projects for IFRS adoption
should start as soon as possible – espe-
cially since there will be other projects
competing for the same internal resourc-
es in the months ahead.
Assessing the Scope of
Accounting Changes
Where Will IFRS Regulations Have Impact?
Because the adoption of IFRS can
mean significant changes in the philo­
sophy and process of financial report-
ing, it is imperative that companies ob-
tain adequate knowledge of what IFRS
involves and what kind of changes they
can expect.
The first step in any IFRS project is to
determine how the accounting rules
in current use differ from those under
IFRS. This entails analyzing individual
financial statement positions to identify
where IFRS rules require different valu-
ation procedures and then pinpointing
the information and entries needed to
achieve the new valuations. Also critical
is the analysis of how those new entries
and valuations will impact financial
statements. When options for compli-
ance exist, a clear understanding of
both the costs as well as the benefits
of different approaches to compliance
will be critical in making the best, most
profitable decisions in achieving IFRS
compliance. Below are just some of
the issues that must be understood,
analyzed, and acted upon.
SAP has built a comprehensive suite
of tools, applications, and best prac­
tices around IFRS adoption by North
American organizations. Supporting the
overarching need to accurately assess,
measure, and analyze the impact of var-
ious adoption methods and understand
their impact on the balance sheet and
income statement, the SAP® solution set
begins with the SAP BusinessObjects™
Business Planning and Consolidation
application and the SAP ERP Financials
solution. With unique and specialized
IFRS and U.S. GAAP starter kits, these
applications are set up to be imple-
mented quickly and successfully so that
companies can begin their planning for
this important accounting conversion.
The following are major subject areas
where new regulations can have an im-
pact on operations and record keeping,
as well as on their underlying IT support
systems.
Acquisition Accounting, Joint
Ventures, and Goodwill
Issue: In situations where control of one
or more businesses is acquired or com-
bined, IFRS requires the identification
of an acquirer and measurement of fair
value (IFRS 3.17). Recent 2008 IFRS
scope changes further require that
combinations of mutual entities without
consideration (such as dual-listed shares)
are also covered by this regulation.
Measurement of these acquired busi-
nesses must be by the IFRS “acquisition
method,” including identification of any
noncontrolling interests and goodwill,
and fair value valuation for all assets
(IFRS 3.36). Acquired intangible assets
must also always be measured and
reported. There is no “reliable measure-
ment” exception, and recognition of
gains or losses is not allowed unless
related to a change in controlling inter-
est. Further changes are being consid-
ered under a new IASB agenda item that
would update rules for the accounting
for joint ventures and other “common
control” transactions. These could be
valued at “proportionate consolidation”
of assets, liabilities, income, and expens-
es, or alternately by the equity method.
Impact: These rules may have a minimal
impact on day-to-day accounting opera-
tions, but they will have a significant
impact on the tax, balance sheet, and
revenue analysis for potential mergers,
acquisitions, and divestitures. Senior
executives engaged in business-to-
business ownership negotiations will
need systems that enable accurate
assessments of these impacts in addi-
tion to other customary due diligence
on cash flows and profitability. Acquirers
who are adept at effective valuation and
financial impact analysis will carry a
competitive advantage in their markets.
Recommended approach with SAP
software: Analytical applications for
business planning and consolidation, as
well as all supporting financial analytics,
will become increasingly important in
any mergers and acquisitions scenario.
A reliable and flexible model of existing
business operations will always be
desired as a starting point. Data transla-
tion and input tools, for merging what-if
scenario data from candidate organiza-
tions, will be further useful for staging
accurate analysis scenarios. Being able
to quickly and accurately produce ad
hoc, pro forma reports for all scenarios
will ensure senior management has the
information they need to accurately value
and negotiate ownership interests. SAP
ERP Financials supports a broad variety
of consolidation and business combina-
tion methods compatible with IFRS.
Additional functionality within SAP
BusinessObjects Business Planning
and Consolidation enables analysis of
potential business impacts from all IFRS-
related decisions. (SAP BusinessObjects
Business Planning and Consolidation
is available as a version for the SAP
NetWeaver® technology platform and
a version for the Microsoft platform.)
9
 Impact: Because companies have often
used multiple tax, cost, and other man-
agement depreciation methods for finan-
cial accounting purposes, the transition
to IFRS will require extensive analysis
and careful planning to smooth the eco-
nomic impact of potential revaluations.
The “good news” is that IFRS adoption
may reduce the expense and effort
of calculating many of these separate
depreciation methods, which will no
longer be allowed. However, as IFRS
requires inclusion of depreciation into
product costs using full-absorption
costing, the rules will carry offsetting
efforts made necessary in other areas,
The collection of knowledge and extensive analysis including inventory values. In many cas-
es, the loss of various tax and income
required for the IFRS project make it necessary to statement advantages of accelerated
start it quickly and coordinate it with other projects depreciation may cause an abrupt fluc-
tuation in apparent corporate profitability.
that involve IT and financial reporting departments. It may be desirable to take steps to
There are many ways in which companies can syn- mitigate these impacts by spreading
them over a period of time before IFRS
chronize projects to serve common interests. reporting will be required.

Recommended approach with SAP

Property, Plant, and
Equipment Valuation
Issue: IFRS does not prescribe specific
depreciation methods for individual
classes of fixed assets, but it is very
clear on how assets overall are to be
valued. All values must be at cost, and
though total costs can include things
like borrowing, acquisition, and con-
struction or production costs under
certain circumstances, these can only
be in cases where valuation policies
can be shown to be consistent across
the entity (IAS 16.15, IAS 23.11). Class-
es of assets may be revalued, if applied
consistently across the entity (IAS 16.3
and 36), though surpluses on revalua-
tion are recognized only as equity on
the balance sheet and never as profit
to the income statement (IAS 16.39 and
40). Revaluation deficits, on the other
hand, are always directly applied as
expenses to the income statement
(IAS 16.48). Depreciation charged to
write off the value of assets over their
estimated useful life, down to their sal-
vage value (recoverable amount), must
be straight-line, unless it can be shown
that the assets are used proportionally
(IAS 16.56). Assessments must be
reviewed at least annually (IAS 16.61).
software: Once a thorough evaluation
of all new depreciation methods and
their impacts is made, a review of asset-
tracking and valuation systems is in
order, to determine their suitability
under the company’s chosen approach
to the new regulations. In some cases,
the most advantageous approach to
adhering to the new rules may involve
reporting assets at a greater level of
detail than under other GAAP approach-
es. In addition to stress-testing related
fixed-asset systems for the change in
volume, this can also have an impact
on transaction volumes into the general
ledger, which should also be tested.

10
Furthermore, because fixed-asset costs
are a potential or required component
under certain IFRS inventory and project
valuation methods, it is necessary to
coordinate this analysis with an evalua-
tion of the impacts in those other areas.
Overall, SAP software’s sophisticated
asset-accounting features enable unlim-
ited flexibility in the application of various
cost bases, depreciation methods, and
useful lives – in parallel versions for
IFRS, national, tax, insurance, or other
purposes – making it the perfect appli-
cation suite to support these important
regulations. The IFRS-compliant soft-
ware from SAP handles all the calcula-
tions and volumes necessary to be in
full compliance.
Inventory and Stock Valuations
Issue: Speaking of inventory values,
all inventory and stock will need to be
handled similarly to current U.S. and
Canadian GAAP LOCOM – or, as it’s
written under IFRS, “net realizable
value,” which must net estimated
selling prices with costs to complete,
transport, and sell (IAS 2.9 and 10).
LIFO is specifically not allowed, and
FIFO may only be applied where
items cannot be individually identified
(IAS 2.25). Costs are to include all
costs of purchase, conversion, and
transportation, plus depreciation costs
where applicable (IAS 2.6).
Impact: Companies already consistently
using LOCOM methods will find follow-
ing this regulation easiest. In cases
where multiple inventory valuation
methods are used for tax, profitability,
or other purposes, IFRS may even
simplify long-term efforts in this area.
However, steps to confirm compliance,
and any changes to LIFO or other disal-
lowed methods, will require analysis
and system or process conversion.
Full-absorption costing will require man-
ufacturers to know the kinds of costs
(such as overhead and depreciation)
that might be included in inventory and
how these costs differ under IFRS.
These additional data collection require-
ments, and changes in fundamental
accounting treatments, may induce
affected companies to reevaluate their
inventory systems, especially when
inventory documentation is newly
required at a more detailed level than
might be currently kept.
Recommended approach with SAP
software: An extended consequence of
the revaluation of fixed assets can be a
change in allocated inventory expenses.
Companies that find themselves no
longer able to utilize favored LIFO cost-
ing algorithms will have to confirm that
their new inventory costing methods do
not have an immediate adverse effect
on reported profitability. They also must
ensure that they are capturing all pre-
scribed costs in their system and provide
the correct documentation should FIFO
be preferred. With financial accounting,
controlling, and materials functionality,
SAP applications can compute the
product cost calculations required by
IFRS as well as those that may be
required under U.S. and Canadian
national accounting standards. In addi-
tion, a material ledger function allows
the software to perform the actual
costing required by other jurisdictions
in parallel with IFRS.
Receivables, Payables and
Borrowing
Issue: Receivables and payables are
to be recorded at fair value (IAS 39.43).
Subsequent assessments are to be
at amortized cost, and anything with
a significant credit duration must be
discounted (IAS 18.11 contains an
example for revenue accounting). If
a receivable is in default, its carrying
amount is to be written down to its
recoverable amount, which can be
either “value in use” or fair value less
costs to factor (IAS 36.9 and 59). All
borrowing is recorded at amortized
cost, using the “effective interest rate”
method, which deducts borrowing costs
from the principal and amortizes them
over the period of the debt (IAS 39.46).
Impact: IFRS regulations will require
careful review and revaluation of pay-
ables and receivables, as credit situa-
tions are known. Factoring and borrow-
ing costs, along with related tax and
other advantages, will require specific
treatments and reporting. This is espe-
cially important where different curren-
cies complicate the process and proper
translation and revaluation techniques
must be maintained. Where systems
are not currently designed to capture
the necessary information and calculate
the proper values, an evaluation may
be in order to study the costs and
rewards involved, as well as ensure
that all required IFRS statements can
be produced successfully.
Recommended approach with SAP
software: All cash-related applications
currently in use should be reviewed to
11

ensure that they are capable of captur-
ing all required data for IFRS. Once
potential gaps are identified and compli-
ance is confirmed, a unified approach
to producing required cash-flow state-
ments, as well as correctly recording
all current asset values according to
IFRS, will be in order. SAP software fully
supports multiple currencies so that
business transactions can be recorded
in both transaction and functional cur-
rencies as they occur, rather than after
the fact. Comprehensive drill-down
functions help ensure that the original
currency and the exchange rate em-
ployed are always available. SAP appli-
cations also provide functions for the
revaluation of foreign currency items
at market rates on the balance sheet
date – and support the translation of
foreign currency financial statements
in consolidation.
12
Revenue
Issue: Revenue is always to be mea-
sured at fair value of receipt or receiv-
able (IAS 18.9). Under IFRS, revenue
can only be recognized after the signifi-
cant risks or rewards of ownership of
goods has been transferred (IAS 18.14),
and revenues for services are recog-
nized only according to the extent of
completion and whenever they can be
measured reliably (IAS 18.20).
Impact: Revenue recognition rules will
certainly have a direct impact on many
revenue transactions. They may also
alter the way companies decide to
compensate sales and other personnel.
During the transition to IFRS, the poten-
tial need to simultaneously record sales
activity in different ways could require
changes to the nonaccounting systems
set up to manage sales transactions.
As these are often beyond the scope
and control of the accounting and report-
ing departments normally involved in
compliance projects, many companies
will find it challenging to ensure all related
systems are updated consistently.
Recommended approach with SAP
software: All revenue, collection, and
variable compensation systems should
be reviewed to confirm that all neces-
sary IFRS data is being captured and
that proper triggers for employee pay-
ments are being made under the same
guidelines as required for corporate
reporting. Full revenue recognition
functionality enables SAP software to
fulfill various rules of revenue reporting
according to IFRS and U.S. GAAP.
Revenue recognition provides unlimited
flexibility by decoupling the realization
of revenues from invoicing and auto-
mates the process of revenue reporting.
The incentive compensation applica-
tions from SAP can further be coordi-
nated to this process to help ensure
timely and accurate payments based
on governing corporate reporting
practices.
Employee Costs and Share-Based
Payments
Issue: Employee costs are to be recog-
nized during the accounting period in
which services have been rendered
(IAS 19.10). Accruals are necessary
for absences, holidays, and vacations
(IAS 19.11), and profit sharing and
bonus plans also require an accrual
(IAS 19.17). Whenever goods or ser-
vices are received in return for the issue
of shares or other equity instruments,
fair value must be accounted as either
an expense or an asset (IFRS 2.7). In
the case of options or other share-
based incentives, market value of
the instruments must be charged as
an expense over the period in which
the benefits vest (IFRS 2.10).
Impact: North American companies
will continue to be required to verify
amounts of unrecorded sick time and
vacation accumulations, as well as in-
vestigate potential for significant equity
compensation liabilities that must be
brought onto their expense books under
IFRS. Updating personnel, benefit, and
compensation systems to accommodate
the new rules will be necessary to en-
sure documentation of compliance, as
will planning for the orderly transition of
the additional expenses to the income
statement in cases where equity com-
pensation programs are not currently
treated according to IFRS regulation.
Recommended approach with SAP
software: Where current accounting
practices for accrued absences, holi-
days, and vacations can be confirmed
in compliance with IFRS, the major
remaining concerns will center on en-
suring that shared-based incentives
are being properly expensed as they
occur. A full assessment of all out-
standing obligations will need to be
tested against both the balance sheet
and income statement to ensure first
reporting under IFRS does not produce
a sudden difference that might be of
concern to investors. In certain cases,
a phased approach of bringing the obli-
gations to their proper statement will
be preferred.
Income Taxes
Issue: Taxes payable based on current
and prior period business activity must
be recorded as a liability to the extent
that they remain unpaid on the balance
sheet date (IAS 12.12). Deferred tax
liabilities are also required to be recog-
nized (IAS 12.15).
Impact: Income tax liabilities based on
capital expenditures will be especially
complex to track and record. “Taxable
temporary differences” have limited
exceptions related to goodwill and other
business combination issues, but they
will generally require careful tracking
of all differences between carrying
amounts and related tax bases. These
amounts will be required to appear on
IFRS financial statements.
Recommended approach with SAP
software: All capital expenditures and
related asset- and project-tracking sys-
tems should be reviewed to confirm all
necessary IFRS data is being captured.
Research should be conducted to con-
firm all deferred tax liabilities, and proper
entries should be made to reflect them
if they do not already exist. Audits may
be useful to ensure that updates to the
tax basis are well coordinated with
changes in the underlying asset and
project systems. Sophisticated asset-
accounting functionality from SAP en-
ables correct tax application of various
cost bases, depreciation methods, and
useful lives.
Leasing
Issue: IAS 17 currently distinguishes
between “finance leases” and “operat-
ing leases,” though the IASB November
2008 discussion paper is intended to
eliminate operating leases as a class
and require all leases to be recorded as
finance leases by 2011. Finance leases
transfer all risks and rewards to the
lessee and are recorded as an asset
on the balance sheet. Lessors record
leases as liabilities on their balance
sheets (IAS 17.4, 20 and 25). Operat-
ing leases, while they are still allowed,
recognize lease payments as expenses
over the time period that the asset is
used (IAS 17.33).
Impact: Companies will need to review
all existing lease agreements to deter-
mine their treatment under IFRS. As
with depreciation, the standard may
have a material effect on production
and inventory costs. Leasing rules under
IFRS could also influence the structure
of future lease agreements.
Recommended approach with SAP
software: Updated lease management
and tracking systems may prove neces-
sary as IFRS regulations move toward
full “finance lease” treatment for all
leases. Review of impacts to production
and inventory costing is necessary as
well. Through its asset-accounting func-
tions for lessees, SAP software sup-
ports accounting for both operating and
finance leases. It further offers a com-
plete leasing solution (the SAP Leasing
application) that includes contract man-
agement and accounting for lessors
that can help automate the administra-
tion of all agreements.
13
Valuations
Issue: Regarding projects and other
intangible assets, IFRS specifies that
research costs remain as expenses,
while development costs must be capi-
talized once technical or commercial
feasibility is established (IAS 38). Mar-
ketable securities and hedge account-
ing require assignment to one of four
holding categories that determine pre-
sentation on the balance sheet as well
as treatment of unrealized gains and
losses (IAS 39). Derivative instruments
must be tracked on the balance sheet
at fair market value, and any other spe-
cial treatment will require extensive and
careful documentation including risk
measurement and effectiveness as-
sessment. Long-term contracts, or
any agreement extending beyond the
term of the reporting period, must be
tracked according to percentage of
completion (POC) for both construction
and service contracts (IAS 11).
14
Impact: Any significant investment in
internally developed projects, from
computer software to revenue-producing
assets, will need to be treated carefully
under IFRS. Project management sys-
tems must be checked to ensure they
generate the necessary accounting in-
formation for proper capitalization and
amortization based on feasibility and
other project milestones that might be
relevant. Hedge accounting and han-
dling of all marketable securities
will be especially complex. New appli-
cations are often required to meet IFRS
criteria in this area, and extensive and
careful documentation of all transactions
and treatments is required. This is gen-
erally regarded as the single most com-
plex area of the new regulations for
adopting businesses.
Recommended approach with SAP
software: Controlling and project-system
functionality enables SAP software to
handle long-term construction contracts
using the POC method – and to apply a
parallel completed-contract method of
valuation if needed. SAP treasury appli-
cations provide multiple valuation meth-
ods for a wide range of financial instru-
ments. In addition, there are options to
set up multi-GAAP accounting, using
predefined rules in parallel valuation
areas. Also supported are comprehen-
sive functions for hedge accounting
under IFRS 39 and FASB 133.
Cash-Flow Statements
Issue: The statement of cash flows is
a mandatory component of financial
statements under IFRS, as an equal
partner to the balance sheet and the
statement of income.
Impact: IFRS will require an analysis of
existing corporate cash-flow reporting
for regulatory purposes. Companies
preparing a cash-flow statement for the
regulators for the first time will have to
decide 1) whether to use the direct or
indirect method and 2) how to classify
their activities (operating, investment,
or financing) according to the catego-
ries in IAS 7. Many companies may
want to consider changing their chart
of accounts and the accounting entry
logic in their software programs to obtain
the right classification and level of detail.
Recommended approach with SAP
software: The cash-flow statement
is an integral part of SAP software’s
financial statement reporting functional-
ity. Direct and indirect cash-flow methods
are supported. SAP applications also
provide standard cash-flow reporting
templates.
Determining Organizational
Consequences
How Moving to IFRS Will Affect
Your Business
Companies must ask not if but how,
and how profoundly, adoption of IFRS
will affect their organizations. While
many will be tempted to simply weigh
the reporting requirements of IFRS,
others will correctly see its adoption
as an opportunity to institute effective
changes to their internal operations and
decision-making systems. Up until now,
many organizations have had separate
procedures for tax, statutory (U.S.
and Canadian GAAP), and manage-
ment reporting. The adoption of IFRS
gives them the chance to more closely
synchronize these areas.
Many large enterprises have long rec-
ognized the benefit of global financial
reporting standards. For example, SAP
AG has based both its internal and
external financial reporting on a single
set of global accounting principles
since 1998 – on U.S. GAAP. This step
has given management, employees,
and external stakeholders a common
set of standards against which to mea-
sure company activities. For example,
a bonus plan for sales representatives
that counts only the revenue that can
be recognized for financial accounting
effectively synchronizes the represen-
tatives’ personal goals with the com­
pany’s overall business objectives.
Thus, the role a company assigns to
IFRS adoption is critical; it will influence
the eventual scope and complexity of
the project.
Companies must take a careful look
at how IFRS differs from their present
reporting standards. Only a careful
comparison will reveal the extent of
the differences. Clearly, the variety and
complexity of the approaches currently
used to comply with U.S. and Canadian
GAAP standards found in common
practice today will yield an equally varied
and complex set of approaches that are
found best to move to valuation and
reporting rules under IFRS for each of
these companies. Further acknowledg-
ing how merging IFRS and U.S. and
Canadian GAAP standards will each be
amended over time, it’s likely that com-
panies will want to prepare parallel sets
of consolidated financial statements to
minimize disruptions to their business.
In this way, while the ultimate regulations
are finalized, these companies will also
be in best position to take advantage of
all opportunities that appear along the
way.
However, the effort to maintain two sets
of books for an undetermined period of
time is not insignificant. National statu-
tory requirements, management require-
ments, and IFRS requirements need to
be constantly evaluated side by side to
determine what is required, as well as
what is most advantageous to the com-
pany at every step along the way. Having
the proper systems for business plan-
ning, consolidation, and analysis, in
addition to accounting, financial supply
chain, and treasury, is crucial to long-
term success.
Fortunately, companies can often move
to initial IFRS compliance without making
across-the-board changes in their IT
systems. Many IT landscapes already
include a variety of valuation methods
and charts of accounts that are robust
enough to handle IFRS requirements,
even though they might be unnecessarily
expensive and complex to maintain for
the long term. SAP software landscapes
have been capable of efficiently and
effectively managing the new require-
ments for many years now – no “big
bang” project will be needed for those
shops to adapt their existing SAP soft-
ware systems to the new accounting
environment. But the opportunity for
better transparency, accountability, and
control afforded by the new IFRS regu-
lations is not to be missed.
15
Project Considerations for
Adopting IFRS
The Project Team and Portfolio
Who Is Involved?
To cover the wide array of issues in-
volved in adopting IFRS, companies
need an interdisciplinary team. The
broad nature of the project requires
the support and participation of man-
agement at the highest level. And
because the project may affect many
aspects of the business organization,
several departments outside financial
accounting should be involved as well.
The team should include, at a minimum,
management accountants, tax accoun-
tants, external auditors, and IT staff.
Management Accountants
Adopting IFRS as a primary reporting
and management standard can bring
far-reaching changes, and establishing
it as the reporting standard will affect
many internal measurements. To make
comparisons between actual and plan-
ning valuations, a company’s manage-
ment accountants must examine the
planning data and processes and adapt
them for IFRS. Product costing, long-
term construction, and other valuation
activities must be addressed from their
beginning. Revenue, stock, and other
accounting could be fundamentally
affected.
Tax Accountants
Until national tax regulations are har-
monized with IFRS, companies moving
to IFRS will still carry the important and
burdensome challenge to choose the
most advantageous tax treatments for
their activities separate from their other
reporting treatments. New confidentiality
and tax audit issues – such as who has
access to the data – must be analyzed
16
carefully by tax accountants to ensure
a smooth transition.
External Auditors
Involving the company’s external audi-
tors is important to remove a lot of the
guesswork from IFRS adoption. Signifi-
cant uncertainty arises when compa-
nies – even those whose managers
understand the new requirements – are
not sure to what degree a specific re-
quirement applies to them or how their
preferred treatment may be assessed
or allowed under the new rules. Issues
of materiality can also arise: it is entirely
possible that a current accounting prac-
tice, although it may not be identical to
the IFRS rule, leads to a materially simi-
lar result. The external auditor can help
identify the more significant differences,
thereby reducing the scope of the initial
adoption project.
IT Department
Your IT department will be responsible
for handling many of the system changes
required by IFRS adoption. In addition
to managing any system configuration,
the department must also determine
where the required accounting data will
come from and how it will be compiled
and computed. In a heterogeneous sys-
tem environment, this means examining
various specialty and legacy systems
as well as their interfaces (with each
other and with SAP solutions).
How Will IFRS Affect the Project
Portfolio?
It is important to consider how the
IFRS project will affect a company’s
larger project portfolio. Today, com­
panies are evaluating their IT pro­­jects
more closely than ever before.
Resources and budgets are tight.
Meanwhile, key decision makers
and IT and accounting staffs are
dealing with other projects and
concerns.
Management may ask, with some justi-
fication, why the company must invest
resources in an accounting project that
primarily satisfies a statutory require-
ment. Other projects with more obvious
and immediate business value are com-
peting for the same resources – resourc-
es that are also needed for routine sys-
tem maintenance and for accounting
departments, whose resources are
stretched even for regular workloads.
Project fatigue and widespread skepti-
cism about yet another “revolution”
can result in a wait-and-see approach
to IFRS adoption, particularly when
companies expect a push-button IT
solution for it. But the collection of
knowledge and extensive analysis
required for the IFRS project make it
necessary to start it quickly and coordi-
nate it with other projects that involve
IT and financial reporting departments.
There are many ways in which compa-
nies can synchronize projects to serve
common interests. For example, adopt-
ing a single global reporting standard
can be a catalyst for harmonizing
accounting structures and processes,
enabling a fast close and reducing the
time and expense of monthly and quar-
terly reporting cycles.
SAP Has the Tools and Expertise
to Handle IFRS
Across the Globe
SAP has more than 30 years of experi-
ence in international business issues. It
is a pioneer in helping companies cope
with multiple languages and currencies
as well as national business practices.
Its IT solutions have supported statuto-
ry reporting requirements in more than
100 countries. Whether a company’s
accounting needs involve fixed assets,
financial instruments, long-term con-
tracts, or inventories, SAP software
offers the widest possible range of
functionality for IFRS implementation.
To support its software solutions, SAP
offers consulting, training, and conver-
sion services that can help customers
ask the right questions and make the
right decisions in adopting IFRS. Cus-
tomers benefit from the knowledge and
experience SAP has gained from a
large base of successful installations
and projects.
More than 20,000 customers depend
on SAP ERP Financials and SAP trea-
sury applications to handle their busi-
ness processes. These customers put
SAP in-depth knowledge of business
processes and accounting treatments
to the test every day. Throughout the
prior process of IFRS adoption in Europe
and elsewhere, SAP has supported its
customers worldwide – helping to ensure
the smoothest possible transition while
maintaining the highest standards of
security and reliability.
SAP Software – Prepared for New
Standards
Built on three decades of global experi-
ence, SAP software already contains
the major functions and methods re-
quired for the adoption of IFRS. Inter-
national financial reporting is not static,
however. Each year, new standards and
issues arise that can have a major impact
on companies and their IT systems.
SAP constantly updates and improves
its software to comply with new statu-
tory and reporting requirements. A com-
pany’s investment in SAP software is
as safe tomorrow as it is today.
The following shows how SAP soft-
ware addresses key issues related to
current IAS rules:
• IAS 2: Inventories. With financial
accounting, controlling, materials
management, and production plan-
ning functionality, SAP applications
can calculate product costs in the
form required by IFRS as well as
those that may be required under
U.S. and Canadian national account-
ing standards. It is possible to store
multiple versions of the costs for a
single material by using the material
ledger function. SAP software also
offers the ability to calculate the actual
costs for each period, required by
some other jurisdictions in parallel
with IFRS. In addition, it is possible
to calculate work in process according
to different accounting approaches
and to create the appropriate postings
for these at period close.
• IAS 7: Cash Flow. The cash-flow
statement is an integral part of SAP
software’s financial-statement report-
ing functionality. Direct and indirect
cash-flow methods are supported.
SAP software also provides standard
cash-flow reporting templates.
• IAS 11: Construction Contracts.
Controlling and project system func-
tionality enables SAP software to
handle long-term construction con-
tracts using a number of different
accounting approaches, including
the POC method and the completed-
contract method in parallel, and to
create the appropriate postings for
these at period close. In addition, it
allows multiple different methods of
determining the percentage of com-
pletion, as appropriate to the contract
in question.
17
• IAS 14: Segment Reporting. SAP
applications have the financial account-
ing and profit-center accounting func-
tionality needed to provide a robust
and flexible basis for both your man-
agement reporting and segment
reporting needs. Enhanced consoli-
dation systems functionality in SAP
BusinessObjects Business Planning
and Consolidation supports all man-
agement consolidations for segment-
reporting purposes.
• IAS 16: Fixed Assets. Asset-account-
ing functionality enables SAP software
to provide unlimited flexibility in the
application of various cost bases,
depreciation methods, and useful
lives – in parallel versions for IFRS,
national, tax, insurance, or other
purposes.
• IAS 17: Leasing. Through its asset-
accounting functionality for lessees,
SAP software supports accounting
for operating and financing leases. It
also offers a complete leasing solu-
tion, SAP Leasing, that includes con-
tract management and accounting for
lessors.
• IAS 18: Revenue. Revenue recogni-
tion functions enable SAP software
to fulfill various rules of revenue re-
porting according to IFRS and U.S.
GAAP. Revenue recognition provides
unlimited flexibility by decoupling the
realization of revenues from invoicing
and automates the process of reve-
nue reporting.
• IAS 21: Foreign Currency. SAP soft-
ware fully supports multiple currencies
so that business transactions can be
18
recorded in both transaction and
functional currencies as they occur,
rather than after the fact. Comprehen-
sive drill-down functions ensure that
the original currency and the exchange
rate employed are always available.
SAP software also provides functions
for the revaluation of foreign currency
items at market rates on the balance
sheet date – and supports the trans-
lation of foreign currency financial
statements in consolidation.
• IAS 22: Business Combinations.
SAP ERP Financials supports a broad
variety of consolidation methods com-
patible with IFRS. Additional function-
ality within SAP BusinessObjects
Business Planning and Consolidation
enables analysis of potential busi­­ness
impacts from all IFRS-related
decisions.
• IAS 38: Intangible Assets. The pro-
cess of capturing costs for internally
generated intangible assets is sup-
ported by SAP ERP Financials
through its treasury and investment
management components. Compa-
nies can create parallel versions ei-
ther to capitalize these costs, as re-
quired by IFRS, or to expense them
for other purposes.
• IAS 39: Financial Instruments. SAP
treasury applications provide multiple
valuation methods for a wide range
of financial instruments. In addition,
there are options to set up multi-GAAP
accounting, using predefined rules
in parallel valuation areas. Also sup-
ported are comprehensive functions
for hedge accounting under IFRS 39
and FASB 133.
SAP Services – Helping to Ensure
a Smooth Transition
In addition to the necessary functional
depth and breadth contained in its solu-
tions, SAP has the knowledge and oth-
er resources needed for a successful
IFRS implementation. Its years of expe-
rience and global reach are valuable as-
sets, helping companies make the right
decisions, avoid costly mistakes, and
create long-term accounting strategies.
SAP Training – Pointing Out What
to Expect
SAP offers training to help companies
understand the effects of IFRS adop-
tion on their current SAP software sys-
tems and to deal with both the new re-
porting requirements and the challenge
of parallel reporting and accounting
rules.
In addition, SAP consultants can help
you:
• Identify where your company can use
SAP software to get the required re-
porting data
• Configure or reconfigure an existing
SAP software system to deliver data
that is compatible with IFRS and can
fulfill your national reporting
requirements
• Review and optimize your closing
processes for faster closings
• Review and optimize your account
and organization structure for IFRS
SAP: Your Partner on the Road to IFRS
An Ideal Platform for Optimizing the
Reporting Process

The adoption of IFRS can help compa-

nies standardize and simplify the clos-
ing process by focusing on a common
reporting standard and optimizing the
procedures that support it. Companies
everywhere encounter issues such as
a common chart of accounts and uni-
form application of valuation methods,
but the pressure of day-to-day business
concerns often prevents them from
dealing with these infrastructure prob-
lems. IFRS can help companies make a
virtue of necessity and achieve goals
far beyond compliance with external re-
porting standards. By establishing the
model for real-time integrated business
solutions, SAP provides the ideal plat-
form for harmonizing and accelerating
IFRS can help companies make a virtue of necessity the entire reporting process.

and achieve goals far beyond compliance with external

reporting standards. By establishing the model for
real-time integrated business solutions, SAP provides
the ideal platform for harmonizing and accelerating
the entire reporting process.

Although the extensive effort required IFRS. Corporate reporting is an obvious

to adopt IFRS appears burdensome,
many companies see the integration as
a useful business opportunity. The
changes required for operational sys-
tems can serve purposes that reach far
beyond statutory compliance. In fact,
businesses can use the adoption of
IFRS to review their systems and ad-
dress matters that have been on their
to-do lists for a long time.
For example, companies may want to
look at their overall reporting setup
while they are analyzing what to do for
target for update. Speeding up and im-
proving the closing process to obtain
better information quickly is a goal that
has become increasingly important as
global expansion and industry consoli-
dation increase the complexity and diver-
sity of IT systems. Companies are being
pressured to reduce their IT costs at
the same time they are being pressured
(by close scrutiny of capital markets) to
produce more information faster – with
fewer resources. The only way to resolve
this conflict is to achieve a high level of
system integration and standardization.

19
50 065
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(08/12)
©20YY by
©2008 by SAP
SAP AG.
AG.
All rights reserved. SAP, R/3, xApps, xApp, SAP NetWeaver, Duet,
PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products
and services mentioned herein as well as their respective logos are
trademarks or registered trademarks of SAP AG in Germany and in several
other countries all over the world.

Business Objects and the Business Objects logo, BusinessObjects,

Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other
Business Objects products and services mentioned herein as well
as their respective logos are trademarks or registered trademarks of
Business Objects S.A. in the United States and in several other countries
all over the world. Business Objects is an SAP company.

All other product and service names mentioned are the trademarks of their
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purposes only. National product specifications may vary.

These materials are subject to change without notice. These materials

are provided by SAP AG and its affiliated companies (“SAP Group”) for
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