Orange County Convention Center Orlando, Florida | May 15-18, 2011

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Asset Accounting and IFRS Things to Consider

Gary Fullmer Americas IFRS Enablement – SAP Lead Ernst and Young LLP

[ Learning Points  Accounting Changes are taking place today  Convergence is now  IFRS is later?

 Financial Managers should have a ―working‖ knowledge of Asset Accounting  Communication with Asset Accounting Experts

 Begin Now  Project teams

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[ What We’ll Cover …    

Meeting the Convergence & IFRS Requirements An Overview of SAP Asset Accounting Planning for your Conversion Project Wrap-up

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[ Convergence Projects Underway

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Timeline for Accounting Change 12 Exposure Drafts (“EDs”) expected in 2010 and 2011– jointly developed by the FASB and IASB

►

►

Includes - Leases, revenue recognition, financial statement presentation and financial instruments

The rate and volume of accounting change is unprecedented SEC final decision on IFRS is still expected in 2011, potentially driving further conversion changes Navigating the uncertainty and complexity will be challenging and will put extreme pressure on the finance function

► ► ►

2010 Q2

Q3

2011 Q4

H1

2012

… fundamental changes in accounting and reporting paradigms … are being proposed in the forthcoming Eds … there are numerous interdependencies among the standards that further complicate the analysis Arnold Hanish, VP & CAO Eli Lilly Chairman, FEI Committee on Corporate Reporting Letter to the FASB and IASB, May 7, 2010

2013

2014

2015

H2 Parallel reporting for comparative purposes

IFRS reporting

SEC decision

IFRS timeline1

IFRS opening balance sheet

Implementation/Effective dates?

FASB/IASB joint projects

Comme nt

Final

Implement and test

Analyze standard and create plan

1Assumes

IFRS adoption in 2015 with two years comparative information

.

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[ Selected IFRS Rules

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[ IFRS will Impact Many of the Major Components of the SAP Financial Landscape

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Reporting Options — Embed or Hybrid Options [ Parallel for Asset Accounting Approach

Definition

Top-side

►

Embed

►

Hybrid

►

Manual

Automated

An approach using journal entries at the company or consolidation level to adjust existing US GAAP balances for IFRS differences

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

An approach using enabling technologies to record IFRS compliant transactions ► May use ERP application via chart of accounts, alternate ledger, company codes or another options ► Individual solutions for assets and other areas are also enabled at the sub-module level by adding transaction types, valuation differences, etc.

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

Combination of the “top-side” and “embed”

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

Companies need to maintain two versions of data within their systems. The challenge is how to enable the different versions without undue manual adjustments.

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Two Options for IFRS Reporting Using SAP General Ledger — Flexibility Suggested Approach Account-Based

Parallel Ledgers

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SAP General Ledger 

Easiest to implement



Single-ledger approach



Most transparent approach



Independent set of books



Future IFRS requirements more easily accommodated



Future enhancements easily accommodated

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[ Asset Accounting Must Be Configured at ERP Sub-Ledger Level Feeder Feeder Feeder Systems Systems Systems

Operational Departments (Cost Centers)

Subsidiary Subsidiaries (Sub) close their GL Finance & Report to HQ

Consolidation Process Corporate Consolidated Results

Sub A Sub A GL

US GAAP & IFRS Financial & Management Reports

Sub B Sub B GL

Reports ---------Reports --- --------- --------- Reports  --------- -------- Reports  --------- ------- -----

Sub C Sub C GL

Asset Accounting Sub ledger

Corporate Consolidation Process & System

Single or Parallel Ledger

Embed at Reporting Package

It is expected that companies will embed IFRS at various levels for different transactions and for different subsidiaries. With the decision being driven by the cost/benefit. Real Experience. Real Advantage.

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[ What We’ll Cover …    

Meeting the Convergence & IFRS Requirements An Overview of SAP Asset Accounting Planning for your Conversion Project Wrap-up

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Asset Accounting Considerations [ Selected US GAAP to IFRS  General topics    

Componentization of Assets Fair Value and Original Costs – converting assets under IFRS Impairments and Residual Values – annual testing/review Disclosures

 Selected Asset topics where there may be changes    

Leases Research and development Intangible assets/software Assets held for resale and investment assets

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[

SAP — Asset Accounting: Overview and Terminology Charts of Dep. Areas Depreciation

Company Code (s)

Dep. Keys

Parallel Ledgers

Deprecation

Chart IFRS

(01) IFRS

Deprec. Keys

Methods & Controls

Chart Local

(02) (Local)

Deprec. Keys

Methods & Controls

Chart TAX

(03) (TAX)

Deprec. Keys

Methods & Controls

LL IFRS

02 Local

APC, Deprec

03 TAX

Asset Master Records Sub-Asset (s) Master Records

FI/CO/MM

Asset Class

Source for asset creation

Line Items Transaction Types

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[ Transaction Types Transaction Types

 Definition  Asset transaction types identify individual business transactions as they are recorded during the original financial posting  Can be a manual entry or automatically derived based on configuration

 Transaction types identify:       

Acquisitions Retirements Fixed Asset Transfers Post Capitalization Down Payments Manual Depreciation Entries Asset Write-Up Entries

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[Asset Master Record Asset Master Records

 Definition  The asset master contains the comprehensive listing of data for an asset including:  General Description, and Functionality  Serial numbers  Time Dependency – For Cost Center, Business Area, ...  Allocations – Investment support measures, links to equipment master, and other data  Origin Information – Vendor, Manufacturing, Country of Origin ...  Net Worth Tax  Insurance – Type, company, agreement number, start, value, index  Depreciation Area Link  Other – Leasing information if applicable Real Experience. Real Advantage.

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[ Asset Master Record (cont.)

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[ Charts of Depreciation Charts of Depreciation

 Definition  They manage various legal requirements for the depreciation and valuation of assets  Usually country-specific requirements by Company Codes  SAP delivers country-specific charts as reference

 Serves as a directory of depreciation areas  Assigns the characteristics to individual depreciation areas  One-to-one relationship with Depreciation Areas

 Each Company Code identified in Asset Accounting must be assigned to a single Chart of Depreciation  Company Code assignment to a Chart of Accounts and Chart of Depreciation are not related

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[ Asset Class Asset Class

 Definition  Individual assets are grouped according to the requirements of your company  Example:  Buildings, Machines, Furniture & Fixtures, …

 Asset Classes drive GL Account Assignments  Asset Class templates can be used when setting up new Asset Master Records  Controls screen layouts, information tabs and required information characteristics, default useful lives

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[ Asset Class (cont.)

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Asset Master Record — Layout Example • Screen Layouts controlled by settings in Asset Class

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[ Depreciation Areas (01) IFRS

 Definition  Used to calculate and track separate valuations by asset according to different accounting rules  Up to 99 different valuations possible

 Depreciation Areas can be grouped according to different account rule requirements  Linked to a Company Code through a Charts of Depreciation

 Depreciation Areas can be Calculated or Derived  Depreciation Areas can but are not required to post to the General Ledger  Depreciation Area 01 must post to the Leading Ledger

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[ Depreciation Area (cont.)

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[ Drill-Down Depreciation Area 01 — Example

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[ Depreciation Keys Deprec. Keys

 Definition  Depreciation keys control the automatic calculation of different depreciation types and resulting values  Examples of types of depreciation  Ordinary Depreciation (Normal wear and tear)  Special Depreciation (Tax related)  Unplanned Depreciation (Unexpected wear and tear)

 Examples of valuation methods  Base method  Declining-bal. method  Maximum amount method

 Depreciation Keys are recorded in each Depreciation Area and linked to each Asset Master Record  An Asset Master will have a Depreciation Key for each Depreciation Area that must track a valuation

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[ What We’ll Cover …    

Meeting the Convergence & IFRS Requirements An Overview of SAP Asset Accounting Planning for your Conversion Project Wrap-up

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[ Planning for IFRS Conversion  Get assistance to understand the impacts that IFRS will have on you, what elections are open to you, and what is recommended for your circumstances  IFRS will impact more than just the Asset Accountants, it is important to develop an integrated IFRS strategy

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[ Planning for IFRS Conversion (cont.)

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution  Understand asset componentization impacts at your company  How will you define a component?  How many and what assets will be impacted?  Configuration

 Componentization of Assets is handled by using asset and sub-asset records in standard SAP  A sub-asset has its own independent asset master record, but is linked to the main asset by common numbering (each subasset has a separate 4 digit extension)  Nomenclature for sub-asset numbering should be developed for tracking component types and year of acquisition

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[ IAS 16 Componentization of PP&E ILLUSTRATIVE US GAAP – The value of an airplane is based on the total cost of the airplane with little or no componentization. Generally, depreciation approach follows the straight line method. Airplane Boeing 787

Total

Yrs

Dep./yr

1 - 10

11 - 20

21 - 30

$270M

30

$9M

$90M

$90M

$90M

IFRS – The value of an airplane is determined based on the components that comprise the airplane. In this case, the Engine, Avionics, Fuselage and Interior. Component

Total

Yrs

Dep./yr

1 - 10

11 - 20

Engines

$100M

20

$ 5M

$50M

$50M

Avionics

$40M

10

$ 4M

$40M

Fuselage

$60M

30

$ 2M

$20M

$20M

Interior

$70M

14

$ 5M

$50M

$20M

Total

$270M

$16M

$160M

$90M

21 - 30

$20M

$20

US GAAP vs. IFRS - The difference in the depreciation between US GAAP and IFRS impacts the bottom line. Standard

1 - 10

11 - 20

21 - 30

Total

1. Identify the current level of componentization

US GAAP

$90M

$90M

$90M

$270M

2. Determine the level needed for componentization

IFRS

$160M

$90M

$20M

$270M

3. Set up new categories in the Fixed Asset Register

Timing Diff.*



-

$70M

0

Proposed Componentization Process

* Temporary Difference

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[ Planning for IFRS Conversion

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[ Planning for IFRS Conversion (cont.)

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution  Configuration (cont.)  Customized transaction types for IFRS impairments and reversals  See comments related to a new Depreciation area  Existing transaction types will need to be reviewed to enable/disable impacts in the new Depreciation Area  New transaction types may be required  Remember increased requirements for disclosures under IFRS  Link to data conversion strategies

 Other configuration and master data can also be impacted  Chart of Account detail  Project Systems WBS’s need to provide the right splits for correct capitalization

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution (cont.)  Process  Identify what processes will be different for IFRS and make sure they are built into your requirements now  Capitalization policy  There may still be differences between Local Country IFRS and US IFRS  Global Accounting Policy may be more concerned with local reporting that it has been in the past

 Disclosures  IFRS requires greater detail in Asset Disclosures, don’t forget these requirements in your design  New reports required? New transaction types?

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution (cont.)  People  Training will be required to educate US employees on IFRS as well as process design changes required to meet IFRS requirements  There may still be differences between Local Country IFRS and US IFRS  Global Accounting Policy may be more concerned with local reporting than it has been in the past  People will have to understand the differences and how they will be reported

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution (cont.)  Data Conversion  Componentization – considerations?    

What level of detail is a component? How will data be disaggregated? When will the data be converted? Fair Value elections and posting changes to asset values?

 Work to have a single data conversion for assets  Componentize the assets now if you can  It will save effort later

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[ Planning for IFRS Conversion (cont.)  Build IFRS requirements into your Asset Accounting solution (cont.)  Test  Make sure integrated tests ensure that other processes or configurations are not inadvertently impacted by IFRS configurations (for example other depreciation areas) in Asset Accounting  Include integrated testing scenarios if you will have changes to your leading ledger while converting to IFRS  Ensure all disclosure requirements can be met with your design today

 Ongoing  Monitor the environment for further changes in SEC and/or IFRS requirements

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Comments If You Already Have Implemented SAP [ Specific Asset Accounting  Develop an integrated plan for implementing IFRS and plan the timeline for implementation of these changes  Do not wait too long  Skilled resources may become scarce  Make sure you understand the options, elections, and impacts

 Identify the changes that will be required to convert to IFRS in your SAP Landscape  Some of these may impact other areas (example: PS WBS element configuration), GL COA, Leading Ledgers  Do not forget disclosure differences in your IFRS requirement gathering

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Comments If You Already Have Implemented SAP [ Specific Asset Accounting (cont.)  Configuration  Integrate design and changes with the planned approach for parallel accounting  Review the process for adding a new Depreciation Area  It is possible to add a new depreciation area after going live with SAP, but it is not recommended  Identify the steps and test them completely in your environment

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Comments If You Already Have Implemented SAP [ Specific Asset Accounting (cont.)  Data Conversion  There is no simple way to create asset components in SAP from existing Asset Master records  Understand the strategy and test the effort required to componentize your assets  Make sure you don’t adversely impact other depreciation areas with any configuration changes that you plan to make

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[ What We’ll Cover …    

Meeting the Convergence & IFRS Requirements An Overview of SAP Asset Accounting Planning for your Conversion Project Wrap-up

Real Experience. Real Advantage.

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[ Key Learning Points  It is critical to understand the ―big picture‖ of the IFRS impacts on your company to enable the right decisions and elections to be made  Asset Accounting is a high-impact area with requirements for componentization, and some differing accounting treatment from US GAAP  SAP’s Asset Accounting module can be configured to meet IFRS requirements – anticipate some new asset classes, GL accounts, transaction types, depreciation areas, and other changes  Depreciation Area 01 must post to the Leading Ledger and may require an SAP SLO project to change (if your Leading Ledger changes Accounting Principles)  IFRS requires significantly more disclosures to support the financial statements. Make sure you understand your disclosure requirements, the information may be hard to find later.

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[ Best Practices  Things to do Next Week  Review you Asset Accounting Records  Check on amount of componentization in place  Check on Lease Accounting  How many operating leases

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[

Resources –  Ernst and Young IFRS Resources  www.ey.com/ifrs     

Industry-Specific updates for IFRS Links to the SEC IFRS Web pages Monthly IFRS status update newsletters Technical Accounting Thought Leadership

 SAP IFRS Resources  www.sdn.sap.com/irj/bpx/ifrs  www.sdn.sap.com/irj/bpx/ifrs?rid=/webcontent/uuid/10ca1d5c0818-2c10-aca7-dae9fa23a363  SAP and Ernst & Young Webcasts  IFRS White Papers from SAP

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