Utilizing HFM to Handle the Requirements of IFRS

Peter FugereVice President

Ranzal & Associatespfugere@ranzal.com

http://www.linkedin.com/in/peterfugere#8075

Introduction• Part of largest HFM practice in North America, Ranzal & Associates• Oracle ACE• Certified in HFM and Enterprise• Consulting for 12 years• Oracle Hyperion Financial Management Tips And Techniques –

Oracle Press, McGraw Hill - Fall 2011

What is IFRS?• IFRS stands for International Financial Reporting Standards • IFRS is a global set of accounting standards developed by the

International Accounting Standards Board (IASB) which is an independent accounting standards body, based in London

• IFRS is intended to be a more principles-based set of standards rather than the rules-based approach of U.S. GAAP. The two systems (IFRS and U.S. GAAP) differ conceptually on a number of points.

• Global companies need to move to IFRS.

Why IFRS?

• Economic globalization brings increased demand for high quality, internationally comparable financial information.

• Facilitate global capital flows• Bring greater clarity and consistency to financial reporting in the

global marketplace. • Provide greater transparency and comparability of financial

information across countries.

IFRS vs. U.S. GAAPEventually, U.S. GAAP will go away, and IFRS will be the lone standard.

Source: Deloitte – Straight Talk Book No. 11

Important / Significant Differences• The way pre-operating and pre-opening costs are reported.• The fact that IFRS prohibits the use of LIFO for inventory valuation. • Borrowing costs• Fair value• Revenue recognition• Extraordinary items

Source: CAMagazine.com – The Road to IFRS

• IFRS Statement No. 1 requires companies to include a number of reconciliations in their first financial statements presented under IFRS, as follows:

• A reconciliation of the company’s equity previously reported under GAAP as of its transition date to its equity restated under IFRS at that date;

• A reconciliation of the company’s equity as of the entity’s most recent annual financial statements under GAAP to its equity restated under IFRS at that date; and

• A reconciliation of its last published US GAAP total comprehensive income with its restated IFRS comprehensive income for the same period.

• For all three of the reconciliations required, companies must distinguish between GAAP differences and correction of errors.

Among Others: IAS/IFRS US GAAP

Fair Market -Revaluation FA & Investments Only certain FI

Cash Flow Indirect (Favored) Direct/Indirect

Consolidation Control 2 models

Joint Ventures Proportional ok Only Equity

Pensions 15 differences

R&D: “Development” Dev. Capitalized Dev. Expensed

Inventory No LIFO LIFO OK

Impairment 1 Step, reversibleInterest rate sensitive

2 Step, no reversal

How are the Statements Changing?Income Statement

Balance Sheet

Statement of Retained Earnings

Statement of Cash Flows

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flow

How are the Statements Changing?

How are the Statements Changing?

• Approximately 100 countries already require, allow or are in the process of converging their national accounting standards with IFRS.

• Japan, the United States and Canada have active programs designed to achieve convergence with IFRS.

• China’s Accounting Standards Committee has announced that convergence is a fundamental goal of its standard-setting program.

• The Institute of Chartered Accountants of India has taken up the issue of convergence of Indian accounting standards with IFRS.

• The EU gave global convergence a kick-start when the EU mandated that EU companies with securities listed on an EU exchange prepare their consolidated accounts for all fiscal years beginning on or after Jan. 1, 2005, under IFRS. (>7,000 companies)

If you haven’t started yet…

Dates

• The US Securities and Exchange Commission (SEC) recently issued its proposed roadmap for conversion from US GAAP to IFRS. – Mandatory reporting under IFRS beginning in 2014, 2015 or 2016,

depending on the size of the issuer, and provides for early adoption in 2009 by a small number of very large companies that meet certain criteria.

• With compliance beginning in 2014. The SEC says it will decide in 2011 whether to hold to that schedule.

• One of the biggest lessons learned from European companies that converted to IFRS in 2005 was that they needed more than the two years time they were given.

Source: PWC – Mapping the Change

Early Conversion to IFRS has Appeal

• Simplified reporting• Reduced operating costs• Greater transparency and comparability for investors• Improved access to capital • Plus some companies see their competitors already embracing

IFRS. That’s why momentum toward IFRS adoption has been steadily building, even before it’s required.

To Adopt or not to Adopt?That is not the Question

• IFRS is being driven by the globalization of capital markets. Not just by government policy.

• “Every business will have a different outlook on IFRS, but no matter what your approach, know this: The full transition will take a well planned effort, requiring leadership and vision. For many companies, it will take at least three years.”

Deloitte

17

US

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Company RevenuesCompany Revenues

US

D S

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RS

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The amount of estimated spend on IFRS varies widely within each category of company size, with some companies in the same size category expecting to spend far more than their peers.

$23.2M $27.1M

$48.5M

$131.9M

$160.9M

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

$180.0

$1 Billion to

$4.9 Billion US

$5 Billion to

$9.9 Billion US

$10 Billion to

$19.9 Billion US

$20 Billion to

$49.9 Billion US

$50 Billion US

or more

0.731%

0.200%

0.141%

0.103%

0.298%

0.000%

0.100%

0.200%

0.300%

0.400%

0.500%

0.600%

0.700%

0.800%

$1 Billion to

$4.9 Billion US

$5 Billion to

$9.9 Billion US

$10 Billion to

$19.9 Billion US

$20 Billion to

$49.9 Billion US

$50 Billion US

or more

Source: Accenture 2008 IFRS SurveySource: Accenture 2008 IFRS Survey

All Stages: Apply Policy and Control Management

Determine impact on accounting in subsystems

Determine impact on accounting in subsystems

Configure accounting rules and set up ledgers

Configure accounting rules and set up ledgers

Process and report using dual accounting

Process and report using dual accounting

Milestone 3Transactions Recorded in Multiple GAAPs

Stage 3Record Transactions in both GAAPS

Stage 3Record Transactions in both GAAPS

Milestone 1Completed Preliminary Study

Stage 1Study Impact & Determine Strategy

Stage 1Study Impact & Determine Strategy

Perform Preliminary StudyPerform Preliminary Study

Assess ImpactAssess Impact

Determine StrategyDetermine Strategy

Determine changes to business modelDetermine changes to business model

Transform operations using IFRS results

Transform operations using IFRS results

Report IFRS results, increase shareholder value

Report IFRS results, increase shareholder value

Stage 4Transform Your Business & Win with IFRS

Stage 4Transform Your Business & Win with IFRS

Milestone 4Business Model Optimized

Collect GAAP Financial ResultsCollect GAAP Financial Results

Adjust and Consolidate Under GAAP & IFRS

Adjust and Consolidate Under GAAP & IFRS

Report, Reconcile and Audit ResultsReport, Reconcile and Audit Results

Milestone 2IFRS Reports Produced

Stage 2Enable Top End ReportsStage 2Enable Top End Reports

IFRS – The Big Impacts• Upstream systems

• Additional reporting requirements in areas such as taxes, financial instruments, and fixed assets.

• General ledger • Changes to the chart of accounts. During transition, general ledger

reporting will likely need to accommodate ledgers for both U.S. GAAP and IFRS.

• Reporting data warehouse• Changes in data models, such as valuation systems and actuarial models.

• Downstream reporting• Changes to the number of consolidated entities, mapping structures, and

financial statement reporting formats.

Next Steps• IFRS Gap Analysis - The first step in the journey is to conduct an IFRS

diagnostic to assess the impact conversion will have on your business.

• Get clear about how IFRS and U.S. GAAP differ. Determine the level of effort required to address the differences.

• Evaluate the impact on accounting policy. Some areas of accounting will require new policies due to clear differences in standards. In other areas, there may or may not be differences, depending on the choices you make.

• Inventory your current IFRS reporting requirements and locations.

• Identify resources within your organization to assist in the IFRS effort.

Next Steps(con’t)

• Assess the impact of IFRS on your technical infrastructure. Front-end systems, general ledgers, sub-ledgers, and reporting applications may need to be evaluated.

• Identify the impact on current system projects. As new projects are planned, take time to align requirements with the likely impact of IFRS

• Identify stakeholder groups affected by IFRS. Assess their current level of understanding of what’s ahead.

• Create a plan to address the training and communication requirements for each stakeholder group. Keep people informed through the entire journey. Take time to celebrate success.

Why HFM to Handle IFRS?• Centralize data – one version of the truth – accessed via the web• HFM can support multiple accounting standards (U.S. / CDN.-GAAP,

IFRS, and so forth)• HFM provides validations and controls over the process• HFM can accommodate multiple data sources• HFM can handle the collection of both financial and non-financial

metrics• HFM can handle different CoA’s• HFM can handle alternate organizational structures• HFM can handle & consolidate multicurrency translations • HFM has a lot of flexibility in writing business rules• Twelve smart dimensions to handle all your data requirements

Why HFM to Handle IFRS? (con’t)

• HFM has out of the box intercompany elimination functionality• Web architected / Designed for the internet / Highly scalable • Dynamic reporting / Excel addin (Smartview) • HFM’s ability to “slice and dice” information facilitates the segmental

reporting requirements in IFRS• Robust controls and audit trails that help with Sarbanes-Oxley

compliance• A vital requirement of an IFRS compliant consolidation model is to be

able to roam between results in different GAAP's and report them side-by-side together with the reconciling differences between them. Reports such as this can be readily generated on demand in Hyperion Financial Management by utilizing its customizable multi-dimensionality.

IAS/IFRS Compliant Processes

IAS/IFRS Compliant Processes

Why HFM to Handle IFRS? (con’t)

Multi-GAAP reporting compares results and quantifies the differences.

HFM has been used for multi-

GAAP reporting for years.

KPI’s can be executed on any

piece of data

Source: Oracle

Why HFM to Handle IFRS? (con’t)

• HFM’s data entry and production reporting can expand dynamically in response to any changes to the chart of accounts, IFRS requirements, or group structure.

• More than 1,500 companies worldwide have adopted Oracle Hyperion Financial Management to address their global financial consolidation and reporting requirements, and half of these customers have upgraded from Hyperion Enterprise.

• These companies have achieved a number of benefits, including: • Faster period-end closing and reporting cycles• Improved internal and external transparency• Reduced compliance costs• High return on investment• Efficient multi-GAAP reporting for the transition to IFRS

Multidimensionality becomes particularly vital when navigating the complexities of segment reporting, as required by IAS 14: Segment Reporting.

Source: Oracle

Impact on HFM Applications• Based on your specific IFRS requirements, how will this impact your

HFM apps? • The key areas to consider are:

• Create a new application• would include new accounts, new rules, new reports…

• Use a custom dimension• like a data type – start off with GAAP and adjust it to IFRS

• Use a new set of accounts• most of the base would be the same• may need more detailed accounts in some areas• new parent accounts would be required

• Use new entities – depends on consolidation complexity

Impact on HFM Applications• Adjust your current reports• Adjust your XBRL reporting – new taxonomies

• Disclosure management• Adjust your FDM apps• Know the impact of your decision on your application

• The choice to build this in you customs, accounts or entities may depend more on the application you have.

• Chris Barbieri, Ranzal has some great metrics to help guide your decision.

Custom Example for HFM

Closing Remark“You’ll need plenty of runway. You’ll have to provide

comparative financials during conversion—and deal with all the systems, process, and organizational issues surrounding the transition. It will take time. And it will ultimately require your signature.”

Deloitte

Source: Deloitte – Straight Talk Book No. 11

pfugere@ranzal.com

Special thanks to Chris Barbieri and Rob Dessureault