Utilities IFRS Conference

ERP parallel reporting implications

Michael Kelly, Partner

17 September 2009
Table of contents

IFRS impacts on an information technology portfolio and

organization
IFRS considerations – parallel accounting
► SAP
► Oracle

Page 2
IFRS impacts on the information technology
portfolio and organization

Page 3
Power and utilities heat map — potential
IFRS impact
Heat map items Potential financial Potential Initial
statement impact business assessment of
impact priority
7
1 Regulatory assets High High High High 2 1

Financial statement impact

10 11 9
2 Impairment of assets High High High

3 Component Medium High High 4

depreciation Medium 3 5
8
4 Decommissioning Medium Medium Medium
liabilities

5 Derivatives and Medium High Medium

hedging Low 6
6 Stock-based Low Low Low
compensation
Low Medium High
7 Leases High Medium Medium

8 Taxes Medium Medium Medium Business impact

9 Consolidation High Medium High

10 First-time adoption High Medium High

Initial assessment of priority
11 Presentation and High Medium High
disclosure High conversion risk and effort; management should
begin addressing these items immediately

Medium conversion risk and effort; plan to

address these issues in the next 6 -12 months

Low conversion risk and effort; plan to address

in the next 12 -24 months

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Many areas of information technology may
be impacted by IFRS
Applications
► COA may be redesigned to handle multi-purpose Impacts throughout the IT landscape
reporting
► ERP applications will require reconfiguration and, in
some cases, it may be prudent to upgrade to new
releases Consolidation
► Consolidation systems - allocation tools will need to system
be modified
► Front office and supporting applications (those that
post financial transactions) may need to be modified
to provide key data and metrics General Ledger
Reports Source
Other systems
► Key financial and operational reports will need to be systems
modified and new ones developed
► Many spreadsheets and other end-user computing
sources will require review and modification
Data
► Data input screens may need to be created/modified
to capture additional requirements
► Data interfaces and middleware may need to be
modified to support new data requirements
► Historical data will need to be readied for IFRS, new
data obtained and master data redefined
IT systems and processes
► Business warehouse structures may need to be
redesigned to account for new data and changes in
consolidation entities
► Technical systems architectures (e.g., storage sizing,
systems performance) may require modifications

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IFRS considerations – parallel accounting

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Parallel accounting requirements
►When a company first reports results under IFRS, they are required to provide two years of historical
results in addition to the current results. In total, three years of comparative financial results will be
presented. This requirement also requires the two previous years’ results to be stated as if always on
IFRS.

►When converting to IFRS, there are a series of first-time adoption options that may create a difference
of potentially significant effects on the balance sheet. Going forward approximately 95% of the
transactions will be handled the same under US GAAP and IFRS, the remaining 5% of the
transactions/balances are treated differently. These two issues give rise to the concept of “parallel
reporting”-
► For example - fixed assets may have a different cost basis for US GAAP than for IFRS, and the
assets/components may be depreciated over different useful lives-
► Some transactions will be capitalized under IFRS and expensed for GAAP.

►Required for both IFRS and US GAAP for a period of time (may extend beyond transition time frame
for other reasons):
► IAS 1 requires the establishment of an opening balance sheet retroactive to the adoption of IFRS
► Analysts and other stakeholders may require comparative reporting while they adjust to reporting using IFRS
► Contractual obligations, such as loan agreements, may require ongoing reporting using US GAAP

Ongoing considerations:
► Financial Covenants – KPIs and ratios used in contracts will ► Investor Relations The differences between US GAAP and
change potentially impacting compliance and some contracts IFRS need to be explained early in the process.
include the requirement of USGAAP accounting ► Investors, Customers, Vendors – The conversion is to
► IRS tax compliance – IRS has not commented on what provide a basis for comparison to other companies still
book basis will be used for tax filings (US GAAP today). reporting under US GAAP.
► Regulatory – Each industry group will have to consider the ► Employees – to explain impact of changes in KPIs, metrics
change that IFRS will bring and whether or not changes will and stock based compensation.
be made to regulatory reporting.

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Parallel accounting options –
embedding vs. top-sided adjustments
Operational Subsidiary Subsidiaries close
Departments
Consolidation Process
(Sub) Finance their GL & Report
to HQ Corporate Consolidated Results
Sub A Sub A GL
r e dee F
s met sy S

Sub B Sub B GL US GAAP & IFRS

Corporate Financial &
Consolidation Management
r e dee F

Process & System

s met sy S

Reports

Sub C Sub C GL
r e dee F
s met sy S

Embed at Embed at Embed at

Subledger COA/GL Reporting
Package

You may embed at various levels for different transactions and for different
subsidiaries with the decision being driven by the cost-benefit.

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Overview of IT options for parallel
accounting
Chart of accounts
Create additional GL accounts in the
existing Chart of Accounts – use of a
range to represent US GAAP
accounts, common accounts and
IFRS accounts.
Pros:
► Does not require the creation of
additional ledgers to account for
IFRS information separately from
current GAAP.
► Managing the chart of accounts is
less intensive from an IT
perspective than creating a new
ledger level.
► Incremental add of new accounts
Cons:
► Volume of accounts could lead to
transaction going to the wrong
account.
► Account ranges may not be
feasible depending on use of
next numbers.
► Account number for IFRS
accounts lack logic to represent
what type of account it is (asset,
liability, etc. – dependent upon
description)
► Full versus differential posting –
see CC comments in far right box
Full versus differential posting applies to all three scenarios – impacts reporting and posting
capabilities.
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Additional / multiple ledgers
Create an IFRS ledger with its own GL
by setting it up as an additional ledger
type for the existing company (same
COA – may add additional accounts for
IFRS purposes).
Pros:
► Facilitates the dual ledger/ dual
accounting requirement at the
transaction level.
► IFRS and US GAAP are kept
separate for easier identification of
any issues in the accounts -
reporting.
Cons:
► Significant number of extra
postings (both manual and
automated) required.
► Essentially data is entered into the
system twice.
► Possible system performance
impact depending if significant
volume of transactions.
► Significant configuration and
customization of system may be
required.
► See full / differential issue for CC
Additional company codes
Create an IFRS company with its own GL
by setting it up as an additional company
code (same COA – may add additional
accounts for IFRS purposes).
Pros:
► Reporting is driven by company
code – change company code for
IFRS or GAAP reports.
► Company code reporting is
flexible.
Cons:
► Potential doubling of existing
company codes for IFRS to track
adjustments.
► Manual process
► Need to determine if posting full
value in IFRS company code
versus differential. If post
differential – add GAAP and IFRS
company codes together to
produce IFRS financials
► If posting full values – will need
to post all transactions to both
company codes (not
recommended)
Parallel accounting and SAP

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Parallel accounting options for SAP
Multiple ledgers must be simultaneously maintained for IFRS and GAAP. Various
versions of SAP were designed to support this in different ways.

SAP R/3 mySAP ERP 2004 SAP ECC 6

Additional

Classic GL

Classic GL
Additional Additional
company code company code/
company code Special ledger

Special ledger
Special ledger Chart of accounts

Chart of accounts

SAP GL
New GL

Chart of
Parallel ledgers
Accounts
Parallel ledgers

Two methods are recommended by SAP

1) Account-based approach
2) Parallel ledgers

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Newest version of SAP provides better
options for IFRS conversion
Prior versions of SAP
► Special ledger
► Additional company code
► Chart of Accounts
All using GL Classic
SAP ECC 6 recommendations
Parallel ledgers in new GL (most
flexible option)
Chart of Accounts with new or Classic
GL
Alternative methods
►Additional company code
►Special ledger
►Profit center accounting

Key considerations:
► Migrating to new GL and parallel ledgers is a large independent effort that is recommended only
after migrating to ECC 6. The time to accomplish both will generally be two years (or greater) for
most organizations.
► In a heterogeneous SAP environment, each SAP instance will require its own conversion
strategy, design, implementation and testing.
► Conversion time and effort will be significantly increased when there is a complex IT landscape
and a large number of instances.
► Opportunities may arise to consider financial process transformation, master data redesign,
spreadsheet elimination, upgrades and instance consolidation prior to conversion.

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SAP options or recommendations or approaches for
IFRS implementation - Option 1 - Chart of Accounts
method
Create additional General Ledger accounts in the current
CoA:
• Different set of accounts should be created and maintained in the chart of
account of the leading company code, for example:
IFRS
• Common accounts
Accounts
• US GAAP accounts
• IFRS Accounts
• Local GAAP accounts – if required Common
G/L
• All set of accounts must balance among themselves (separate retained
earning accounts for each set of accounts) US GAAP Local GAAP
Accounts Accounts
• Additional configurations should be considered (i.e.; foreign exchange
valuations, financial statements for each accounting principle, asset
accounting, validations) One Chart of Accounts
• Manual postings are entered to the correspondent account.
• Additional validations may be required to ensure that no incorrect cross-over posting occur (i.e.; Local
GAAP posting into IFRS accounts)
• Manual reconciliations need to be considered for segment reporting. (IAS 8)
• May require Report Painter/Writer or ABAP programs to develop specific accounting principle reports.

Recommended for clients where:

• Increased number of GL accounts is not an issue for the leading company code.
• Different fiscal year variant is not required.
• Migrating to parallel ledgers is not a good option
• Have limited approaches to valuation

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SAP options or recommendations or approaches for IFRS
implementation - Option 1 - Chart of Accounts method

SAP - General Ledger system

General Ledger Company Ref. no. Reporting Account
code standard
B/S I/S
GL has US GAAP, IFRS and local accounts
embedded into the system assuming normal
100 1 US GAAP/IFRS PP&E Depreciation
reporting processes.
2 US GAAP LIFO TBD
inventory

3 IFRS FIFO Cost of goods

IFRS
inventory sold
Accounts

Common
G/L

US GAAP Local GAAP US GAAP trial balance IFRS trial balance

Accounts Accounts
Ref. no. 1 and 2 = US Ref. no. 1 and 3 = IFRS
GAAP trial balance Trial balance
General
ledger

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Use of Chart of Accounts method
Pros and cons
Pros
► Low initial set-up costs as the company uses their existing COA to create
additional IFRS Chart of Account values
► Easy option for companies with limited IFRS impacts- e.g., single currency
operations.
► This method can be easily migrated to parallel ledgers
► Limited impact on data volumes (many journal entries are shared)

Cons
► Account number conversion may be needed if current Chart of Accounts setup
does not allow addition of parallel accounts
► Higher maintenance costs as transactions impacting more than one area may
need to be entered twice
► Separate retained earnings accounts will be needed
► Higher level of adjusting and reversal entries may be required
► High level of manual intervention will increase the propensity of error and fraud
► Not conducive for companies with high level of off-shore operations
► Limited reporting capabilities including segment reporting

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SAP options or recommendations or approaches for
IFRS implementation - Option 2 - parallel ledgers

Use of parallel ledger functionality

• Parallel Ledger functionality should be configured or the IFRS
Ledger
IFRS ledger should be added. FI-GL
FI-AA
• Configuration of a leading ledger and various non- FI-AP
leading ledgers. FI-AR
US GAAP
• Accounting principles are assigned to the ledgers, and
FI
foreign currency valuations are defined to the Postings
accounting principles.
Local

det a dpu er a sr e gdel ll A

• Different asset valuations are managed through GAAP
depreciation areas, and these are assigned to the MM Foreign

det a dpu er a sr e gde L dei fi ce p S yl n O

ledgers. PP Valuations
SD
• Segment reporting is available through the segment
functionality and document splitting. (IAS 8).
New G/L
• Manual postings still need to be included. (i.e., taxes).
• Accruals and Work In Process (WIP) is managed through valuation methods and versions, and these are assigned
to the accounting principles.
• Provisions and manual postings are performed simultaneously or to separate accounting principles.
• Only the CO-related postings in the leading ledger are transferred to CO.
• Inventory valuation can be configured with an alternative valuation costing method.
• Inventory differences will be issued in a report and manual entries can be posted in a different ledgers.
• Automated inventory postings are managed by creating alternative valuation areas. Alternative price fields on the
material master record are needed.

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SAP options or recommendations or approaches for
IFRS implementation - Parallel Ledger (Cont'd.)
Use of parallel ledger functionality
► Profit center master data and hierarchies still apply for parallel ledger functionality.
► Profit center accounting is not required to be activated in the parallel ledger.
► CO-PA ledger is not replaced by parallel ledger functionality (CO-PA is normally
used for segment reporting for margin analysis).
► Standard reports are executed by the leading and non-leading ledger.
► Data volume increases as a result of maintaining parallel ledgers1.

Recommended for clients where:

► Increased number of GL accounts is an issue for the leading company code.
► Different fiscal year variant is required.
► mySAP ERP 2004 (support package 10) or above is the main ERP application.
► Plans to upgrade or migrate in the short or long term.

(1) SAP advises that if the number of entries in the new GL total records table is lower than 10 million, there
usually are no performance problems. If the number of entries exceeds this value, SAP recommends that you
update the ledger in separate table groups.

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 Use of parallel ledger functionality
Pros and cons
Pros
► Low maintenance costs as transactions with all impacting areas are auto-entered separately in each parallel
ledger
► Low level of manual intervention will decrease the propensity of error and fraud.
► Conducive for companies with complex COAs and high level of off-shore operations
► Easy reporting (including better segment report), good controlling features and effective monitoring capabilities
► Standard integration of primary ledger in real time with CO, reconciliation ledger does not need to be
maintained. (CO to FI was previously not possible)
► Easier reconciliation of reports at the consolidation level
► Low level of adjusting and reversal entries needed
► Good for companies that have already upgraded to 6.0
► No additional accounts (or balance sheet and P&L statement structures)
► Ledger groups can be used to minimize posting overhead
► Various fiscal year variants can be mapped
► Consistent with SAP future directions

Cons
► High initial set up costs as the company may need to upgrade to ECC 6
► Migration to new GL is a long process that should occur only after fiscal year-end.
► It is not recommended to migrate to ECC 6 and parallel ledgers simultaneously; mitigation to both would typically
take at least two or more years.
► Companies are required to decide upon and configure a “leading ledger” - which may initially be GAAP, resulting
in a need to perform a second migration to IFRS
► SAP has not yet committed to a migration scenario that will change a leading ledger from GAAP to IFRS
► Increased data volume due to additional ledgers

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But there are still challenges with parallel
ledgers

Leading ledger: A leading ledger (GAAP or IFRS) must be defined. Once set, this cannot
currently be changed (i.e. If US GAAP is set as the leading ledger today, it cannot be
changed to IFRS in 2014).
Controlling (CO) reporting: The CO module only references the leading ledger, so how
are comparatives produced?
Project Systems (PS) assets: Assets are attributed to projects via the PS module. This is
linked to CO and therefore the leading ledger. If the leading ledger is set to IFRS prior
to 2013, how will asset depreciation for both US GAAP and IFRS be managed?
Company codes: The leading ledger is set at the “instance” level and will apply to all
company codes. This may be a challenge for companies that have multiple countries
and reporting requirements under a single instance.
SAP has recently issued new patches that provides work-arounds for a few of these issues
(BADI) but there are limitations.

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Parallel accounting and Oracle

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IFRS compliance under different Oracle E-Business Suite
(EBS) versions
Parallel accounting, reconciliation and effective GAAP/IFRS reporting

11i R12
Option 1: use of Option 2: use of sub- Option 3: use of MRC Option 4: use of new
additional IFRS accounts segment functionality to create multi-ledger
company code to dependent on natural an IFRS SOB linked functionality to create
account for IFRS account segment to a GAAP SOB GAAP and IFRS
transactions ledgers

Other considerations
• Interfaces • Reporting

• Data management • Data cleansing and integrity

• Upgrades
• Security
• Business continuity / Disaster recovery plans

• Re-training issues • Changes to support organization

• Future upgrade considerations / complexity • Changes to IT and business controls

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 Use of sub-accounts segment dependent on
natural account segment - Option 2
Use the sub-account segment to automate postings:
► Use the same set of books and chart of accounts
► Define the sub-account segment to be “dependent” on the natural account segment
► Create sub-account segment values for GAAP and IFRS
► Natural Accounts – xx.xxx.xxxx.XX (XX values being GAAP & IFRS)
► US GAAP sub-Account – xx.xxx.xxxx.GAAP
► IFRS Sub-Account – xx.xxx.xxxx.IFRS
► Define separate roll-ups for GAAP and IFRS sub-account in order to report on GAAP and IFRS separately
► Manual adjustments to IFRS roll-up values may be required
► Financial Statement Generator (FSG) reports will be need to reports of sub-account level activity
► Manual reconciliations need to be considered for segment reporting

Recommended for clients where:

► Use of sub-account functionality is not an issue
► Doing a COA re-structure is not an issue
► Increased number of GL accounts is not an issue, one COA is used
► May consider upgrading to R12 in the short term

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Use of sub-accounts segment dependent on natural
account segment - Option 2 pros and cons

Pros
► Lower transaction entry costs as transactions with all impacting areas will need to
be entered once with the parallel impact for IFRS and GAAP
► Better reporting capabilities than Option 1
► Use of the existing COA and GL

Cons
► Higher initial set-up cost than Option 1 as this will require a re-structuring the COA
in order to use the sub-account segment functionality
► High level of manual intervention for adjustments may increase the propensity of
error and fraud
► High level of manual reconciliation may be required
► Not conducive for companies with high amounts of international operations

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 Use of new IFRS ledger set, ledger and SLA to gain dual
accounting, auto adjustments and reconciliation - Option 4

Use of new multi-ledger functionality – ledgers and ledger sets

► Configure separate IFRS adjusting and GAAP ledgers within an IFRS Ledger set
► Accounting principles assigned to the ledgers are defined to the accounting principles through configuration in the
Sub-Ledger Accounting (SLA) engine
► SLA accounting is configured to enter GAAP transaction in the GAAP ledger and the IFRS adjustments with the GAAP
transactions in the IFRS adjustment ledger. SLA functionality should be configured to link IFRS and GAAP ledgers
and therefore will be able to automated the process of reconciliation
► IFRS reporting done out of the IFRS ledger and the GAAP reporting done out of the GAAP ledger; FSG will need to be
configured
► Different asset valuations are managed through depreciation areas, and these are assigned to the different ledgers
(That intelligence can be configured within the SLA engine)
► Provisions and adjustment postings are performed simultaneously and to separate accounting principles that
intelligence can be configured within the SLA engine)
► Inventory valuation can be configured with an alternative valuation costing method that intelligence can be configured
within the SLA engine)
► Accruals and WIP are managed through valuation methods and versions, and these are assigned to the accounting
principles

Recommended for clients where:

• R12 is already implemented
• An upgrade to R12 is underway

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Use of new IFRS ledger set, ledger and SLA to gain dual
accounting, auto adjustments and reconciliation - Option 4

Use of NEW IFRS Ledger Set Example of Transaction

Sub Ledger Purchased Plane

transaction price: $600K
Sub Ledger Sub Ledger
Dr Cr Accounting
Dr Cr

NEW IFRS LEDGER SET

New IFRS
US GAAP IFRS Ledger Set
Ledger Adj. Ledger

GAAP STD IFRS STD

US GAAP IFRS
ACCTG Rules COA Adjs. COA Airplane Dr. 600 Fuselage Dr. 300
Rules STD USD STD USD Payables Cr. 600 Engines Dr. 200
Calendar ($) Calendar ($) Wings Dr. 100
Airplane Cr. 600

GAAP REPORTING IFRS REPORTING GAAP REPORTING IFRS REPORTING

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Use of new IFRS ledger set, ledger and SLA to gain dual
accounting, auto adjustments and reconciliation - Option 4

Pros
► Low transaction entry costs as transactions with all impacting areas will be auto-entered
separately in GAAP ledger and IFRS ledger
► Automation in reconciliation and adjustments and better reporting of differences
► Very low level of manual intervention by way of adjustments will decrease the propensity of
error and fraud.
► Easy reporting (including better segment report), good controlling features and effective
monitoring capabilities
► Good for companies in the process of upgrading to R12., (i.e. get it right and get it right the
first time)
► Low level of adjusting and reversal entries needed
► Easier reconciliation of reports at the consolidation level
Cons
► High initial set-up costs as the company will need to upgrade to R12, create multiple ledger
sets and ledgers.
► Required to configure new ledgers GAAP and IFRS account rules/principles within the SLA
engine

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 What other challenges await?

Support from Oracle – All support officially ended on 30 June 2008 for 11.5.9 and premier
support will officially end on November 2010 for 11.5.10 (Source: Oracle Corporation)
All companies are expected to be on R12 by end 2011 (as even extended support for
11.5.10 will end November 2011; Source: Oracle Corporation)
Cost and effort to upgrade to R12
Restructure the CoA for parallel accounting standards
Determine new posting logic
Configure method for both manual and automatic postings (including account
determination procedures) to fulfill business requirements and to be IFRS compliant
Determine reporting system and map system data, considering number of bolt-on systems

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Considering an upgrade to R12 – Link to
SEC Roadmap
► Based on the SEC’s proposed Roadmap, it is expected that companies may be required to report
using IFRS beginning in 2014 and after (based on the filing status of the company) with two years
of comparative financial information and an IFRS-compliant opening balance sheet
► Detailed considerations include:
► Assessment of the system and process impacts on reporting and consolidation systems
► Determination of changes required to source systems to provide additional data (e.g., –
supplemental disclosures)
► Develop understanding of the impact on other strategic initiatives in your organization (e.g., –
FSCP process improvement, new ERP system roll-out, etc.)
► Need to implement new procedures to support “business as usual” IFRS reporting
► US registrants need to consider the Sarbanes-Oxley Act (corporate governance) requirements for
internal control reporting, including financial reporting controls
► We have seen organizations plan to combine the R12 upgrade and chart of account restructuring
simultaneously to avoid duplicate efforts during IFRS implementation:
► All Oracle support for 11.5.9 officially ended on 30 June 2008 and premier support will
officially end on November 2010 for 11.5.10 (Source: Oracle Corporation)
► All companies are expected to be on R12 by the end of 2011 (extended support for 11.5.10
will end November 2011 (Source: Oracle Corporation)
► Configure method for both manual and automatic postings (including account determination
procedures) to fulfill business requirements and to be IFRS compliant

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Break

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