how to support international accounting standards in sapssi/download/erpias2004/umbbias_sap5.pdf ·...

How to Support International Accounting

Standards in SAP

(Pripravenosť ERP na IAS)

Ján Kôpka

SAP

FF UMB

Banská Bystrica 14. 4. 2004

SAP AG 2003, Title of Presentation, Speaker Name / 2

What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222

Accounts, Ledgers, Company Codes


What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222



Standards and Terminology

IAS (International Accounting Standard): high-level guidelines for financial reporting

IFRS (International Financial Reporting Standard(s)):new terminology for the IAS

SIC: Interpretation(s) issued by the Standing Interpretations Committee of the IASB clarifying and detailing the interpretation of the IAS or IFRS

SEC: U.S. Securities and Exchange Commission.

IASC: The International Accounting Standards Committee predecessor of the IASB, the International Accounting Standards Board

Standards emphasize intention rather than working according to the letter of the law.


What does “IAS” mean?

IAS stands for „International Accounting Standards“

The IASB (International Accounting Standards Board) issues IAS (also known as “International Financial Reporting Standards,” IFRS)Goal of IAS is to get internationally comparable financial statements

The European Commission has mandated that all listed European companies must publish their financial statements according to the principles of IAS starting in 2005

This is the next step in harmonizing the European economy. The second reason is to get more transparency for the capital market.

This directly affects about 7,000 listed companies in the European Union


What does “IAS” mean? (II)

However:

For national tax purposes, local laws and regulations still applyAllowable dividends and other distributions to shareholders are still based on national regulations

Therefore:

Affected companies will have to prepare at least two sets of financial statements which requires significantly greater time and expense

And:

Capital markets demand comparable numbers to make investment decisionsTherefore non-listed companies will practically be forced to provide IAS financial statements


The Cost of Conversion

Apart from the general problems associated with implementing parallel accounting, the following areas should be considered:

Acquiring knowledge about IAS

Training personnel

Reconfiguration of IT

An IAS implementation project affects the whole company--not just accounting and IT!


Local Accounting Standards vs. IAS: Examples

XX

X

XXX

XX-Long-term contracts

Percentage of completionCompleted contract method

XXXXXX

X

Capitalization of internally generated intangible assetsMust capitalize

Election to capitalizeNo capitalization allowed

XXXXXX

X

Segment ReportingSales by lines of business and region

Segment income, expenses, assets, liabilities, etc.

NLIFEDBIAS


History

1973: The professional accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom/Ireland, and United States took the initiative for IAS.

Late 1980s: The EU committed itself to IAS. All future member states will do the same.

Late 1990s: the IMF and G7 voice support of IAS.

2002: European Commission decides to adopt IAS for EU as of 2005.


The IAS Organization

IAS Foundation - 19 trustees(appointments, control, funding)

IAS Board - 14 members(approve standards, drafts, interpretation)

IAS Board - 14 members(approve standards, drafts, interpretation)

International FinancialReporting Interpretations

Committee – 12 members

International FinancialReporting Interpretations

Committee – 12 members

Standards AdvisoryCouncil – ca. 45 members

Steering committees(major projects)

Appoints

Appoints

Appoints

Advice

Advice

Reports

Reports

IAS Foundation - 19 trustees(appointments, control, funding)


Timetable for IAS Implementation and SAP R/3 Release Upgrade

20062005200420032002

Parallel accouting

local GAAP / IAS

Upgrade to R/3 Enterprise

Initial application of

IAS for comparative

data

Project preparation and IAS implementation

project

General

SAP

Upgrade to R/3 4.6C

Account-ing

Other organizational or IT Projects (Restructuring, CRM, SCM, statutory requirements etc.)

End of supportR/3 4.6C

End of supportR/3 3.1I, 4.0B,

4.5B, 4.6B

optional

First IAS F/S


How does SAP Handle Parallel Accounting?

Where do the numbers come from?Details from each component (FI, FI-AA, CO, MM, etc.)

Where do you post them?Parallel AccountsParallel LedgersParallel Company Codes

How do you post them?“Full” or “delta” entries?


Waves of Harmonization in Europe

Euro

European jurisdiction in

taxEuropean Company

IAS

20xx

1996 Project start2002 2003


What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222



Analyzing Your Firm

What is your current approach?US GAAP is leading in my system.I have multiple entities that follow local practices; consolidated through additional tool (Excel, SAP, Hyperion).My corporate accounting rules are leading in my system. US GAAP and other reporting is done by manual adjustment.It emerged over time, it works, we dont fix what isn’t broke.

What does the introduction of IAS mean?European reporting needs to follow IAS.Banks are already starting to request IAS reporting for loans.US GAAP and IAS will converge, but it will take time. Meanwhile for US firms it means a minimum of two different approaches in one system.It requires close cooperation between F&A and IT. Many issues can only be resolved when auditors, accountants, and SAP specialistspool their resources.


IAS and SAP: Basic Software Considerations

What information is required when?Parallel sets of books do not necessarily mean doing everything all the timeWhat is needed for internal reporting purposes?Primary valuation monthly or quarterlyTax reporting annually

Choice of Primary ValuationLocal GAAP as primary valuation usually means monthly reconciliation to IAS for internal and/or consolidated reportingIAS as primary valuation provides instant comparability throughout the group and easier aggregation of accounting data: uniformity.(SAP recommendation)


“Continental” Approach with Additional Ledgers

IAS

GLLocal GAAP

COManagement

Additional Ledgers

GL contains local GAAP

CO contains a different management valuation

FI-SL contains IAS valuation


“Convergent” Approach with Additional Ledgers

Local GAAP

GLIAS

COIAS

Additional Ledgers

IAS is primary valuation

Internal and external accounting are convergent

Local GAAP books are maintained in an additional ledger


What is the principle?

A selection of posting is copied in a special ledger. Corporate differences (e.g., US GAAP) are posted in the ledger only.

This allows for a complete, separate environment according to a different accounting principle.

SAP Enterprise contains extra support for this solution.


How Does It Work?

Special ledger

Selected transactions +

+

+

Financial ledger Reporting

GL

AP

AR

SD

MM

PS

PM

IAS posting

IAS posting

IAS posting

IAS

US GAAP


An Example

Special ledgerFinancial ledger Reporting

Selected transactions +

IAS988.000

FI995.000

BS investment assets10000

100000

BS depre. value10001

5000

PL depreciation4010000

5000

BS value 995.000

7000

IAS postingBS revaluation

S10001

PL revaluationS4010000

7000


Why Would You Want a Special Ledger?

With a special ledger, you could use the special account approach to deal with local legal fiscal issues in FI while reporting from two different accounting views on the corporate level.

Still, it is a complex and demanding solution. Consequently, a future convergence of IAS and US GAAP is extremely desirable. SAP AG is a strong advocate for this policy.

In practice, most customers until now opted for special accounts. However, in the EU companies do not have to deal with both IAS and US GAAP.


Special Ledger: Supporting Tools in SAP

In SAP Enterprise, SAP has created an IAS ledger to support these solutions. In earlier versions, a special ledger had to be designed and built from scratch.

According to WDEIAS, these components are supported in the IAS ledger:


Financial Assets a Complex Area

Corporate Financial Management offers parallel valuation to deal with the problems caused by IAS:

SAP documentation 4.7


Introducing the Special Ledger

Requires system preparation: one CoA, one controlling area, probably upgrade to SAP Enterprise.

Requires detailed instructions for postings and month-end procedures.

Requires extensive change management to introduce the new way of working.

Often will require the introduction of a one-way-of-working concept.

Requires a detailed and complex design phase to decide what postings are copied to the special ledger and what additional postings are required.


Using Parallel Ledgers in R/3 Enterprise

An additional Special Ledger is set up to maintain a parallel set of books.

The new ledger receives all the transactions as the main GL and creates its own line items (delta entries not supported in every application)

Transactions that do not involve valuation differences are posted to the main GL and to the additional ledger

Automatic valuation methods can create entries into one ledger

A new entity “Accounting Principle” controls posting destination.

Up to Release 4.6C, supported only in Corporate Finance Management

Other components are currently not able to post to additional ledgers automatically.

The Parallel Ledger Solution will be expanded in R/3 Enterprise (FI, FI-AA, CO)


SAP Solutions (Parallel Ledgers)

Parallel Ledgers are good when:

You do not want a large number of additional GL accountsYou need a set of books complete and separate from the rest

Local posting without “original” documentYou do not require online detail posting from all subledgers

Summary entries from AADelta entries in some cases, full entries in others

You want to use standard financial statement reportingYou need different fiscal yearsYou do not mind implementing FI-SL

Extra data volumeOwn data entry transactionsLedger Selection


Pitfalls & Problems

To allow postings in the special ledger, the account has to be created in your CoA; it does not simplify your general ledger.

A special ledger does not make correction postings for you. A lot of manual work is still involved.

Special ledgers are outside the experience of many consultants. Be careful in hiring.

On help.sap.com, the SAP Enterprise (4.7) documentation is now available (no password needed)

Good

Thing


Standard Data Flow in R/3 (Logical View)

Process COFI-GL

SL

Process

PCA

ReconciliationLedger

Process

Ledger SelectionAllocations


Data Flow in R/3 with Parallel Ledger (Logical View)

Process COFI-GL

Ledger Selection

SL

Process

PCA

ReconciliationLedger

Process

Allocations


What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222



Using Parallel GL Accounts

Pure Local GAAP

Accounts

Pure IAS

Accounts

Common

Accounts

Items with significant valuation differences are posted to different accounts. Each valuation has its own set of “pure” accounts.

Common accounts are used where no material valuation differences occur.

Each set of accounts contains its own retained earnings accountsin order to balance.

It is advisable to have clearly discernable account number ranges or distinguishing digits or letters to distinguish among sets ofaccounts.

Since each set must be in balance, extra care must be taken to ensure correct account determination: establish a coding handbook!


Financial Statements Using Parallel GL Accounts

Common

Accounts

Pure IAS

Accounts

Pure Local GAAP

Accounts

Local GAAP Financial StatementsReport using common accounts and the “pure” local GAAP accounts together.Report in local currency.


Financial Statements Using Parallel GL Accounts

Common

Accounts

Pure IAS

Accounts

Pure Local GAAP

Accounts

Local GAAP Financial StatementsReport using common accounts and the “pure” local GAAP accounts together.Report in local currency.

IAS Financial StatementsReport using common accounts and “pure” IAS accounts together.Report in local or group currency. Appropriate remeasurement and translation methods are available in FI.


SAP Solutions (Parallel Accounts)

Parallel Accounts are good:

Where relatively few valuation differences are involved; this is the easiest solution to implementBecause every valuation method in R/3 supports parallel accountsIf you want to use standard reportingIf it is not a problem to mix different valuations together in one General LedgerIf a greater number of GL accounts is not a problemIf you do not have to support different fiscal years

Local GAAP restrictionsParent / Subsidiary discrepancy


What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222



SAP Solutions (Parallel Company Codes)

Parallel Company Codes are good when:

You do not want a large number of additional GL accountsYou only have valuation differences resulting only from fixed assets, FI, or manual entriesYou want to use standard reportingYou do not mind a larger number of company codesYou do not need different account names in the various company codesYou have already implemented this solution and have no further needs: no additional development planned


What We’ll Cover

Background

Full or Delta?

Primary Valuation

111

333

444

222



“Full” or “Delta” Entries? (1)

Scenario: Two valuations, IAS is primary

FI-AA has two depreciation areas01 is IAS30 is for local GAAP

For December 20X2, there are two depreciation entries to make:01 IAS EUR 1000.0030 Local EUR 600.00

Conventional logic would be to post each entry independentlyDr Depreciation Expense IAS 1000.00Cr Acc. Depreciation IAS 1000.00

Dr Depreciation Expense local 600.00Cr Acc. Depreciation local 600.00


“Full” or “Delta” Entries? (2)

Delta Logic would make the following entriesDr Depreciation Expense IAS 1000.00Cr Acc. Depreciation IAS 1000.00

Dr Depreciation Expense Adj. local -400.00Cr Acc. Depreciation Adj. local -400.00

In this case, the local GAAP entry acts as a correction to the first entry to get the right resultLocal GAAP can only be explained by reference to IASUnderstandability is restrictedAudit issues: should the tax man see IAS?“Delta” entries are not recommended!


Summary: Do’s and Don’ts

Do decide on primary valuation in conjuction with overall business needs

Do use parallel accounts

Do isolate material differences as opposed to minor differences

Do examine the interdependency between FI, CO, PCA, SL, CO-PA etc.

Don’t use delta entries!

Don’t use parallel company codes!


Information Sources

“IAS in your pocket,” available from www.iasplus.com. This Web site offers a lot of interesting, up-to-date material.

SAP courses (currently only available in German) WDEIAS and WDEBF3. Courses have a country focus.

GAAP 2001 – A Survey of National Accounting Rules available from www.kpmg.ru/detail.thtml/en/library/assurance/GAAP/.

International Accounting Standards Similarities and Differences IAS, US GAAP, UK GAAP and Dutch GAAP; PriceWaterhouseCoopers. Available from http://www.pwcglobal.com/extweb/pwcpublications.nsf/DocID/803E18F1DDD4A91E852568CC0055602B at www.pwcglobal.com.

IASB Web site: www.iasb.co.uk.

International Forum for Accountancy: http://www.ifad.net.

SAP finance specialists www.sapfico.nl.

http://www.iasplus.com/

http://www.kpmg.ru/detail.thtml/en/library/assurance/GAAP/

http://www.kpmg.ru/detail.thtml/en/library/assurance/GAAP/

http://www.pwcglobal.com/extweb/pwcpublications.nsf/DocID/803E18F1DDD4A91E852568CC0055602B

http://www.pwcglobal.com/extweb/pwcpublications.nsf/DocID/803E18F1DDD4A91E852568CC0055602B

http://www.pwcglobal.com/

http://www.iasb.co.uk/

http://www.ifad.net/

http://www.proxyon.nl/


Your Turn!


Your Turn!

Questions?


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