ISSUES AND TERMINOLOGY RELATED TO IFRS.pdf

HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS

UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS

A White Paper prepared by IT Convergence

presented at Collaborate 10.

Author Patrick Krause

Copyright IT Convergence 2010

HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS

IT Convergence White Paper 2 / 11

TABLE OF CONTENTS

What is IFRS and Who is IASB................................................................................................................................................. 4

Adoption of IFRS Around the World.......................................................................................................................................... 4

Securities and Exchange Commission and IFRS...................................................................................................................... 4

Advantages of Converting to IFRS............................................................................................................................................ 4

Disadvantages of Converting to IFRS....................................................................................................................................... 4

Convergence vs Adoption ......................................................................................................................................................... 5

Key Players in the United States............................................................................................................................................... 5

Major U.S. companies on the Transition to IFRS...................................................................................................................... 5

Key Differences between IFRS and GAAP ...............................................................................................................................5

Issues Regarding the Conversion to IFRS from U.S. GAAP..................................................................................................... 6

Cost of converting to IFRS........................................................................................................................................................ 6

Plan of Action............................................................................................................................................................................ 6

Impact on Oracle Financials...................................................................................................................................................... 6

IFRS1, First –Time Adoption of International Financial Reporting Standards ........................................................................... 6

Revenue Recognition................................................................................................................................................................ 7

Liabilities in IFRS ...................................................................................................................................................................... 7

Oracle Solutions........................................................................................................................................................................ 8

When Using Oracle for IFRS, Trust in Experience.................................................................................................................... 8



Abbreviations .......................................................................................................................................................................... 10

Sources................................................................................................................................................................................... 11

Other Resources..................................................................................................................................................................... 11



What is IFRS and Who is IASB

The International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is leading the effort to create a global standard for the issuance of public company financial statements. The IASB is an independent accounting standards body, based in London.

The IASB consists of members from nine countries, including the United States. The IASB was organized in 2001, when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, and other international and professional organizations throughout the world. The AICPA was a founding member of the International Accounting Standards Committee.

Adoption of IFRS Around the World

To date, more than 12,000 companies in over 100 countries have adopted IFRS, including many companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS by 2011. Mexico plans to adopt IFRS for all listed companies starting in 2012. Japan and Mexico have plans to converge the IFRS with their national standards by eliminating significant differences between the two accounting standards.

Securities and Exchange Commission and IFRS

The Securities and Exchange Commission is weighing a five-year work plan that would lead to conversion of all U.S. public companies to IFRS. This is in response to global demand from regulators, investors, businesses, and auditing firms for a single set of high-quality accounting standards; demand that is driving increasing worldwide adoption of IFRS and a convergence with U.S. generally accepted accounting principles.

Advantages of Converting to IFRS

By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad.

Disadvantages of Converting to IFRS

Despite a general consensus of the inevitability of the global acceptance of IFRS, many people also believe that U.S. GAAP is the gold standard, and that something will be lost with full acceptance of IFRS. Further, certain U.S. issuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. Some U.S. issuers may not deviate from U.S. GAAP due to requirements to file with other regulators and authorities and would result in extra costs than currently incurred by following only U.S. GAAP.



Another concern is that many countries that claim to be converting to international standards may never get to 100 percent compliance. Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability – one of the main objectives of IFRS.

Convergence vs Adoption

“Adoption” would mean that the SEC sets a specific timetable when publicly listed companies would be required to use IFRS as issued by the IASB. “Convergence” means that the U.S. FASB and the IASB would continue working together to develop high quality, compatible accounting standards over time. More convergence will make adoption easier and less costly and may even make adoption of IFRS unnecessary. Supporters of adoption, however, believe that convergence alone will never eliminate all of the differences between the two sets of standards.

Key Players in the United States

The key players are the Securities and Exchange Commission, which is responsible for the supervision and regulation of the securities industry and has oversight responsibility for the FASB; the Financial Accounting Standards Board, an independent body that establishes and interprets U.S. GAAP; and the IASB, which is working with the FASB on the convergence of GAAP and IFRS. Through its Accounting Standards Executive Committee, the AICPA has provided thought leadership to the IASB and the FASB on financial reporting topics.

Major U.S. companies on the Transition to IFRS

Until the Securities and Exchange Commission issues a rule allowing or requiring U.S. public companies to adopt IFRS, they must continue to prepare their financial statements under U.S. GAAP. Several large multinational corporations, such as Procter & Gamble, however, have started using IFRS for their foreign subsidiaries where allowed by local law. Also, some U.S. subsidiaries of foreign-owned companies are also using IFRS.

"Start now, treat it as an opportunity, and make sure your entire organization is invested in the change," suggested Margaret M. Smyth, Vice President, Controller of United Technologies Corporation (UTC), a $53 billion manufacturer of everything from elevators to helicopters.

"In talking to some of my European and Asian peers who have already adopted IFRS, it seems clear that one of the challenges is the toll it takes on IT systems," said Smyth. "Many companies do not have the capabilities they will need." "Sure the 2014 deadline could move to the right, but the training and preparation necessary to do this well will be significant."

Key Differences between IFRS and GAAP

The biggest difference between U.S. GAAP and IFRS is that IFRS provides much less overall detail. Its guidance regarding revenue recognition, for example, is significantly less extensive than GAAP. IFRS also contains relatively little industry-specific instructions.



Issues Regarding the Conversion to IFRS from U.S. GAAP

Conversion to IFRS is much more than an accounting exercise. It will affect many aspects of a U.S. company's operations, from information technology systems and tax reporting requirements, to internal reporting and key performance metrics and the tracking of stock-based compensation.

Cost of converting to IFRS

The size and nature of the respective company would determine the cost to adapt. While the initial cost to identify and quantify the differences between U.S. GAAP and IFRS, staff training, and implementing IT support could be significant, the conversion also might result in a reduction of capital and financial reporting related operation costs.

Plan of Action

The bottom line is that those involved in the publication of financial statements need to begin to prepare for the day in the near future when the Securities and Exchange Commission could designate a date for voluntary, or even mandatory, adoption of IFRS by all U.S. public companies. Also, be aware that the way financial statements are prepared differs based on whether a company is using IFRS, U.S. GAAP, or another country's GAAP.

To be proactive, the best advice is to stay on top of SEC developments regarding IFRS and its potential adoption by U.S. companies, and of the various efforts to allow nonpublic companies to use IFRS as well. Two good sources of information are the AICPA's Web site at www.ifrs.com, and the SEC website at www.sec.gov.

Impact on Oracle Financials

There are specific differences between GAAP and IFRS that may impact Oracle applications, or the business process involved in configuring or using them. For example, IFRS does not allow the LIFO accounting method which is used in valuing inventory and COGS.

Discrepancies can occur between reports based on IFRS and those based on local GAAP as a result of a change in accounting policy or in the method of measurement. Companies have sought to manage this variance in an effort to distinguish real changes in performance from discrepancies that arise due to the application of new accounting rules. The implementation of IFRS can significantly improve or worsen reported results, depending on the number of individual reporting changes required by each new standard.

IFRS1, First –Time Adoption of International Financial Reporting Standards

IFRS 1 requires that the opening IFRS balance sheet follow these general principles:

Include all of the assets and liabilities that IFRS requires;

Exclude any assets and liabilities that IFRS does not permit;

http://www.ifrs.com/

http://www.sec.gov/



Classify all assets, liabilities and equity in accordance with IFRS;

Measure all items in accordance with IFRS; and

Be prepared and presented within an entity’s first IFRS financial statements

Revenue Recognition

A discussion paper, ‘Preliminary Views on Revenue Recognition in Contracts with Customers’ was published in December, 2008. The standard presented there is expected to apply one model and basic principles across all industries as opposed to the U.S. GAAP detailed guidance that is industry specific. The proposed revenue recognition model within the discussion paper is very different from what US companies have long been following. For instance, under current guidance, warranty obligations are recorded as a cost accrual at the time of sale. Such warranties may be a separate performance obligation under the proposed model and would result in revenue deferral as opposed to cost accrual. At the same time, sales type incentives such as free products or customer loyalty programs are currently recognized as marketing expense in some circumstances. The proposed model would generally require that those incentives be performance obligations and revenue deferred until such obligations are satisfied as when a customer redeems loyalty points. This change would align US GAAP with the guidance for customer loyalty programs under IFRS. In general, the proposal will drive an increase in the identification and separation of performance obligations, which may require greater use of estimates which is different from the current practice. How a company recognizes revenue can impact sales strategy, salesperson compensation, cash management, investor communications, and information system design.

Under the new standard, an entity should recognize revenue when it satisfies its performance obligations in a contract by transferring control of goods and services to a customer. According to the March 2010 edition of the Journal of Accountancy, the IASB, after consulting with FASB, tentatively decided that the principle of control involved a customer’s “unconditional obligation to pay for an asset, legal title to an asset, the ability to sell the asset or physical possession of the asset.”

Combining and segmenting contracts is allowed under U.S. GAAP, but not required. In contrast, under certain criteria it is a requirement under IFRS. The impact can substantially change a company’s revenue contingent upon the circumstances within each contract.

Liabilities in IFRS

ACCRUED EXPENSES

IFRS requires a detailed disclosure of the nature of each accrued expense and the nature of the changes to those accrued expenses. Under U.S. GAAP, accrued expenses can be presented as one line item in the financial statements.

Under U.S. GAAP, the classification of the deferred tax asset or liability is either short or long-term, depending on the underlying relationship of the timing difference. Under IFRS, deferred tax assets and liabilities are always recorded as long-term.



Oracle Solutions

Customers have been complying with IFRS by deploying all versions of Release 11 through the use of General Ledger balances and recurring/reversing journals to support dual reporting. FSG reports are used to create an Income Statement and Balance Sheet in the General Ledger; trial balances are available in Accounts Payable, Inventory and Accounts Receivable.

The Oracle E-Business Suite Release 12 with multiple ledger functionality facilitates automation employing Subledger Accounting (SLA) to process individual transactions with multiple accounting representations to comply with IFRS and U.S. GAAP. SLA enables you to standardize your accounting policies, document them in the form of user-defined accounting rules and distribute them across the entire company to ensure that everyone uses the same rules.

You can create customized reports from Oracle Subledger Accounting data. Using Oracle BI Publisher Finance can create and maintain report formats with familiar desktop tools. Transaction and accounting details from Subledger Accounting XML data extracts can be mixed and matched, including information captured in descriptive flexfields, to create Subledger Accounting reports for your specific needs. BI Publisher merges the custom report template with the data extract to generate the output in the selected format (e.g., PDF, HTML, RTF, and Excel).

Oracle’s Enterprise Performance Management system helps finance professionals confidently meet and exceed the levels of versatility in analysis and transparency in reporting that are now required globally. This application suite offers three modules that enable companies to generate reports that comply with current requirements, as well as respond quickly and accurately to new requirements as global standards and policies evolve. These modules are Oracle Hyperion Financial Management, Oracle Hyperion Financial Data Quality Management, and Oracle Hyperion Strategic Finance.

Oracle Hyperion Financial Management is a highly flexible module with multidimensional capability. It allows companies to comply with IFRS as well as with multiple GAAP, to support segment reporting as well as management and statutory reporting, to reconcile differences in results, and to create an audit trail of reporting activity. It streamlines the collection, consolidation, and reporting of financial and non-financial information. The result is more control and consistency over financial and non-financial reporting, improved data integrity and audit trails, as well as savings in time, effort, and costs.

Oracle Hyperion Financial Data Quality Management provides a Web-based workflow that maps and reconciles reporting data to the reporting consolidation system, integrating and validating data regardless of which standards were used for the initial reports. It supports standardized consolidation and reporting processes in compliance with U.S. GAAP, IFRS, and local statutory requirements. It provides intercompany eliminations, multicurrency translations, and minority interest calculations, delivering them quickly and cost-effectively out of the box.

Finally, Oracle Hyperion Strategic Finance allows finance managers to evaluate changes in accounting policies required by IFRS, model their impact on internal or external KPIs, and adjust operational strategies to produce favorable results.

When Using Oracle for IFRS, Trust in Experience

Everyday, advances in technology and communications bring the world closer and closer together and economic integration between countries and continents goes deeper and deeper. Competition between global companies has always been fierce, but for small and medium sized companies (SME’s) today face global competition whether they attempt to go global, or the global economy comes to them.



Case in point, according to the U.S. Small Business Administration, exports by U.S. small businesses soared fourfold – to $400 billion – between 1992 and 2007. And it's expected that half of U.S. small businesses will be involved in international trade in the next 10 years.

What does this mean for IFRS? Well, consider the simple fact that, Canada, the biggest trading partner of the United States, has called for full adaptation of IFRS in 2011. Consequently, many U.S. businesses that have ties to Canada will have the acronym "IFRS" on their financial statements.

This is only the start of things to come. One way or another you’re going to need to get your financial team and your ERP system ready for IFRS.

IT Convergence, as the primer, global Oracle solution provider has already helped numerous clients navigated though IFRS. If you’re contemplating adopting IFRS or simply have questions on how you can get your systems up to speed, please feel free to contact us at 1-800-675-0032 ext. 2101.

September 2009 PriceWaterhouseCoopers IFRS and US GAAP similarities and differences

http://www.itconvergence.com/portal/page?_pageid=33,15589&_dad=portal&_schema=PORTAL



Abbreviations

ARC Accounting Regulatory Committee of the EC

CESR Committee of European Securities Regulators

EC European Commission

EEA European Economic Area (EU 27 + 3 countries)

EFRAG European Financial Reporting Advisory Group

EITF Emerging Issues Task Force (of FASB)

EU European Union (27 countries)

FASB Financial Accounting Standards Board (US)

FEE European Accounting Federation

GAAP Generally Accepted Accounting Principle(s)

IAS(s) International Accounting Standard(s)

IASB International Accounting Standards Board

IASC International Accounting Standards Committee (predecessor to the IASB)

IASCF IASC Foundation (parent body of the IASB)

IFAC International Federation of Accountants

IFRIC International Financial Reporting Interpretations Committee

IFRS(s) International Financial Reporting Standard(s)

IOSCO International Organization of Securities Commissions

SAC Standards Advisory Council (advisory to the IASB)

SEC Securities and Exchange Commission (US)

SIC Standing Interpretations Committee of the IASC

SME(s) Small and medium-sized entity(ies)



Sources

IFRS In Your Pocket 2008, An IAS Plus Guide, Deloitte, April 2008

Managing the Transition to International Financial Reporting Standards, An Oracle White Paper, Updated July 2008

Preparing to Transition to International Financial Reporting Standards (IFRS), Jim Springer, Principal Solutions Consultant, Oracle

Other Resources

Additional information is available on the website for the American Institute of Certified Public Accountants at www.ifrs.com.

LEGAL DISCLAIMER:

The information contained herein should be deemed reliable but not guaranteed. The author has made every attempt to provide current and accurate information. If you have any comments or suggestions, please contact us: [email protected].

IT Convergence White Paper: How to Help IT Staff and other Non-Finance Experts Understand the Issues and Terminology Related to IFRS

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ISSUES AND TERMINOLOGY RELATED TO IFRS.pdf