What is IFRS
IFRS - International Financial Reporting Standards are a series of accounting
standards developed by the International Accounting Standards Board (IASB),
that is becoming the global standard for the preparation of public company financial
statements.
IFRS focuses on the standardization of financial reporting standards across
international borders. This standardized reporting practice provides a uniform view of
a corporations accounting statements.
The US Securities and Exchange Commission is weighing a five-year work plan that
would lead to conversion of all US public companies to IFRS. This is in response to
global demand from regulators, investors, businesses and auditors for a single set of
accounting standards.
While support for maintaining US GAAP remains strong in the U.S., it is clear that
multinational corporations or corporations that simply do business internationally will
need to begin preparing for IFRS one way or another.
There are quite a few similarities between IFRS and US GAAP because the convergence project
between IASB and FASB (the standard setters responsible for IFRS and US GAAP respectively) has
been going on for a while (since 2003 actually).
US GAAP vs. IFRS Similarities
US GAAP is always more specific…
US GAAP vs. IFRS Differences
Some specific differences between
the two standards include:
Fair Market Revaluation - Under IFRS,
organizations must revalue ixed assets.
Under US GAAP, only certain assets like
real estate must be revalued.
Extraordinary Items - Negative goodwill
has gone away under IFRS.
Consolidation - Only entities that are
under your control should be consolidated
under IFRS.
R&D - Development costs are placed in
the Balance Sheet under IFRS.
Inventory - IFRS does not allow LIFO Or
“Last In First Out.” There are particular tax
advantages to LIFO, so that is why firms
practice it. But under IFRS, LIFO is not allowed
because inventory in the Balance Sheet is not
quite reflective of actual cost.
R11i: General Ledger - Adjusting Company Method
Reporting on US GAAP and IFRS simultaneously
requires different results to be displayed from the same
accounting base. Using this option, IFRS adjustment
journals are created and posted in a separate adjusting
company or balancing segment that shares the same
chart of accounts, calendar, and currency as the main
operating company.
There exists 11i capability at the subledger level that
can be used to address multi-GAAP reporting
requirements. For example, the requirement for
componentized fixed assets per IFRS can be addressed
by setting up a secondary Fixed Asset Ledger where the
componentized child assets can be separately
depreciated per IFRS, while the parent asset remains in
the primary FA Ledger to be depreciated as usual per
US GAAP rules and regulations.
US GAAP reports are generated in the main operating
company. Oracle’s capability of consolidating multiple
sets of books can be leveraged to obtain IFRS reports
from the consolidated entity as illustrated in the
diagram.
US GAAP Operating Company
AP AR FA
Sub-ledgers
IFRS Adjusting Company
Consolidated Entity
Transactions
IFRS Adjusting J/E’s
US GAAP Reporting
IFRS Reporting
Secondary FA Ledger
R11i: Global Accounting Engine (AX)
The Global Accounting Engine (AX) in Oracle 11i provides an
accounting system for Oracle Sub-ledgers (i.e. Payables, Receivables
and Inventory). AX is designed to help satisfy IFRS or other local
reporting requirements. AX is currently available for five countries
(France, Italy, Portugal, Greece and Spain), AX allows companies to
account for transactions from a Sub-ledger system using two different
accounting methods—French GAAP and IFRS for example. Entries
made in the Sub-ledgers are subject to certain rules that dictate the
treatment of accounting transactions differently to satisfy differing
accounting legislations.
Oracle also provides localizations and globalizations in 11i to manage
local rules and regulations for selected countries around the globe (i.e.
Latin Tax Engine, etc.).
R11i approach and is limited to 5 countries (France, Italy, Portugal, Greece, and Spain).
GL (IFRS)
AP AR INV
Sub-ledgers
GL (Local GAAP)
Global Accounting Engine (AX)
Transactions
Rules Based Postings
National vs. Parent/Group Compliance
National Parent and Group Resulting Problem
Statutory & Transaction Tax
regulations drive bookkeeping
IAS/IFRS or US GAAP drive
balance definition & disclosure
Eg: Billing not equal to Recognizable
Revenue
Invoice & document basis
(Sales Tax & VAT rules)
Reality & Market basis
(Accrual & Mark-to-Market)
Under-accrued,
Under-provided
Arms Length Values
(Landed cost, tax mark-up)
Intercompany Eliminated
(Lower of Cost & Market)
Inventory over-valued,
OOB Intercompany
National and Local
Chart of Accounts
External Reporting & Management
COA
Inconsistent Roll Up
minibus: T&E or HR expense
Local practice forces
classifications
Home country practice
assumes classifications
False mapping:
Exempt=from military service
“Not legal in my country” Simply book the entry… Discrepancies,
reporting errors
Use a Ledger for each LE, or use BSVs?
Limitation
Many LEs use
the same Ledger
Ledger not
owned by a LE
When
Compliance
Single LE uses
one Ledger
• No Legal Entity
Context
in Subledger
Transactions
• AGIS not available
• Not for Legal Entity
Legal Reporting
• Good for Adjustments
• Management
Reporting
• GL-only
implementation
Generally,
One OU per Ledger -
Requirement is:
Preserve LE’s privacy
vis-à-vis VAT auditor
Independent Doc
Sequencing,
VAT Controls,
Statutory COA, etc
Countries that regulate
individual LEs
e.g France, Italy
Many OUs per ledger
if desired:
Requirement is:
No privacy vis-à-vis
State Tax inspectors
No Autonomous Doc
Sequencing and Tax
Per Legal Entity
Countries that regulate
at the Group level
e.g US, Canada
Comment
Maintain Multiple Accounting Representations with
Secondary Ledgers
Source: Oracle Corporation, 2005
Secondary Ledgers
• For global companies that must comply with different countries’ legal requirements
• Useful for supplementary purposes, such as consolidation or management reporting
• Provides a complete accounting picture within itself or a partial picture to be grouped with other ledgers to provide a complete picture
• More Flexibility!
• Represent legal entity(s) accounting information in a different:
• Accounting Method
• Chart of Accounts
• Calendar
• Subledger Accounting Method
• Maintain 4 Different Levels
When to use a Secondary Ledger, an Adjustment Segment,
or an Adjustment Ledger
Adjusting
Segment
Adjusting
Ledger
Secondary
Ledger
Corp. wants GL balances per Parent
GAAP
Corp. wants “Just the adjustments,
thank you”
Corp. wants a complete Parent GAAP
& Currency edition of the Sub’s books
Subsidiary books are pretty similar to
parents
Mapping gets us most of the way to
Parent
Subsidiary books are quite alien to
parents
No inventory Inventory is the big difference Inventory is one of the big differences
National chart of accounts is clearly
related to IAS IFRS or GAAP
balances
Manageable series of
reclassifications
National chart of accounts is radically
different from corporate
National Controllership
- Corp GAAP known
Regional Controllership
- Corp GAAP administered
Parent Controllership
Mexico plant, US parent
Balances are enough
(Full drill down available)
See they’ve been properly adjusted to
our rules Every petty cash slip
Corporate GAAP - IAS/IFRS or National Regulation
Primary?
National ‘GAAP’ Primary,
Corporate ‘GAAP” Secondary
Corporate ‘GAAP’ Primary,
National ‘GAAP’ Secondary
Country regulates intensely Country is easy going
Country regulations differ from US GAAP
or IAS/IFRS
Country regulations similar to US GAAP or
IAS/IFRS
You have lots of in-country transactions
with local companies
Most of your transactions are with HQ or
are exports
You are in a regulated industry with local
oversight
You are in a regulated industry with
corporate oversight
Your national staff don’t know Corporate
culture
Your national staff know what you need
them to do. (Expatriates)
If you use Reporting Currency, you decide on the level of
detail you need
Source: Oracle Corporation, 2005
Four Options to “Consolidate” Information - Why and
When?
Ledger Sets GCS DBI FCH
Objective Manage Ledgers,
Balances
Non-Complex
Consolidation
“Barn door
is open –
close it”
Complex
Consolidation &
analysis
IAS/IFRS &
US GAAP
Use GCS to
eliminate
By Design Daily
Decisions
By Design
Internal control GL Controls, OICM GL Controls,
OICM
OICM on
subledger
Processes
OICM
Integration
Frequency Once Posted Monthly Daily Once Run
Source GL from SLA GL from SLA GL, SLA, Sub
Ledgers
GL from SLA, SAP,
E, etc.
Reporting FSG
send to FCH
FSG
send to FCH
Portal as Delivered EPB + Excel
Interface
R12: Convergence vs. Compliance
The Compliance approach requires the configuration
of accounting rules in SLA to reflect the duality of
accounting treatments for certain classes of
transactions. In this model, US GAAP accounting
would take place in the Primary Ledger and where
IFRS would be generated out of the Secondary Ledger.
With this approach, adjustment entries for IFRS need
not be created separately. SLA allows organizations to
define two sets of business rules for certain
transactions. Thus, at the transaction level, two SLA
records are maintained, thereby minimizing the back-
end work to adjust US GAAP to IFRS and allowing drill-
down to the source of the transaction.
The concept of “Ledger Sets” in R12 enables
transactions to be recorded with dual views, stream-
line month-end processes for Primary and Secondary
Ledgers, and reports to be generated based on dual
accounting treatments for the comparative year(s).
Note, definition of SLA rules are limited to certain classes of transactions. For instance, SLA
cannot be used to generate two sets of inventory cost accounting entries.
R12: Convergence vs. Compliance
The Convergence approach also requires the
configuration of accounting rules in SLA to reflect the
duality of accounting treatments for certain classes of
transactions. In this model, IFRS accounting would
take place in the Primary Ledger and where US GAAP
would be generated out of the Secondary Ledger.
With this approach, adjustment entries for IFRS need
not be created separately. SLA allows organizations to
define two sets of business rules for certain
transactions. Thus, at the transaction level, two SLA
records are maintained, thereby minimizing the back-
end work to adjust US GAAP to IFRS and allowing drill-
down to the source of the transaction.
The concept of “Ledger Sets” in R12 enables
transactions to be recorded with dual views, stream-
line month-end processes for Primary and Secondary
Ledgers, and reports to be generated based on dual
accounting treatments for the comparative year(s).
Note, definition of SLA rules are limited to certain classes of transactions. For instance, SLA
cannot be used to generate two sets of inventory cost accounting entries.
• IFRS will impact many areas of your business
• IFRS conversion will be a multi-year effort
• The need to capture more transactional data at a more granular level
may impact existing chart of account designs
• The conversion effort will be more than an accounting exercise
• Parallel reporting will be required under the current SEC roadmap
• Will require robust change management championed by top company
leadership
Conversion Considerations