Sap International Financial Reporting Standards (ifrs) 6i2l3y

IFRS Implementation

Achieving IFRS Compliance

Succeed with SAP® Software, Consulting, and Training

CONTENT

^ 4 Meeting the Challenges of IFRS1 ^ 5 Moving to a Single International Standard ^ 6 Much More than a Reporting Project ^ 8 An Aggressive Timetable ^ 9 Assessing the Scope of ing Changes 9 Acquisition ing, t Ventures, and Goodwill 10 Property, Plant, and Equipment Valuation 11 Inventory and Stock Valuations 11 Receivables, Payables and Borrowing 12 Revenue 12 Employee Costs and Share-Based Payments 13 Income Taxes 13 Leasing 14 Valuations 14 Cash-Flow Statements

^15 Determining Organizational Consequences ^16 Project Considerations for Adopting IFRS 16 Who Is Involved? 16 Management ants 16 Tax ants 16 External Auditors 16 IT Department 16 How Will IFRS Affect the Project Portfolio? ^17 SAP Has the Tools and Expertise to Handle IFRS 17 SAP Software – Prepared for New Standards 18 SAP Services – Ensuring a Smooth Transition 18 SAP Training – Pointing Out What to Expect ^19 SAP: Your Partner on the Road to IFRS

Meeting the Challenges of IFRS1 An Overview

First known as International ing Standards (IAS), International Financial Reporting Standards (IFRS) were developed by the International ing Standards (IAS) Committee beginning in 1973. In 2001, the standards were certified by the International ing Standards Board (IASB) and formally adopted by the European Union as its single financial reporting standard. Since then, in addition to taking effect throughout Europe, IFRS has become the accepted reporting standard in over 100 countries and is the single accepted standard in 85 of them, including Hong Kong, Singapore, Malaysia, Australia, Pakistan, India, the Gulf Cooperation Council of Arab States, Russia, and South Africa. The 2002 “Norwalk Agreement” between the IASB and the U.S. Financial ing Standards Board (FASB) has led to a commitment that FASB rules and IFRS standards will be made fully compatible. The Canadian ing Standards Board has already adopted a timetable for convergence, and Canadian companies will be required to comply by 2011. Based on continuing convergence, the U.S. SEC has announced that U.S. companies will be allowed to report under these new standards as early as 2009, and compliance for all U.S. companies could be required by 2014 assuming certain project milestones are met.

The SEC’s current milestones are: 1. Improvements in ing standards (such as IFRS) 2. Funding and ability of the International ing Standards Committee Foundation 3. Improvement in the ability to use interactive data (such as Extensible Business Reporting Language, or XBRL) for IFRS reporting 4. Education and training on IFRS in the United States 5. Limited early use by eligible entities. This milestone would give certain U.S. issuers the option of using IFRS for fiscal years ending on or after December 15, 2009. 6. Anticipated timing of future rule making by the SEC. On the basis of the progress of milestones 1 through 4 and the experience gained from milestone 5, the SEC will determine in 2011 whether to require mandatory adoption of IFRS for all U.S. issuers. If so, the SEC will determine the date and approach for a mandatory transition to IFRS. Potentially, the option to use IFRS when filing could be expanded to other issuers before 2014. 7. Potential implementation of mandatory use. The proposed road map will raise many questions, including whether the 2014 transition date to IFRS should be sequenced. The road map envisions a transition approach, where large accelerated filers could be required to comply in 2014, then accelerated filers in 2015, and nonaccelerated filers in 2016.

A major consideration, even given a firm set of dates, will be how the merging IFRS and U.S. and Canadian GAAP standards will each be amended over time. Several presently known examples are listed in this paper, but many more will undoubtedly appear. This suggests that companies will want to prepare parallel sets of consolidated financial statements to minimize unforeseen disruptions to their businesses’ reported financial picture. However, the effort to maintain two sets of books for an undetermined period of time is not insignificant. These aggressive commitments will have a fundamental impact on all North American companies, large and small. The extensive tax, income, and balance sheet consequences must be studied carefully and plans implemented to enable a smooth reporting transition that does not distort the financial position of a company upon first report under the new standards. Clearly, both short and long term, organizations, processes, and IT systems must change. To cope with the systemic demands the new standards will impose, and to avoid unpleasant surprises, companies must prepare their infrastructures for this change in advance. SAP can help by providing software that already meets the new requirements – and by delivering the software with the tools, training, and consulting needed to identify risks, threats, and opportunities related to the regulations, thereby easing the burdens of the transition.

1 Information on International Financial Reporting Standards (IFRS) regulations contained in this paper is taken directly from International ing Standards and IFRS documents produced by the International ing Standards Board (see www.iasb.org). However, these citations and interpretations are both subjective and subject to change as the regulations are updated. Information here should not be relied upon in place of sound analysis by a well-qualified and certified ant, as well as a thorough review by your auditing firm. 4

Moving to a Single International Standard

Challenges and Opportunities

enterprise, saving time, money, and resources, as well as improving the information available for important management decisions.

IFRS is “principles based” and not prescriptive. For this reason, unlike U.S. and Canadian GAAP and other rules that can have thousands of individual requirements and specifications, IFRS is based on a clearly stated set of principles and can comprise a much smaller number of stated “rules.” However, this does not mean IFRS is any less stringent or clear on how business activity is to be treated. On the contrary, “mark to market” and other principles are rigorous standards that require careful attention, documentation, and comprehensive financial record keeping. To paraphrase, the objective of IFRS statements is to provide information about the financial position, performance, and changes in the financial position of an entity that will be useful to a wide range of s in making economic decisions. They assume an “accrual basis” (never “cash”) and a “going concern.” The statements are, above all, to be understandable, relevant,

reliable, and comparable. Statements included under the regulations are: • Balance sheet (to be known as “statement of financial position”) • Income statement (“statement of comprehensive income”) • Statement of changes in equity (“statement of recognized income or expense” or SORIE) • Cash-flow statement (“statement of cash flows”) • Notes, including a summary of significant ing policies

To cope with the systemic demands IFRS standards will impose, and to avoid unpleasant surprises, companies must prepare their infrastructures for this change in advance. SAP can help by providing software that already meets the new requirements – with the tools, training, and consulting needed to identify risks, threats, and opportunities related to the regulations, thereby easing the burdens of the transition.

It’s clear that a comprehensive review of regulated reports is needed to assess the differences between current reporting data and processes and the new data and processes that will be required under IFRS. Both the scope and the nature of the required information will change, as will the means by which it is recorded and managed. However, along with these challenges also comes the opportunity to standardize and automate financial reporting across the

5

Much More than a Reporting Project A Chance to Reevaluate ing Functions

The switch to IFRS carries the potential to greatly affect the valuations of individual business transactions, which means that companies must study the potential need to apply the new standard wherever these transactions occur. Many people initially view the IFRS changes as simply a reporting issue. But although reporting is one aspect of IFRS, it is by no means the central aspect. Much more significant is the impact the standards will have on a company’s organization, philosophy, and operational IT systems at both corporate and subsidiary levels. The switch to IFRS carries the potential to greatly affect the valuations of individual business transactions, which means that companies must study the potential need to apply the new standard wherever these transactions occur. One option, of course, is to post manual adjustments in consolidation

6

software. However, consolidation software cannot revalue inventory, perform effectiveness tests for hedging activities, or calculate revenue using the percentage-of-completion method, among other concerns. Major areas of treatment of significant concern to North American standards adopters include: • Acquisition ing and goodwill (requires purchase method) • Property, plant, and equipment valuation, including depreciation (primarily “straight line”) • t ventures, associates, and other investments (by rule at either equity method or fair value)

• Inventory and stock (similar to U.S. GAAP lower of cost or market, or LOCOM, and LIFO is not allowed) • Receivables and payables (all at fair value, with amortized costs) • Borrowing (amortized cost using effective interest rate method) • Revenue (at fair value, with specific conditions for recognition) • Employee costs (accruals for vacations and holidays, profit sharing, expected bonuses, and the like) • Share-based payment (fair value taken as an expense or as an asset upon first granting) • Income taxes (taken as a liability if unpaid upon balance sheet date, with other deferral rules) • Leasing (all leases to eventually be classified as “finance leases” with all risk or reward to lessee) • Valuations (specifications for fair value, amortized costs, and so forth) If a company wants to make all these adjustments upon first implementation, it must still determine where it will get the required data – which may necessitate the configuration of transactional systems. Although a consolidation tool can perform many consolidation-specific processes, it cannot capture transactional data in any reasonable volume. For this, companies usually have to consider system changes at the operational level.

Understanding that IFRS requires both ing and reporting changes is also important for correctly gauging the time and resources it will take to successfully complete the implementation project. IFRS disclosure and transparency requirements not only extend beyond present reporting obligations of U.S. and Canadian GAAP standards, (for example, the new “Notes” statement), they also introduce “opportunities” for data collection and testing that carry potential for making compliance an extensive endeavor, even after the period of parallel running is complete. To meet all the new requirements, organizations must be prepared to augment their existing reporting procedures and collect all necessary information in the proper context and under the proper ing treatment. Such preparation is especially important in areas such as:

• Long-term construction contracts (such as percentage-of-completion methods) • Intangible assets (such as in-house computer software and patents) • Financial instruments and hedge ing The requirement for more and different information may necessitate new processes for closing a reporting period. Companies will have to make sure that their monthly, quarterly, and annual closing procedures produce all of the required information and deliver that information on time. The use of IFRS to harmonize internal and external reporting may lead to organizational changes that require previously auto­ nomous departments to work more closely together.

In the fiscally oriented financial reporting systems of North America, published corporate reports and related financial statements have generally played a limited role in company decision making. As a result, internal reporting has traditionally been separate from external reporting – both in of the data involved and sometimes even the organizations producing that data. The introduction of IFRS reporting should encourage companies to reevaluate their managerial and financial ing functions. In many cases, the introduction of IFRS may give companies an opportunity to simplify their operations in this regard. It can also help them reduce costs by synchronizing the areas involved and providing a single set of numbers for both internal and external decision makers – including managers, shareholders, creditors, and analysts.

SAP has built a comprehensive suite of tools, applications, and best practices around the topic of IFRS adoption by North American organizations.

An Aggressive Timetable

Plans Should Start as Early as Possible

Businesses converting to IFRS must make substantial effort and investment now in order to reap benefits in the future. For many companies, the adoption of IFRS represents a continuing shift from a model of ing that is fiscally and management-oriented to a model that is further focused on financial markets and investors. It also poses specific challenges related to the statement of earnings, which can carry significant potential impact on share prices and investor confidence. It is essential for business leaders to understand the depth and breadth of the changes and challenges they will face, and they must help their organizations take the steps necessary to address them. These are some of the key questions in need of answers today: • What are the candidate areas for change? Which options for change are to our best advantage? • Where will the new numbers come from? How will they be recorded and consolidated? • How will IFRS affect business processes? Do we have the operational systems to that?

8

• How will IFRS affect the project portfolio? How will IFRS affect the financial portfolio? • Will IFRS disclosures affect internal management decisions as well as external reporting? • How will the impact of IFRS changes need to be monitored and managed over time so that reporting impacts are smooth and orderly? Needless to say, company decision makers cannot answer these questions overnight – let alone make key business decisions based on them. But they must begin now, and they must devote adequate time and resources to the task. By 2010, most North American businesses will be using some form of IFRS compliance in the production of their consolidated financial statements. Canadian firms will be reporting entirely according to IFRS in 2011, and U.S. firms will follow closely in collecting two years of history in anticipation of their deadline date in 2014. All this leaves a very short time in which to understand the impact of IFRS adoption, plan for the adoption, and execute that plan.

The effect of IFRS adoption will also reach beyond publicly traded companies. Capital markets and financial institutions are already reeling from present market turbulence, and they will soon need to demand comparable financial data from North American organizations of all sizes to manage their risks. These new standards will continue to set the pace for broader change, as financial statements become a competitive requirement for any company seeking positive market perception or access to capital. This is already underway at larger international financial institutions adhering to the recently adopted Basel II Capital Accord. These regulations require banks to rate their customers using extensive financial information, and an objective rating in this process requires financial data that is both accurate and easily compared with data from other companies. With IFRS being the standard for data on companies from over 100 countries, North American firms in search of liquidity will likewise find that IFRS compliance is an increasingly important aspect of their overall financial planning. With IFRS adoption dates already set, companies can anticipate the dates upon which they will need to run parallel and “test” operations for prior-year comparisons (two years in advance). To ensure there is enough time to address all the relevant issues, it is widely recommended that projects for IFRS adoption should start as soon as possible – especially since there will be other projects competing for the same internal resources in the months ahead.

Assessing the Scope of ing Changes

Where Will IFRS Regulations Have Impact?

Because the adoption of IFRS can mean significant changes in the philo­ sophy and process of financial reporting, it is imperative that companies obtain adequate knowledge of what IFRS involves and what kind of changes they can expect. The first step in any IFRS project is to determine how the ing rules in current use differ from those under IFRS. This entails analyzing individual financial statement positions to identify where IFRS rules require different valuation procedures and then pinpointing the information and entries needed to achieve the new valuations. Also critical is the analysis of how those new entries and valuations will impact financial statements. When options for compliance exist, a clear understanding of both the costs as well as the benefits of different approaches to compliance will be critical in making the best, most profitable decisions in achieving IFRS compliance. Below are just some of the issues that must be understood, analyzed, and acted upon. SAP has built a comprehensive suite of tools, applications, and best prac­ tices around IFRS adoption by North American organizations. ing the overarching need to accurately assess, measure, and analyze the impact of various adoption methods and understand their impact on the balance sheet and income statement, the SAP® solution set begins with the SAP BusinessObjects™ Business Planning and Consolidation application and the SAP ERP Financials solution. With unique and specialized IFRS and U.S. GAAP starter kits, these applications are set up to be imple-

mented quickly and successfully so that companies can begin their planning for this important ing conversion. The following are major subject areas where new regulations can have an impact on operations and record keeping, as well as on their underlying IT systems.

Acquisition ing, t Ventures, and Goodwill Issue: In situations where control of one or more businesses is acquired or combined, IFRS requires the identification of an acquirer and measurement of fair value (IFRS 3.17). Recent 2008 IFRS scope changes further require that combinations of mutual entities without consideration (such as dual-listed shares) are also covered by this regulation. Measurement of these acquired businesses must be by the IFRS “acquisition method,” including identification of any noncontrolling interests and goodwill, and fair value valuation for all assets (IFRS 3.36). Acquired intangible assets must also always be measured and reported. There is no “reliable measurement” exception, and recognition of gains or losses is not allowed unless related to a change in controlling interest. Further changes are being considered under a new IASB agenda item that would update rules for the ing for t ventures and other “common control” transactions. These could be valued at “proportionate consolidation” of assets, liabilities, income, and expenses, or alternately by the equity method. Impact: These rules may have a minimal impact on day-to-day ing opera-

tions, but they will have a significant impact on the tax, balance sheet, and revenue analysis for potential mergers, acquisitions, and divestitures. Senior executives engaged in business-tobusiness ownership negotiations will need systems that enable accurate assessments of these impacts in addition to other customary due diligence on cash flows and profitability. Acquirers who are adept at effective valuation and financial impact analysis will carry a competitive advantage in their markets. Recommended approach with SAP software: Analytical applications for business planning and consolidation, as well as all ing financial analytics, will become increasingly important in any mergers and acquisitions scenario. A reliable and flexible model of existing business operations will always be desired as a starting point. Data translation and input tools, for merging what-if scenario data from candidate organizations, will be further useful for staging accurate analysis scenarios. Being able to quickly and accurately produce ad hoc, pro forma reports for all scenarios will ensure senior management has the information they need to accurately value and negotiate ownership interests. SAP ERP Financials s a broad variety of consolidation and business combination methods compatible with IFRS. Additional functionality within SAP BusinessObjects Business Planning and Consolidation enables analysis of potential business impacts from all IFRSrelated decisions. (SAP BusinessObjects Business Planning and Consolidation is available as a version for the SAP NetWeaver® technology platform and a version for the Microsoft platform.)

9

The collection of knowledge and extensive analysis required for the IFRS project make it necessary to start it quickly and coordinate it with other projects that involve IT and financial reporting departments. There are many ways in which companies can synchronize projects to serve common interests. Property, Plant, and Equipment Valuation Issue: IFRS does not prescribe specific depreciation methods for individual classes of fixed assets, but it is very clear on how assets overall are to be valued. All values must be at cost, and though total costs can include things like borrowing, acquisition, and construction or production costs under certain circumstances, these can only be in cases where valuation policies can be shown to be consistent across the entity (IAS 16.15, IAS 23.11). Classes of assets may be revalued, if applied

10

consistently across the entity (IAS 16.3 and 36), though surpluses on revaluation are recognized only as equity on the balance sheet and never as profit to the income statement (IAS 16.39 and 40). Revaluation deficits, on the other hand, are always directly applied as expenses to the income statement (IAS 16.48). Depreciation charged to write off the value of assets over their estimated useful life, down to their salvage value (recoverable amount), must be straight-line, unless it can be shown that the assets are used proportionally (IAS 16.56). Assessments must be reviewed at least annually (IAS 16.61).

Impact: Because companies have often used multiple tax, cost, and other management depreciation methods for financial ing purposes, the transition to IFRS will require extensive analysis and careful planning to smooth the economic impact of potential revaluations. The “good news” is that IFRS adoption may reduce the expense and effort of calculating many of these separate depreciation methods, which will no longer be allowed. However, as IFRS requires inclusion of depreciation into product costs using full-absorption costing, the rules will carry offsetting efforts made necessary in other areas, including inventory values. In many cases, the loss of various tax and income statement advantages of accelerated depreciation may cause an abrupt fluctuation in apparent corporate profitability. It may be desirable to take steps to mitigate these impacts by spreading them over a period of time before IFRS reporting will be required. Recommended approach with SAP software: Once a thorough evaluation of all new depreciation methods and their impacts is made, a review of assettracking and valuation systems is in order, to determine their suitability under the company’s chosen approach to the new regulations. In some cases, the most advantageous approach to adhering to the new rules may involve reporting assets at a greater level of detail than under other GAAP approaches. In addition to stress-testing related fixed-asset systems for the change in volume, this can also have an impact on transaction volumes into the general ledger, which should also be tested.

Furthermore, because fixed-asset costs are a potential or required component under certain IFRS inventory and project valuation methods, it is necessary to coordinate this analysis with an evaluation of the impacts in those other areas. Overall, SAP software’s sophisticated asset-ing features enable unlimited flexibility in the application of various cost bases, depreciation methods, and useful lives – in parallel versions for IFRS, national, tax, insurance, or other purposes – making it the perfect application suite to these important regulations. The IFRS-compliant software from SAP handles all the calculations and volumes necessary to be in full compliance.

simplify long-term efforts in this area. However, steps to confirm compliance, and any changes to LIFO or other disallowed methods, will require analysis and system or process conversion. Full-absorption costing will require manufacturers to know the kinds of costs (such as overhead and depreciation) that might be included in inventory and how these costs differ under IFRS. These additional data collection requirements, and changes in fundamental ing treatments, may induce affected companies to reevaluate their inventory systems, especially when inventory documentation is newly required at a more detailed level than might be currently kept.

Inventory and Stock Valuations

Recommended approach with SAP software: An extended consequence of the revaluation of fixed assets can be a change in allocated inventory expenses. Companies that find themselves no longer able to utilize favored LIFO costing algorithms will have to confirm that their new inventory costing methods do not have an immediate adverse effect on reported profitability. They also must ensure that they are capturing all prescribed costs in their system and provide the correct documentation should FIFO be preferred. With financial ing, controlling, and materials functionality, SAP applications can compute the product cost calculations required by IFRS as well as those that may be required under U.S. and Canadian national ing standards. In addition, a material ledger function allows the software to perform the actual costing required by other jurisdictions in parallel with IFRS.

Issue: Speaking of inventory values, all inventory and stock will need to be handled similarly to current U.S. and Canadian GAAP LOCOM – or, as it’s written under IFRS, “net realizable value,” which must net estimated selling prices with costs to complete, transport, and sell (IAS 2.9 and 10). LIFO is specifically not allowed, and FIFO may only be applied where items cannot be individually identified (IAS 2.25). Costs are to include all costs of purchase, conversion, and transportation, plus depreciation costs where applicable (IAS 2.6). Impact: Companies already consistently using LOCOM methods will find following this regulation easiest. In cases where multiple inventory valuation methods are used for tax, profitability, or other purposes, IFRS may even

Receivables, Payables and Borrowing Issue: Receivables and payables are to be recorded at fair value (IAS 39.43). Subsequent assessments are to be at amortized cost, and anything with a significant credit duration must be discounted (IAS 18.11 contains an example for revenue ing). If a receivable is in default, its carrying amount is to be written down to its recoverable amount, which can be either “value in use” or fair value less costs to factor (IAS 36.9 and 59). All borrowing is recorded at amortized cost, using the “effective interest rate” method, which deducts borrowing costs from the principal and amortizes them over the period of the debt (IAS 39.46). Impact: IFRS regulations will require careful review and revaluation of payables and receivables, as credit situations are known. Factoring and borrowing costs, along with related tax and other advantages, will require specific treatments and reporting. This is especially important where different currencies complicate the process and proper translation and revaluation techniques must be maintained. Where systems are not currently designed to capture the necessary information and calculate the proper values, an evaluation may be in order to study the costs and rewards involved, as well as ensure that all required IFRS statements can be produced successfully. Recommended approach with SAP software: All cash-related applications currently in use should be reviewed to

11

set up to manage sales transactions. As these are often beyond the scope and control of the ing and reporting departments normally involved in compliance projects, many companies will find it challenging to ensure all related systems are updated consistently.

ensure that they are capable of capturing all required data for IFRS. Once potential gaps are identified and compliance is confirmed, a unified approach to producing required cash-flow statements, as well as correctly recording all current asset values according to IFRS, will be in order. SAP software fully s multiple currencies so that business transactions can be recorded in both transaction and functional currencies as they occur, rather than after the fact. Comprehensive drill-down functions help ensure that the original currency and the exchange rate employed are always available. SAP applications also provide functions for the revaluation of foreign currency items at market rates on the balance sheet date – and the translation of foreign currency financial statements in consolidation.

12

Revenue Issue: Revenue is always to be measured at fair value of receipt or receivable (IAS 18.9). Under IFRS, revenue can only be recognized after the significant risks or rewards of ownership of goods has been transferred (IAS 18.14), and revenues for services are recognized only according to the extent of completion and whenever they can be measured reliably (IAS 18.20). Impact: Revenue recognition rules will certainly have a direct impact on many revenue transactions. They may also alter the way companies decide to compensate sales and other personnel. During the transition to IFRS, the potential need to simultaneously record sales activity in different ways could require changes to the noning systems

Recommended approach with SAP software: All revenue, collection, and variable compensation systems should be reviewed to confirm that all necessary IFRS data is being captured and that proper triggers for employee payments are being made under the same guidelines as required for corporate reporting. Full revenue recognition functionality enables SAP software to fulfill various rules of revenue reporting according to IFRS and U.S. GAAP. Revenue recognition provides unlimited flexibility by decoupling the realization of revenues from invoicing and automates the process of revenue reporting. The incentive compensation applications from SAP can further be coordinated to this process to help ensure timely and accurate payments based on governing corporate reporting practices.

Employee Costs and Share-Based Payments Issue: Employee costs are to be recognized during the ing period in which services have been rendered (IAS 19.10). Accruals are necessary for absences, holidays, and vacations (IAS 19.11), and profit sharing and bonus plans also require an accrual (IAS 19.17). Whenever goods or services are received in return for the issue of shares or other equity instruments,

fair value must be ed as either an expense or an asset (IFRS 2.7). In the case of options or other sharebased incentives, market value of the instruments must be charged as an expense over the period in which the benefits vest (IFRS 2.10). Impact: North American companies will continue to be required to amounts of unrecorded sick time and vacation accumulations, as well as investigate potential for significant equity compensation liabilities that must be brought onto their expense books under IFRS. Updating personnel, benefit, and compensation systems to accommodate the new rules will be necessary to ensure documentation of compliance, as will planning for the orderly transition of the additional expenses to the income statement in cases where equity compensation programs are not currently treated according to IFRS regulation. Recommended approach with SAP software: Where current ing practices for accrued absences, holidays, and vacations can be confirmed in compliance with IFRS, the major remaining concerns will center on ensuring that shared-based incentives are being properly expensed as they occur. A full assessment of all outstanding obligations will need to be tested against both the balance sheet and income statement to ensure first reporting under IFRS does not produce a sudden difference that might be of concern to investors. In certain cases, a phased approach of bringing the obligations to their proper statement will be preferred.

Income Taxes

Leasing

Issue: Taxes payable based on current and prior period business activity must be recorded as a liability to the extent that they remain unpaid on the balance sheet date (IAS 12.12). Deferred tax liabilities are also required to be recognized (IAS 12.15).

Issue: IAS 17 currently distinguishes between “finance leases” and “operating leases,” though the IASB November 2008 discussion paper is intended to eliminate operating leases as a class and require all leases to be recorded as finance leases by 2011. Finance leases transfer all risks and rewards to the lessee and are recorded as an asset on the balance sheet. Lessors record leases as liabilities on their balance sheets (IAS 17.4, 20 and 25). Operating leases, while they are still allowed, recognize lease payments as expenses over the time period that the asset is used (IAS 17.33).

Impact: Income tax liabilities based on capital expenditures will be especially complex to track and record. “Taxable temporary differences” have limited exceptions related to goodwill and other business combination issues, but they will generally require careful tracking of all differences between carrying amounts and related tax bases. These amounts will be required to appear on IFRS financial statements. Recommended approach with SAP software: All capital expenditures and related asset- and project-tracking systems should be reviewed to confirm all necessary IFRS data is being captured. Research should be conducted to confirm all deferred tax liabilities, and proper entries should be made to reflect them if they do not already exist. Audits may be useful to ensure that updates to the tax basis are well coordinated with changes in the underlying asset and project systems. Sophisticated asseting functionality from SAP enables correct tax application of various cost bases, depreciation methods, and useful lives.

Impact: Companies will need to review all existing lease agreements to determine their treatment under IFRS. As with depreciation, the standard may have a material effect on production and inventory costs. Leasing rules under IFRS could also influence the structure of future lease agreements. Recommended approach with SAP software: Updated lease management and tracking systems may prove necessary as IFRS regulations move toward full “finance lease” treatment for all leases. Review of impacts to production and inventory costing is necessary as well. Through its asset-ing functions for lessees, SAP software s ing for both operating and finance leases. It further offers a complete leasing solution (the SAP Leasing application) that includes contract management and ing for lessors that can help automate the istration of all agreements.

13

Valuations Issue: Regarding projects and other intangible assets, IFRS specifies that research costs remain as expenses, while development costs must be capitalized once technical or commercial feasibility is established (IAS 38). Marketable securities and hedge ing require assignment to one of four holding categories that determine presentation on the balance sheet as well as treatment of unrealized gains and losses (IAS 39). Derivative instruments must be tracked on the balance sheet at fair market value, and any other special treatment will require extensive and careful documentation including risk measurement and effectiveness assessment. Long-term contracts, or any agreement extending beyond the term of the reporting period, must be tracked according to percentage of completion (POC) for both construction and service contracts (IAS 11).

Impact: Any significant investment in internally developed projects, from computer software to revenue-producing assets, will need to be treated carefully under IFRS. Project management systems must be checked to ensure they generate the necessary ing information for proper capitalization and amortization based on feasibility and other project milestones that might be relevant. Hedge ing and handling of all marketable securities will be especially complex. New applications are often required to meet IFRS criteria in this area, and extensive and careful documentation of all transactions and treatments is required. This is generally regarded as the single most complex area of the new regulations for adopting businesses. Recommended approach with SAP software: Controlling and project-system functionality enables SAP software to handle long-term construction contracts

using the POC method – and to apply a parallel completed-contract method of valuation if needed. SAP treasury applications provide multiple valuation methods for a wide range of financial instruments. In addition, there are options to set up multi-GAAP ing, using predefined rules in parallel valuation areas. Also ed are comprehensive functions for hedge ing under IFRS 39 and FASB 133.

Cash-Flow Statements Issue: The statement of cash flows is a mandatory component of financial statements under IFRS, as an equal partner to the balance sheet and the statement of income. Impact: IFRS will require an analysis of existing corporate cash-flow reporting for regulatory purposes. Companies preparing a cash-flow statement for the regulators for the first time will have to decide 1) whether to use the direct or indirect method and 2) how to classify their activities (operating, investment, or financing) according to the categories in IAS 7. Many companies may want to consider changing their chart of s and the ing entry logic in their software programs to obtain the right classification and level of detail. Recommended approach with SAP software: The cash-flow statement is an integral part of SAP software’s financial statement reporting functionality. Direct and indirect cash-flow methods are ed. SAP applications also provide standard cash-flow reporting templates.

14

Determining Organizational Consequences How Moving to IFRS Will Affect Your Business

minimize disruptions to their business. In this way, while the ultimate regulations are finalized, these companies will also be in best position to take advantage of all opportunities that appear along the way.

Companies must ask not if but how, and how profoundly, adoption of IFRS will affect their organizations. While many will be tempted to simply weigh the reporting requirements of IFRS, others will correctly see its adoption as an opportunity to institute effective changes to their internal operations and decision-making systems. Up until now, many organizations have had separate procedures for tax, statutory (U.S. and Canadian GAAP), and management reporting. The adoption of IFRS gives them the chance to more closely synchronize these areas. Many large enterprises have long recognized the benefit of global financial reporting standards. For example, SAP AG has based both its internal and external financial reporting on a single set of global ing principles since 1998 – on U.S. GAAP. This step has given management, employees, and external stakeholders a common set of standards against which to measure company activities. For example, a bonus plan for sales representatives

that counts only the revenue that can be recognized for financial ing effectively synchronizes the representatives’ personal goals with the com­ pany’s overall business objectives. Thus, the role a company assigns to IFRS adoption is critical; it will influence the eventual scope and complexity of the project. Companies must take a careful look at how IFRS differs from their present reporting standards. Only a careful comparison will reveal the extent of the differences. Clearly, the variety and complexity of the approaches currently used to comply with U.S. and Canadian GAAP standards found in common practice today will yield an equally varied and complex set of approaches that are found best to move to valuation and reporting rules under IFRS for each of these companies. Further acknowledging how merging IFRS and U.S. and Canadian GAAP standards will each be amended over time, it’s likely that companies will want to prepare parallel sets of consolidated financial statements to

However, the effort to maintain two sets of books for an undetermined period of time is not insignificant. National statutory requirements, management requirements, and IFRS requirements need to be constantly evaluated side by side to determine what is required, as well as what is most advantageous to the company at every step along the way. Having the proper systems for business planning, consolidation, and analysis, in addition to ing, financial supply chain, and treasury, is crucial to longterm success. Fortunately, companies can often move to initial IFRS compliance without making across-the-board changes in their IT systems. Many IT landscapes already include a variety of valuation methods and charts of s that are robust enough to handle IFRS requirements, even though they might be unnecessarily expensive and complex to maintain for the long term. SAP software landscapes have been capable of efficiently and effectively managing the new requirements for many years now – no “big bang” project will be needed for those shops to adapt their existing SAP software systems to the new ing environment. But the opportunity for better transparency, ability, and control afforded by the new IFRS regulations is not to be missed.

15

Project Considerations for Adopting IFRS

The Project Team and Portfolio

Who Is Involved? To cover the wide array of issues involved in adopting IFRS, companies need an interdisciplinary team. The broad nature of the project requires the and participation of management at the highest level. And because the project may affect many aspects of the business organization, several departments outside financial ing should be involved as well. The team should include, at a minimum, management ants, tax ants, external auditors, and IT staff. Management ants Adopting IFRS as a primary reporting and management standard can bring far-reaching changes, and establishing it as the reporting standard will affect many internal measurements. To make comparisons between actual and planning valuations, a company’s management ants must examine the planning data and processes and adapt them for IFRS. Product costing, longterm construction, and other valuation activities must be addressed from their beginning. Revenue, stock, and other ing could be fundamentally affected. Tax ants Until national tax regulations are harmonized with IFRS, companies moving to IFRS will still carry the important and burdensome challenge to choose the most advantageous tax treatments for their activities separate from their other reporting treatments. New confidentiality and tax audit issues – such as who has access to the data – must be analyzed

16

carefully by tax ants to ensure a smooth transition. External Auditors Involving the company’s external auditors is important to remove a lot of the guesswork from IFRS adoption. Significant uncertainty arises when companies – even those whose managers understand the new requirements – are not sure to what degree a specific requirement applies to them or how their preferred treatment may be assessed or allowed under the new rules. Issues of materiality can also arise: it is entirely possible that a current ing practice, although it may not be identical to the IFRS rule, leads to a materially similar result. The external auditor can help identify the more significant differences, thereby reducing the scope of the initial adoption project. IT Department Your IT department will be responsible for handling many of the system changes required by IFRS adoption. In addition to managing any system configuration, the department must also determine where the required ing data will come from and how it will be compiled and computed. In a heterogeneous system environment, this means examining various specialty and legacy systems as well as their interfaces (with each other and with SAP solutions).

How Will IFRS Affect the Project Portfolio? It is important to consider how the IFRS project will affect a company’s larger project portfolio. Today, com­

panies are evaluating their IT pro­­jects more closely than ever before. Resources and budgets are tight. Meanwhile, key decision makers and IT and ing staffs are dealing with other projects and concerns. Management may ask, with some justification, why the company must invest resources in an ing project that primarily satisfies a statutory requirement. Other projects with more obvious and immediate business value are competing for the same resources – resources that are also needed for routine system maintenance and for ing departments, whose resources are stretched even for regular workloads. Project fatigue and widespread skepticism about yet another “revolution” can result in a wait-and-see approach to IFRS adoption, particularly when companies expect a push-button IT solution for it. But the collection of knowledge and extensive analysis required for the IFRS project make it necessary to start it quickly and coordinate it with other projects that involve IT and financial reporting departments. There are many ways in which companies can synchronize projects to serve common interests. For example, adopting a single global reporting standard can be a catalyst for harmonizing ing structures and processes, enabling a fast close and reducing the time and expense of monthly and quarterly reporting cycles.

SAP Has the Tools and Expertise to Handle IFRS Across the Globe

SAP has more than 30 years of experience in international business issues. It is a pioneer in helping companies cope with multiple languages and currencies as well as national business practices. Its IT solutions have ed statutory reporting requirements in more than 100 countries. Whether a company’s ing needs involve fixed assets, financial instruments, long-term contracts, or inventories, SAP software offers the widest possible range of functionality for IFRS implementation. To its software solutions, SAP offers consulting, training, and conversion services that can help customers ask the right questions and make the right decisions in adopting IFRS. Customers benefit from the knowledge and experience SAP has gained from a large base of successful installations and projects. More than 20,000 customers depend on SAP ERP Financials and SAP treasury applications to handle their business processes. These customers put SAP in-depth knowledge of business

processes and ing treatments to the test every day. Throughout the prior process of IFRS adoption in Europe and elsewhere, SAP has ed its customers worldwide – helping to ensure the smoothest possible transition while maintaining the highest standards of security and reliability.

SAP Software – Prepared for New Standards Built on three decades of global experience, SAP software already contains the major functions and methods required for the adoption of IFRS. International financial reporting is not static, however. Each year, new standards and issues arise that can have a major impact on companies and their IT systems. SAP constantly updates and improves its software to comply with new statutory and reporting requirements. A company’s investment in SAP software is as safe tomorrow as it is today. The following shows how SAP software addresses key issues related to current IAS rules:

• IAS 2: Inventories. With financial ing, controlling, materials management, and production planning functionality, SAP applications can calculate product costs in the form required by IFRS as well as those that may be required under U.S. and Canadian national ing standards. It is possible to store multiple versions of the costs for a single material by using the material ledger function. SAP software also offers the ability to calculate the actual costs for each period, required by some other jurisdictions in parallel with IFRS. In addition, it is possible to calculate work in process according to different ing approaches and to create the appropriate postings for these at period close. • IAS 7: Cash Flow. The cash-flow statement is an integral part of SAP software’s financial-statement reporting functionality. Direct and indirect cash-flow methods are ed. SAP software also provides standard cash-flow reporting templates. • IAS 11: Construction Contracts. Controlling and project system functionality enables SAP software to handle long-term construction contracts using a number of different ing approaches, including the POC method and the completedcontract method in parallel, and to create the appropriate postings for these at period close. In addition, it allows multiple different methods of determining the percentage of completion, as appropriate to the contract in question.

17

• IAS 14: Segment Reporting. SAP applications have the financial ing and profit-center ing functionality needed to provide a robust and flexible basis for both your management reporting and segment reporting needs. Enhanced consolidation systems functionality in SAP BusinessObjects Business Planning and Consolidation s all management consolidations for segmentreporting purposes.

recorded in both transaction and functional currencies as they occur, rather than after the fact. Comprehensive drill-down functions ensure that the original currency and the exchange rate employed are always available. SAP software also provides functions for the revaluation of foreign currency items at market rates on the balance sheet date – and s the translation of foreign currency financial statements in consolidation.

SAP Services – Helping to Ensure a Smooth Transition

• IAS 16: Fixed Assets. Asset-ing functionality enables SAP software to provide unlimited flexibility in the application of various cost bases, depreciation methods, and useful lives – in parallel versions for IFRS, national, tax, insurance, or other purposes.

• IAS 22: Business Combinations. SAP ERP Financials s a broad variety of consolidation methods compatible with IFRS. Additional functionality within SAP BusinessObjects Business Planning and Consolidation enables analysis of potential busi­­ness impacts from all IFRS-related decisions.

SAP Training – Pointing Out What to Expect

• IAS 17: Leasing. Through its asseting functionality for lessees, SAP software s ing for operating and financing leases. It also offers a complete leasing solution, SAP Leasing, that includes contract management and ing for lessors. • IAS 18: Revenue. Revenue recognition functions enable SAP software to fulfill various rules of revenue reporting according to IFRS and U.S. GAAP. Revenue recognition provides unlimited flexibility by decoupling the realization of revenues from invoicing and automates the process of revenue reporting. • IAS 21: Foreign Currency. SAP software fully s multiple currencies so that business transactions can be

18

• IAS 38: Intangible Assets. The process of capturing costs for internally generated intangible assets is ed by SAP ERP Financials through its treasury and investment management components. Companies can create parallel versions either to capitalize these costs, as required by IFRS, or to expense them for other purposes. • IAS 39: Financial Instruments. SAP treasury applications provide multiple valuation methods for a wide range of financial instruments. In addition, there are options to set up multi-GAAP ing, using predefined rules in parallel valuation areas. Also ed are comprehensive functions for hedge ing under IFRS 39 and FASB 133.

In addition to the necessary functional depth and breadth contained in its solutions, SAP has the knowledge and other resources needed for a successful IFRS implementation. Its years of experience and global reach are valuable assets, helping companies make the right decisions, avoid costly mistakes, and create long-term ing strategies.

SAP offers training to help companies understand the effects of IFRS adoption on their current SAP software systems and to deal with both the new reporting requirements and the challenge of parallel reporting and ing rules. In addition, SAP consultants can help you: • Identify where your company can use SAP software to get the required reporting data • Configure or reconfigure an existing SAP software system to deliver data that is compatible with IFRS and can fulfill your national reporting requirements • Review and optimize your closing processes for faster closings • Review and optimize your and organization structure for IFRS

SAP: Your Partner on the Road to IFRS

An Ideal Platform for Optimizing the Reporting Process

IFRS can help companies make a virtue of necessity and achieve goals far beyond compliance with external reporting standards. By establishing the model for real-time integrated business solutions, SAP provides the ideal platform for harmonizing and accelerating the entire reporting process. Although the extensive effort required to adopt IFRS appears burdensome, many companies see the integration as a useful business opportunity. The changes required for operational systems can serve purposes that reach far beyond statutory compliance. In fact, businesses can use the adoption of IFRS to review their systems and address matters that have been on their to-do lists for a long time. For example, companies may want to look at their overall reporting setup while they are analyzing what to do for

The adoption of IFRS can help companies standardize and simplify the closing process by focusing on a common reporting standard and optimizing the procedures that it. Companies everywhere encounter issues such as a common chart of s and uniform application of valuation methods, but the pressure of day-to-day business concerns often prevents them from dealing with these infrastructure problems. IFRS can help companies make a virtue of necessity and achieve goals far beyond compliance with external reporting standards. By establishing the model for real-time integrated business solutions, SAP provides the ideal platform for harmonizing and accelerating the entire reporting process.

IFRS. Corporate reporting is an obvious target for update. Speeding up and improving the closing process to obtain better information quickly is a goal that has become increasingly important as global expansion and industry consolidation increase the complexity and diversity of IT systems. Companies are being pressured to reduce their IT costs at the same time they are being pressured (by close scrutiny of capital markets) to produce more information faster – with fewer resources. The only way to resolve this conflict is to achieve a high level of system integration and standardization.

19

50 065 xxx xxx 788(YY/MM) (08/12) ©20YY by ©2008 by SAP SAP AG. AG. All rights reserved. SAP, R/3, xApps, xApp, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products and services mentioned herein as well as their respective logos are trademarks or ed trademarks of SAP AG in and in several other countries all over the world. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or ed trademarks of Business Objects S.A. in the United States and in several other countries all over the world. Business Objects is an SAP company. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its d companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with r­ espect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty s­ tatements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.

www.sap.com /sap