The introduction of International Accounting Standards is a business project of unprecedented scale and complexity. The world's capital markets ebb and flow continuously and it is vital that participants in that marketplace have access to financial information that is consistent between companies, faithfully reflects their economic performance and is supported by a respected and trustworthy regime of corporate governance and compliance.
The development of a single set of International Financial Reporting Standards (IFRSs) has been in hand since the early seventies under the stewardship of the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee. This massive endeavour is now beginning to bear fruit and despite some minor setbacks on the way, for example, the well publicised amendments to IAS 39 by the European Commission, IFRS has gained traction in all major regions of the world.
Europe
The most notable progress has been made in Europe . In June 2000, the European Commission published its communication entitled 'EU Financial Reporting Strategy: The Way Forward' which proposed that all listed companies prepare their consolidated accounts in accordance with one single set of accounting standards, namely International Accounting Standards (IAS), at the latest by 2005. Remarkably, given the scale of the undertaking, around 9,000 listed companies will begin using IFRS in their consolidated financial statements in 2005.
In addition, Member States of the EU may extend the use of IFRS to non-listed companies and to company-only statements. At the time of writing, IFRS is required in Cyprus , Malta and Slovakia . The majority position on this is that IFRSs are not mandatory but permitted for non-listed companies in most EU countries. However, companies will find themselves implementing IFRS by the back door, as local GAAP (Generally Accepted Accounting Principles) increasingly converges with IFRS.
United States
Following the broadly successful deployment of IFRS in Europe there appears to be renewed vigour in attempts to converge US and international accounting standards. Presently, there are approximately 13,000 companies whose securities are registered with the US Securities and Exchange Commission, of which around 1,200 are non-US companies. If these foreign companies submit IFRS or local GAAP financial statements rather than US GAAP, a reconciliation of earnings and net assets to US GAAP figures is required. However, the SEC is seeking to eliminate the reconciliation requirement by the end of the decade or perhaps earlier.
In addition, the IASB and the US Financial Accounting Standards Board have embarked on a joint programme to converge US and international accounting standards to the maximum extent possible. However, progress is likely to measured in years and it is difficult to foresee a wholesale change in US standards.
Elsewhere
Further afield, IFRSs are required for all listed companies in geographies as diverse as Armenia , Costa Rica , Kuwait , Peru and South Africa . In addition, The International Organisation of Securities Commissions has recommended that the world's regulators permit foreign issuers to use IFRSs in preparing financial statements for cross-border offerings and listings. The IASB has also begun a convergence project with Japan .
Despite the profound success of IFRS around the world, the position remains complex for preparers of financial statements in global 2000 companies. International accounting standards have simplified the compliance landscape in Europe but are subject to exceptions and different rules in many geographies. In large measure, regulators and accounting bodies have left it to individual companies to explain their business performance to the capital markets against constantly shifting accounting benchmarks.
Therefore, it is likely that the reporting environment will be subject to change continuously in the light of market and investor reaction to results announcements and as best practice emerges.
Similarly, it is reasonable to expect that policy makers, standards setters, regulators and the accounting profession will cause standards to change as the collective understanding of IFRS in practice improves. In addition, the International Financial Reporting Interpretations Committee (IFRIC), in its vital role of providing timely guidance on financial reporting issues not specifically addressed in IFRS will seek to influence the direction of reporting where necessary.
For all of these reasons, financial reporting systems have to be nimble and amenable to change if finance professionals are to respond to investor and analyst enquiries with confidence. This whitepaper explores how an 'IFRS aware' implementation of Hyperion's System 9 application suite provides that level of certainty against the backcloth of the exceptional demands of global financial reporting.
How well have we coped with IFRS? Introduction
Although successive governments, regulators, accounting bodies and senior figures in the accounting profession have signalled the introduction of IFRS well in advance it has nevertheless created surprising challenges for preparers and users of financial statements. For large corporations, the main concern has been to understand the impact of applying the new accounting rules on reported earnings and the shape of the balance sheet. Reported results can be affected materially simply because of a change in accounting policy or method of measurement in an IFRS compared to local GAAP. Companies have sought to manage this so called 'volatility' in order to distinguish real changes in performance from that arising simply because of the application of new accounting rules. The overall effect of IFRS can be either to significantly flatter or worsen reported results depending on the sum of the individual changes required by each standard. In addition, the position varies significantly from industry to industry, for example, IAS 39 Financial Instruments is very material to the financial services industry whereas IAS 16 Property, Plant & Equipment is significant to capital intensive industries in, say, manufacturing and utilities.
Therefore, the introduction of IFRS has been accompanied by constant working and reworking of management and statutory accounts in order to quantify the potential impact of standards. This effort has been accompanied by considerable reconciliation effort aimed at quantifying and teasing out the reasons for the differences so that their impact on reported results can be explained.
Flexibility of Hyperion's Financial Management Module was "the outstanding benefit" at Wella AG
Dr Dietmar Scheja, who was Head of Corporate Financial Analysis at Wella AG, one of the world's leading suppliers of cosmetics and toiletries, faced significant issues after the group had completed its IFRS implementation.
"We had separate consolidation models for management and financial reporting. They were never completely in step and we had the added burden of making sure that what we reported externally to shareholders in IFRS agreed with what we were saying to management."
When Dr Scheja and his colleagues replaced the old Hyperion Enterprise consolidation system he quickly discovered that by using the more powerful Hyperion Financial Management solution he could combine statutory and management reporting into one application. At a stroke, this removed one level of complexity, but in addition the 'custom dimensions' within Financial Management allowed the group to accommodate IFRS reporting within the same model. For example, the group's brand and product hierarchy could be introduced within the same application that was used for statutory reporting. Similarly, Dr Scheja's team could reflect the group's management structure in the hierarchy and could, for example, readily distinguish operating units which sell products from central units such as research and development.
"We could ensure that the detail of our brands hierarchy fed into summary levels and that our internal reporting was consistent with our external segmental reporting."
At first, data capture was demanding and end users took some time to acclimatise to the challenges of IFRS reporting. However, they quickly appreciated the benefits of having just one application for statutory and financial reporting and the larger subsidiaries were able to automate the upload of data from their operational systems directly to group.
However, the flexibility of Financial Management really became apparent when the Wella Group was taken over by Procter and Gamble and was required to report under US GAAP as well as IFRS and local GAAP.
"At first we simply added US GAAP adjustment members to the existing custom dimensions and put through the larger adjustments at a consolidated level. But later we were able to push responsibility for US GAAP adjustments down to the reporting," says Dr Scheja. "Financial Management was also vital in allowing us to reconcile results between US GAAP and IFRS so that we could explain the differences".
"The most outstanding benefit of Financial Management is its flexibility. We were able to accommodate US GAAP when it was suddenly sprung on us and prepare profit forecasts in the application very quickly and relatively easily without incurring big consulting costs. This really was a key benefit".
Centralised web based model gave Pearson Group plc "total visibility of the process"
Pearson Group plc, the publishing giant which owns the Financial Times has dual listings in the UK and the United States . As such, Andrew Midgley, Head of Financial Reporting had to cope with complex multi-GAAP issues when transitioning the group from UK GAAP to IFRS. A parallel move to a centralised, web based, Hyperion Financial Management system proved vital in allowing the group to understand and communicate the business impact of the IFRS standards as well as deal confidently with the constant stream of accounting changes required.
Pearson started its transition for US listing purposes on the 1 st January 2003 and therefore had to provide two years worth of comparisons between IFRS and UK GAAP. "It was difficult at first because there was considerable uncertainty around the application of standards which were still subject to change," says Midgley.
An initial paper based exercise quickly identified the types of IFRS adjustments that had to be handled at the centre and those which could be posted by the reporting units. "There were fewer adjustments at the reporting entity level than we had expected and they tended to be relatively small. They mainly related to acquisitions, intangibles, leases, and joint ventures," says Midgley. "Adjustments at the centre were bigger and more complex and included pensions, share option expense, deferred tax and financial instruments." Given this relatively straightforward background, the group was quickly able to establish a unified chart of accounts in Financial Management covering, UK GAAP, IFRS and US GAAP. It was then a simple matter to post the adjustments against these accounts as required.
S egmental reporting was a challenge but the group was already accustomed to the concept under US GAAP even though not all of the detail is required to be published in the US . The segmental requirements were readily accommodated within Financial Management's entity structure and a custom dimension was used for more detailed reporting of segments used in internal management accounts.
In the face of all of the changes, Financial Management fulfilled a pivotal role in supporting communication within the group and enabling it to respond flexibly to change. The centralised application conferred major advantages for Midgley and the finance team. "We had total visibility of the process and could instantly see the effect of changes posted anywhere in the group. Also, if we needed to maintain the central model, for example, to collect more data, we could effect the change and it was immediately available throughout the group. We could not have managed this so easily using our old distributed Hyperion Enterprise package."
The flexibility and ease of reporting using standard production reporting and the Excel add-in for Financial Management also assisted a smooth transition to IFRS. "Not only could we easily reconcile between UK GAAP and IFRS but we could also take the Board through the changes and help everyone understand the impact on our published results.," says Midgley.
Although the decision to move from Hyperion Enterprise to Hyperion Financial Management was not motivated initially by the introduction of IFRS it is clear that a centralised web based system has been a major advantage. "It's difficult to imagine how we would have coped just relying on our old system," says Midgley.
Responding with Hyperion System 9 Financial Management?
At first glance the requirements of IFRS are daunting. Not only does management need to respond to the specific accounting policies and procedures laid down in IFRS but it also needs to keep firm control of all of the other GAAP requirements relevant to the group at the same time. It is this "multi-GAAP" view of the world that makes IFRS so challenging.
Many groups throughout the EU and elsewhere will find themselves reporting in local GAAP and preparing group financial statements in IFRS. Those groups that have US parentage or are listed on US exchanges could find themselves burdened with US GAAP as well. Additional complexity arises from transitional arrangements in local geographies as well as slight differences even where local GAAP and IFRS are apparently converging.
So how does management move from reporting one GAAP to another, or local GAAP to IFRS without losing control? How can management be certain that results reported one way are consistent and reconcilable to the numbers reported another way? Do management's systems allow complete mastery of performance or is management to be continuously exposed to unexpected volatility of results?
Important thought it is, multi-GAAP reporting is part of a much bigger challenge. Statutory reporting has to be aligned with management reporting and the impact of IFRS on performance management and KPIs has to be understood. Forward looking statements of performance based on IFRS have to be consistent with budgets captured in the operational GAAP. Reporting tools and dashboards need the versatility to allow management to monitor, understand and report performance in whatever GAAP or language is desired. In a compliance culture, where good governance equates to superior management capability, nothing short of complete oversight of performance and risk is acceptable. So how does Hyperion System 9 Financial Management help finance professionals confidently meet and exceed these high standards?
In common with most consolidation products Financial Management is comprised of entity structures which define the group structure, i.e. the management or statutory hierarchies of reporting units and a chart of accounts hierarchy which maintains the relationship or roll-up of account lines used in management and statutory reporting. Whilst older products are forced to use these basic building blocks to develop a limited and unsatisfactory response to IFRS, the application has embedded multi-dimensionality that not only handles multi-GAAP reporting but also forms the cornerstone of a complete performance management capability.
Early attempts to build IFRS compliant consolidation models without multi-dimensional capability used either additional chart of accounts hierarchies or an expanded entity structure or a combination of the two. In the chart of accounts approach, additional hierarchies were built for IFRS but experience has shown that the burden of maintaining multiple instances of the chart of accounts is onerous and reporting across hierarchies to compare performance under different GAAP regimes is impractical. Similarly, an entity based approach creates a very high maintenance burden, has an adverse impact on systems performance and severely limits the flexibility of reporting.
Managing multi-GAAP requirements using Financial Management
A vital requirement of an IFRS compliant consolidation model is to be able to roam between results in different GAAPs and report them side by side together with the reconciling differences between them. Picture 1 , below, illustrates a multi-GAAP report with adjustments. Reports such as this can be readily generated on demand in Financial Management by utilising its customisable multi-dimensionality. In other words, the system holds a single instance of the full management and statutory chart of accounts and a completely separate and customisable hierarchy for any of the relevant GAAPs, see picture 2 . In practical terms this means that any of the chart of account lines can, if required, be analysed to any of the applicable GAAPs. The whole consolidation model becomes a completely self-contained model that is amenable to change. Data entry and production reporting can expand dynamically in sympathy with any changes to the chart of accounts, IFRS requirements or group structure.
Multi-dimensionality comes into its own around the complexities of segmental reporting required by IAS 14. In theory, segmental reporting is supposed to reflect internal reporting for the purposes of identifying appropriate business or geographical segments. The reality is that the level of detail required for the 'primary' segment is stretching and there is also a need to report 'secondary' segments. This gives rise to a very serious concern around how best to capture segmented, multi-dimensional, multi-GAAP data from reporting entities without encumbering end users with unmanageable web based data entry forms that seem to scroll forever!
Picture 1 : Multi-GAAP Reporting
Picture 2: Multi-GAAP requirements in custom dimension
Controlling multi-GAAP/segmental data entry using Financial Management
Fortunately Financial Management has smart capability in data capture. Web based schedules for data entry permit multiple-GAAP data to be captured in a columnar format through a 'point of view' on the underlying database that is relevant to the end user. Scrolling across the page is kept to a minimum and segmental reporting schedules, where required, can be populated via sub forms in a separate window, see picture 3.
Picture 3: Data entry point of view with IAS 14 segmental reporting
The ability to provide on line guidance via written instructions on a form, or to capture commentary at a cell level which explains an IFRS adjustment provides useful support to end users and helps safeguard the reliability of the information and confidence in the integrity of the system, see picture 4.
Picture 4: Guidance can be appended to data entry schedules
Coping with multi IFRS format reporting in Financial Management
The presentation of reports can vary significantly under different GAAP regimes and for example, IAS 1 describes minimum line items to be presented on the face of the balance sheet, income statement, and statement of changes in equity which can be different from local GAAP. So Financial Management 's versatility in report design is crucial to satisfying local GAAP around the world or IFRS. However, management can take comfort that once designed, these reports will dynamically reflect the latest changes in say, IFRS or the chart of accounts and that the different formats, drawn from the same database will remain consistent with each other.
Moving between GAAPs can give unexpected results. Therefore the ability to isolate the build up of audit trail from original data capture through to final result and to be able to drill down on reconciling or adjusting entries should give management the confidence that the information is complete.
Similarly, from a management perspective, the system can be used to compare and contrast key performance indicators between any GAAP and IFRS. The ease with which management can choose the performance reports it requires provides a high level of certainty that it can meet changing regulatory or business circumstances.
Managing IFRS volatility with Hyperion System 9 Strategic
Finance Whilst Hyperion's Financial Management module is an outstanding tool for managing the complex mechanics of multi-GAAP accounting and reporting, management will generally have broader concerns about the impact of IFRS on external reporting and stakeholder relationships. Implementing IFRS can have deep implications for pensions, share option schemes, directors' remuneration packages, bank covenants and credit ratings to name but a few. So how can Hyperion help management regain control and be certain of the overall impact of IFRS on reported results?
Hyperion's Strategic Finance Module allows a suitable economic model of the business to be developed so that management can plan for different scenarios, carry out business sensitivity analysis and adjust inputs and assumptions using goal-seeking techniques. In general this capability can be used to look at the impact of different business decisions, such as capital allocation, debt structuring, acquisitions and divestments on the Profit and Loss, Balance Sheet and Cash Flow. However, in an IFRS context it can also be used to understand the effect of different accounting policies on reported results.
The need to perform asset impairment tests under IAS 36 is a good example. Strategic Finance can help to provide rigorous analysis whilst improving transparency of results and retaining strategic context. All too often, calculations of the 'recoverable amount' of an asset are performed by discounting future cash flows in an unconnected spreadsheet. Whilst this might give an arithmetically correct result, the implications of the calculation are divorced from other aspects of business performance. By including impairment tests within a completely integrated economic model of the business the combined implications of different IFRS accounting policies and planning scenarios on, say, key balance sheet ratios can be seen. Also, if desired, the results can be plugged back into an underlying Financial Management application using additional IFRS account lines to record the movement in amortisation regardless of whether Strategic Finance or a spreadsheet has been used to calculate it.
Unlike spreadsheet based modelling management can be confident in the results generated by the model. Its integrity is guaranteed because auditable business rules can be established and financial features "financial intelligence" within the package ensure that balance sheets, profit and loss accounts and cash flows are synchronised and automatically updated for any changes in the model. In other words, one model can help management understand 'business as usual' decisions confident that the outcomes also take account of accounting policies that would otherwise introduce unwelcome volatility.
Modelling the business in this way helps to build confidence that the strategy is resilient to foreseeable business events including the impact of international accounting standards. It also provides a valuable audit trail in support of the assumptions that management have used to develop their plans.
Subsequently, this information can be shared with other applications and used to inform long term plans, budgets and operational plans as part of a complete business performance management regime. In this way management can be not only sure that the organisation is aligned with its strategy but also that everyone is using IFRS sensitised data and 'singing off the same hymn sheet'.
The future of group reporting
It is inevitable that group reporting will be in a state of flux for the foreseeable future. The IASB has a full programme of convergence and other projects planned for the next few years and this does not take account of unexpected issues arising during the implementation of IFRS or other unplanned changes in circumstances that could cause the standards to be adjusted and refined.
Customer experiences illustrate that the flexibility of Hyperion System 9 Financial Management is of paramount importance in managing the challenges of IFRS. Whether it is the need to combine statutory and management accounts in one IFRS application, or the requirement to introduce new GAAP requirements across the enterprise at a moment's notice, the application's centralised, web based design is pivotal to compliance. Customers attest that its multidimensional capability gives it distinct advantages in handling multi-GAAP processing or segmental analysis and the variety of reporting options allows the impact of IFRS changes to be reconciled and understood.
On the other hand, Hyperion System 9 Strategic Finance allows finance managers to evaluate changes in accounting policies arising from IFRS, model their impact, for example, asset impairment, on internal or external KPIs and set operational plans that are consistent with its strategy. Whilst Financial Management provides a flexible platform for technical compliance with IFRS, Strategic Finance assists management to understand fully the strategic implications of the changes alongside 'business as usual' assumptions.
Naturally, in this transitional period, most effort has been applied in understanding the broad impact of IFRS and ensuring that group consolidated results faithfully comply with the standards. As described earlier, Financial Management and Strategic Finance provide a very competent solution to these needs. However, as preparers of financial statements become more accustomed to the standards, it is likely that their requirements will extend in the medium to longer term and that they will benefit from the broader range of applications within the Hyperion System 9 product portfolio.
Crucial to any further developments is Hyperion's tight integration between applications, the central management of the metadata (structural information) that is shared between them and a unified technology platform which underpins the whole solution and provides users with complete flexibility of reporting.
The completeness of the solution confers significant advantages on the finance function as it grapples with a constantly changing reporting landscape. For example, at the users' option, performance metrics (KPIs) can be reported and compared in any GAAP. Budgets, forecasts and strategic plans can be established on a consistent basis in reporting GAAP but compared, say, to local GAAP or IFRS, if required. Finally, an OLAP or relational database could be used to record very detailed segmental analysis but summarised appropriately in Financial Management for external reporting.
Hyperion users can take advantage of a complete and robust 'IFRS aware' solution as their requirements change, allowing management to comply confidently with international accounting standards now whilst benefiting from the broader business insights that such a complete performance management solution can provide in the future.
About FSN Publishing Limited
FSN Publishing Limited is an independent research, news and publishing organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University , a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.
Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document.
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