IFRS Analyst Presentation Migration

8/10/2019 IFRS Analyst Presentation Migration

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Full Migration of SAP’s Financial Reportingfrom U.S. GAAP to IFRS

Dr. Christoph Hütten

Chief Accounting OfficerSAP AG



© SAP 2008 / Page 2© SAP 2009 / Page 2

1988: SAP starts to report consol idated financials under German GAAP (HGB)

German requirement due to size and existence of subsidiaries

1999: SAP starts to report consolidated f inancials under U.S. GAAP

Obligation due to U.S. listing

Most major competitors located in the U.S.=> U.S. GAAP as the accounting language of the industry

IFRS (IAS) no alternative at that time

2002: European Union requires all publicly l isted European companies to report under IFRS

from 2005 onwards (U.S. listed companies to start 2007)

2004: SAP starts preparation for IFRS and defines reporting strategy for IFRS and U.S. GAAPbased on investor & analyst feedback

Focus of communication to capital markets continues to be on U.S. GAAP

Continue to prepare and file U.S. GAAP financial statements until financial communityunderstands comparability of SAP‘s IFRS reporting with competitors‘ U.S. GAAP reporting

Prepare IFRS financial statements in accordance with legal requirements=> no proactive communication beyond legal requirements

No voluntary IFRS financial statements prior to 2007

No „independent“ IFRS accounting strategy. Goal: Minimize the U.S. GAAP / IFRS differences

Internal Reporting continues to be based on U.S. GAAP

The History of SAP‘s Financial Reporting



© SAP 2008 / Page 3© SAP 2009 / Page 3

2004-2008: Increasing U.S. GAAP/IFRS convergence and increasing IFRS acceptance worldwide

2008: SAP issues first IFRS financials

Minimal differences to U.S. GAAP financials

No differences in revenue except for different classification of discontinued operations

2008: SEC accepts from foreign issuers IFRS financials without U.S. GAAP reconcil iation

2008: SEC proposes roadmap to converge all U.S. issuers to IFRS unti l 2014

Final decision to be expected in 2009

Remarks of new SEC chairman Shapiro creates some confusion regarding SEC’s commitment

G20 meeting in April 2009 mandates worldwide transition to one global accounting standard

2008: SAP collects feedback from investors regarding full conversion to IFRS

Mixed feedback:

Some investors stated that this is a wise move

For some investors U.S. GAAP versus IFRS does not make a difference while

Some investors indicated they may need to consider sale of their SAP stake

Several investors asked for the migration not to be done short-term per end of 2008 but askedSAP to report U.S. GAAP and IFRS in parallel during 2009

To accustom the capital markets to IFRS@SAP

To have one year of consistency in SAP‘s external reporting after the changes in 2008

The History of SAP‘s Financial Reporting





© SAP 2008 / Page 5

SAP‘s IFRS Roadmap

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 2010 etseq.

PressRelease

U.S.GAAP

U.S.GAAP

U.S.GAAP

U.S.GAAP

& IFRS 1

U.S.GAAP

& IFRS 1

U.S.GAAP

& IFRS 1

U.S.GAAP

& IFRS 1

U.S.GAAP

& IFRS 1

IFRSQuarterlyReport

U.S.GAAP

IFRS &U.S.

GAAP 2

U.S.GAAP

n.a. IFRS &U.S.

GAAP 2

IFRS &U.S.

GAAP 2

IFRS &U.S.

GAAP 2

n.a.

AnnualShare-holdersReport

n.a. n.a. n.a. IFRS &

U.S.GAAP 3

n.a. n.a. n.a. IFRS

Form 20-F n.a. n.a. n.a. U.S.GAAP

n.a. n.a. n.a. IFRS

Guidance Non-GAAP, derived from U.S. GAAP Non-IFRS 4

1 IFRS: only balance sheet & income statement plus comments on major U.S. GAAP/IFRS differences2 Full IFRS statements (incl. notes) plus U.S. GAAP-data from press release3

Full IFRS statements (incl. notes) plus U.S. GAAP short version (balance sheet, income statement, cash flowstatement) with reference to Form 20F

4 Derived from IFRS



© SAP 2008 / Page 6

Benefits and Risks of Full IFRS Migration

Benefits

Communication to capital markets basedon single accounting regime eliminates

confusion that reporting under multipleGAAPs creates

Use of a global accounting standards fitsbetter to SAP as global company

IFRS is increasingly applied as local GAAPacross the world => Reduction in localGAAPs to be applied by SAP subsidiaries

Risks

Concern that SAP‘s financials changesignificantly

Concern that comparability toU.S. competitors is impaired

IFRS revenue recognition rules providemore flexibility

Differences in U.S. GAAP and IFRSrules regarding non-revenuetransactions

IFRS as a principle based standard isless strict



© SAP 2008 / Page 7

Benefits and Risks of Full IFRS Migration

Risks Mitigation Measures

Resolution of SAP Executive Board to toapply U.S. GAAP revenue recognition rulesunless specifically prohibited by IFRS

Reference to application of U.S. GAAPrevenue recognition rules in the notes to thefinancials => to be audited by KPMG

Three years (2006-2009) of parallel U.S.GAAP and IFRS reporting to evidenceinsignificance of differences

IFRS requirement to consistently applyaccounting policies => obligation to continuecurrent U.S. GAAP-like accounting policies

Risks

Concern that SAP‘s financials changesignificantly

Concern that comparability toU.S. competitors is impaired

IFRS revenue recognition rules providemore flexibility

Differences in U.S. GAAP and IFRSrules regarding non-revenuetransactions

IFRS as a principle based standard isless strict

Strong support for convergenceIFRS/U.S. GAAP efforts

Training and information materialfor financial community

Further reduce differences on Non-GAAPand Non-IFRS level



© SAP 2008 / Page 8

Classification of DifferencesBetween U.S. GAAP and IFRS

Differences betweenIFRS and U.S. GAAP

Avoidable differences Unavoidable differences

Differencesnot relevant to SAP

Differencesrelevant to SAP

Insignificantdifferences

Significantdifferences

Avoided via accounting

policy choice „ as close aspossible to U.S. GAAP“ or

Accepted in exceptionalcases at IFRS int roduct ion(Pensions, CTA)

Includes

non-software R&D expenses – themost important difference for manyother who migrated from U.S. GAAPto IFRS

most differences re. financialinstruments that are currentlydebated worldwide

Closely monitored but notconsidered as long as

clearly inconsequential


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Revenue RecognitionIFRS versus U.S. GAAP

IFRS revenue recognition (IAS 11, IAS 18)

IFRS revenue recognitionrules are rather broad

=> most U.S. GAAP practicesare in compliance with IFRS

Potential Unavoidable Differences

Multi Element Arrangements where Vendor Specific Evidence of Fair Value (VSOE) does not exist forelements other than software (Deferral under U.S. GAAP but possibly not under IFRS)

SAP has VSOE for all services

VSOE requirement may fall soon under U.S. GAAP

Custom Development and Consulting Arrangements where reliable estimates cannot be made (ZeroProfit Margin under IFRS, Completed Contract Method under U.S. GAAP)

SAP has a long history of custom development and consulting arrangements

SAP has hardly ever encountered Completed Contract Method scenarios under U.S. GAAP

Software contracts with payment terms > 12 months but high probability of payment

SAP very rarely has software contracts with payment terms > 12 months

U.S. GAAP revenuerecognition (SOP 97-2)







Reconciling U.S. GAAP to IFRS OperatingIncome for Q1 2009 (€ millions)

Valuationdifferences

Classificationdifference

U.S. GAAPoperating

income +332

IFRSoperating

income +307

Discontinuedoperations

-6Pensions /termination

benefits-5

Recognition ofother provisions-8

Acquisition re-lated charges

-6

-25



Non-IFRS Measures

Present: Non-GAAP

Currently, SAP provides guidance and reports performance against guidance based onNon-GAAP measures – in line with performance measures used internally

These Non-GAAP numbers differ from the respective U.S. GAAP numbers due toadjustments for

Deferred revenue writedown (from Business Objects acquisition)

Acquisition related charges

Future: Non-IFRS

Upon full migration to IFRS SAP will provide guidance and report performance againstguidance based on Non-IFRS measures – internal performance measures will be aligned

These Non-IFRS numbers differ from the respective IFRS numbers due to adjustments for

Deferred revenue writedown (from Business Objects acquisition)

– identical to Non-GAAP adjustment

Acquisition related charges – different from Non-GAAP adjustment due to (former) U.S. GAAP/IFRS differences in

accounting for business combinations

Discontinued operations – to eliminate U.S. GAAP/IFRS difference in accounting for discontinued operations



-3

U.S. GAAP to Non-GAAP versusIFRS to Non-IFRS - Q1 2009 (€ millions)

U.S. GAAPoperating

income +332

Non-GAAPoperating

income +410

Deferred

maintenancewritedown

Acquisition

relatedcharges


6611n/a

IFRSoperating

income +307

Non-IFRSoperating

income +397

7211

Non-GAAPoperatingincome atconstant

currencies+407

Currencyadjustment

Non-IFRSoperatingincome atconstant

currencies

+394

6 -3



U.S. GAAP to IFRS versusNon-GAAP to Non-IFRS - Q1 2009 (€ millions)

U.S. GAAPoperating

income +332IFRS

operatingincome +307


Acquisition

relatedcharges

Non-GAAPoperating

income +410

Non-IFRSoperating

income +397

-6 -6-5

-8

Recognitionof provisions

Pensions/

Terminationbenefits

n/a n/a-5

-8



U.S. GAAP/Non-GAAP versus IFRS/Non-IFRS –Q1 2009

Net Income (€ mill.) /EPS

Non-IFRSU.S. GAAP Non-GAAP IFRS

262

€0.22

262

€0.22204

€0.17

204

€0.17

196

€0.16

196

€0.16

262

€0.22

262

€0.22

Total Revenue (€ mil l.)

Non-IFRSU.S. GAAP

Non-GAAP IFRS

2,4092,4092,3972,3972,3972,397 2,4092,409

Equity (€ mil l.)

U.S. GAAP IFRS

7,4827,482 7,4097,409

Operating Income (€ mill .) /Operating Margin

Non-IFRSU.S. GAAP Non-GAAP IFRS

410

17.0%

410

17.0%

307

12.8%

307

12.8%

332

13.9%

332

13.9%

397

16.5%

397

16.5%



Comparison of U.S. GAAP and IFRS Cash Flow – Q1 2009 (€ millions)

U.S.GAAP

IFRS

Operatingcash flow

Net income 204 196

Net loss from discontinued operations 6 0Income from continuing operations 210 196

Non-cash relevant changes in balance sheet items 1,177 1,189

Net cash provided by operating activities from continuingoperations

1,387 1,385

Investingcash flow

Net cash provided by investing activi ties from continuingoperations

-588 -588

Financingcash flow

Net cash provided by financing activities from cont inuingoperations

13 13

Net cash used in operating activities from discontinued operations -2 0

Effects of foreign exchange rates on cash and cash equivalents -67 -67

Cash and cash equivalents at the beginning of the period 1,277 1,277

Cash and cash equivalents at the end of the period 2,020 2,020



Thank you!



Backup



Reconciling U.S. GAAP to IFRS Operating Incomefor 12 months ended 2008, based on press releaseannouncements (€ millions)

Valuationdifferences

Classificationdifference

U.S. GAAPoperating

income +2,842

IFRSoperating

income +2,731


-71Pensions /termination

benefits+1

Recognition ofother provisions-2

Acquisition re-lated charges

-39

-111



U.S. GAAP to Non-GAAP versusIFRS to Non-IFRS for 12 months ended 2008, based onpress release announcements (€ millions)

U.S. GAAPoperating

income+2,842

Non-GAAPoperating

income+3,305

Deferredmaintenance

writedown

Acquisitionrelated

chargesDiscontinuedoperations

297166n/a

IFRSoperating

income+2,731

Non-IFRSoperating

income+3,304

336166

Non-GAAPoperatingincome atconstant

currencies+3,450

Currencyadjustment

Non-IFRSoperatingincome atconstant

currencies

+3,449

+145

71+145



U.S. GAAP to IFRS versusNon-GAAP to Non-IFRS for 12 months ended 2008, basedon press release announcements (€ millions)

U.S. GAAPoperating

income

+2,842

IFRSoperating

income+2,731


Acquisition

relatedcharges

Pensions/

Terminationbenefits

-39-71

Non-GAAPoperating

income+3,305

Non-IFRSoperating

income+3,304

+1 -2

Recognitionof provisions

n/a n/a +1 -2

Documents

IFRS Analyst Presentation Migration