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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
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.................................................................................................................... 9
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
Another concern is that many countries that claim to be converting to international standards may never get to 100 percent compliance. Most countries 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 the exact opposite 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 would 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.
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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, one has to keep in mind that the way financial statements are prepared differs from company to company, 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 website at www.ifrs.com, and the SEC website at www.sec.gov.
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
Exclude any assets and liabilities that IFRS does not permit; Classify all assets, liabilities and equity in accordance with IFRS; Measure all items in accordance with IFRS; and Be prepared and presented within an entitys 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. GAAPs 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. The changes mentioned above 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 than is currently 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 customers 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 companys 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.
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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. Financial Statement Generator 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. 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). Oracles 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.
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
Abbreviations
ARC CESR EC EEA Accounting Regulatory Committee of the EC Committee of European Securities Regulators European Commission European Economic Area (EU 27 + 3 countries)
EFRAG European Financial Reporting Advisory Group EITF EU FASB FEE GAAP IAS(s) IASB IASC IASCF IFAC IFRIC Emerging Issues Task Force (of FASB) European Union (27 countries) Financial Accounting Standards Board (US) European Accounting Federation Generally Accepted Accounting Principle(s) International Accounting Standard(s) International Accounting Standards Board International Accounting Standards Committee (predecessor to the IASB) IASC Foundation (parent body of the IASB) International Federation of Accountants International Financial Reporting Interpretations Committee
IFRS(s) International Financial Reporting Standard(s) IOSCO SAC SEC SIC International Organization of Securities Commissions Standards Advisory Council (advisory to the IASB) Securities and Exchange Commission (US) Standing Interpretations Committee of the IASC
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HOW TO HELP IT STAFF AND OTHER NON-FINANCE EXPERTS UNDERSTAND THE ISSUES AND TERMINOLOGY RELATED TO IFRS
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: info@itconvergence.com.
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