Contents
Flexibility in AGRESSO Business World
Handling multi-GAAP processing in AGRESSO Business World
Managing segmental reporting in AGRESSO Business World
Managing IFRS volatility with AGRESSO's workflow
Enhancing business understanding through reporting in AGRESSO
The introduction of International Accounting Standards is a global business project of unparalleled scope and reach. It aims to encourage the free flow of funds between capital markets across the world by making the financial statements of multinationals comparable, so that investors and other users of the accounts can assess performance of leading businesses on a like for like basis.
The development of a single set of International Financial Reporting Standards (IFRSs) has been in progress since the early seventies under the leadership of the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee. In June 2002, 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. This massive international project is now coming to a head and astonishingly, given the scale of the undertaking, around 9,000 listed companies will begin using IFRS in their consolidated financial statements in 2005. In fact, all of the major territories in which AGRESSO operates, regardless of whether they are in the EU, require their domestic listed companies to comply with IFRS. The notable exceptions are Canada and the US (see below).
However, the position in relation to non-listed companies varies at the discretion of individual Member States of the EU. For example, 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. For example some commentators have noted a shift in business language from " UK accounting" to "accounting in the UK ", reflecting the increasing importance of IFRS over local GAAP as we approach the implementation deadline.
Perhaps the biggest barrier to a truly global set of international accounting standards is the need to converge US GAAP with IFRS and there are encouraging signs that this will happen. At a recent United States-European Union summit meeting in Washington , the US and the EU jointly announced a series of undertakings designed to implement the Declaration on Enhancing Transatlantic Economic Integration and Growth. One of the undertakings is "promoting convergence of accounting standards as soon as possible".
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.
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 .
Whilst the introduction of international accounting standards has been reasonably successful around the world, the initiative has not been entirely free of controversy and challenge, for example, the European Commission's highly politicised carve- out of IAS 39, Financial Instruments. However, the most significant challenges that remain are not around the principles of the standards themselves, but more with their practical implementation, including computer systems.
The application of IFRS can give rise to significant differences between the accounts produced under local GAAP and those published under IFRS. The cumulative effect of individual IFRS changes on, for example, reported earnings, depends on the circumstances of individual companies and the characteristics of their industry. For example, manufacturers with large investments in research and development will be impacted differently by standards from capital intensive businesses or financial services organisations. In addition, the standards themselves are subject to change and best practice is still emerging. The changes to IAS 39 are well publicised but there have also been changes to IFRSs 2 to 5, concerning, Share Based Payments, Business Combinations, Insurance Contracts and Discontinued Operations, respectively. The net effect of these changes can lead to significant positive or negative swings in reported results under IFRS compared with local GAAP. However, the burden of explaining this so called "volatility" to the markets falls squarely on the shoulders of management.
The year 2005 has been a period of transition during which companies have sought to reconsider their accounting policies and to assess the impact of IFRS on their management and published accounts. Given the high level of uncertainty surrounding the application of IFRS, many businesses have managed the transition to IFRS temporarily and quantified the impact through a variety of spreadsheets and ad-hoc tools. However, this does not provide the sound basis for an auditable and permanent solution.
Looking ahead, the IASB has a full agenda of projects to introduce new standards and review the workings of existing standards. So, coping with changing standards and transitional arrangements is going to be a permanent feature of the reporting landscape for the foreseeable future. As the main body of standards settles down, the challenge of IFRS has moved from one of accounting principles to one of presentation and disclosure. Foresighted companies recognise that compliance is not only grounded in education and training but also in the robustness and adaptability of their underlying financial reporting and accounting systems.
In this paper we examine how users of AGRESSO Business World can embrace any changes thrust upon them by the standards setters confidently and gain a full business understanding of the impact of accounting standards on their reported operating performance.
Whilst the introduction of international accounting standards is radical in some areas, such as IAS 39, it does not give rise to fundamental changes for the way in which accounting transactions are recorded, processed and reported. After all, at this point in time there are probably more similarities between IFRS and local GAAP around the world than there are differences.
Therefore, in practical terms, the challenge of implementing IFRS is around coping with additional data elements where necessary, managing the transition to a new reporting framework whilst simultaneously providing comparatives according to an old standards regime and being able to report and understand the differences. In systems terms, coping with IFRS is all about flexibility, both now and in the future.
Flexibility in AGRESSO Business World
AGRESSO Business World has always been noted for the strength of its analytical capability. Whereas many packages rely on third party tools to extract and manipulate management information AGRESSO Business World is fundamentally a financial data warehouse with in-built capability to satisfy complex information needs.
Analysis in AGRESSO Business World is achieved using "attributes". These are the basic building blocks of an AGRESSO application and the way in which the system can be customised to meet a variety of information needs. In broad terms, attributes define what analysis is to be captured on entering transactions but they can also be organised into reporting hierarchies to allow information to be viewed in different dimensions. "Out of the box", attribute definition covers all of the standing data i.e. fixed or static data within the AGRESSO application. However, users can add their own definitions as required to deliver the analysis most appropriate to their business. Using only the standard functionality the application can be heavily tailored. For example, the validity of attributes can be limited to certain defined date ranges, or can be limited to certain user groups and linkages defined between attributes enable one attribute to be 'owned' by another.
Account Rules in AGRESSO Business World govern the way individual accounts are treated in the application and what information attributes must be entered when users post transactions to accounts.
In an IFRS context careful use of the account rules in concert with attributes is absolutely central to the handling of complex multi-GAAP processing as well as the demanding rules around Segmental Reporting, IAS 14. which seeks to analyse the major geographies and business segments that contribute to group turnover. It also accelerates data entry, reduces input errors and sets the basis of flexible reporting and reconciliations around all IFRS requirements. Using the latest release of AGRESSO Business World, which incorporates workflow functionality at the attribute level, it is possible to create a superbly controlled, auditable and efficient response to a wide range of IFRS needs.
Handling multi-GAAP processing in AGRESSO Business World
Many companies will be confronted with the challenge of multi-GAAP processing under IFRS. Whilst a number will be required to report under local GAAP and IFRS for the foreseeable future others, with a U.S. parent, may be saddled with reporting under three GAAP conventions simultaneously. The inherent flexibility of AGRESSO Business World supports a number of different ways of implementing a multi-GAAP solution. These include very straightforward reporting solutions where group adjustment journals are captured at the highest level, through to comprehensive solutions which take full advantage of AGRESSO's versatility to embed IFRS in the whole organisation.
Since there is considerable common ground between IFRS and local GAAP in most locations around the world the most expeditious route to embedding IFRS is to add IFRS specific accounts to the chart of accounts dimension where necessary to reflect those items not covered specifically by local GAAP.
In addition, for those local GAAP accounts that need to be adjusted to comply with IFRS, an attribute can be set in AGRESSO Business World for each GAAP adjustment that is required to be captured at data entry. Account rules are used to designate those accounts for which additional GAAP data is mandatory. (As a bi-product this helps to guide users who may be unfamiliar with all of the GAAP requirements). So where the chart of accounts is primarily local-GAAP, separate attributes can be established for, say, IFRS adjustments and US-GAAP adjustments. In this way, it is possible to report the original local GAAP value and the relevant GAAP adjustments separately to arrive at IFRS or US-GAAP numbers.
As a further refinement, each unique attribute or category of analysis can have multiple values. Using this facility, it is possible to analyse separately adjustments for each accounting standard, if desired, to provide another layer of analysis, accountability and control. Additionally, attributes can be reserved to specific user groups or limited to different user defined date ranges. In this way it is feasible to keep year end adjustments separate from interim adjustments.
Managing segmental reporting in AGRESSO Business World
The disclosures required under 'Segmental Reporting', IAS 14 are onerous yet they can also be readily accommodated using the power of attributes in AGRESSO Business World. The 'primary' or main segment can be based on a geographical analysis or some form of business grouping such as revenue from external customers by product division. The primary segmental analysis also needs to disclose the carrying amount of, for example, segment assets and segment liabilities. In addition, IAS 7, 'Cash Flow Statements' encourages disclosure of the amount of cash flows arising from the operating, investing and financing activities of each reported business and geographical segment.
AGRESSO Business World allows this information to be captured at source from operating companies by simply analysing to the appropriate attribute. Whilst the information is captured at a subsidiary level AGRESSO usefully allows the information to be reported at any summary level. This means that group companies charged with providing segmental reporting can comply with the legislation but confidently provide a detailed analysis, (as required by the standard), reconciling the segmental analysis to the figures in the financial statements and drilling down to lower levels where required.
Managing IFRS volatility with AGRESSO's workflow
IFRS adjustments are by definition of a technical accounting nature and therefore have to be applied with extreme care. For example, bringing pension scheme deficits onto the balance sheet or recognising the true cost of share option schemes can have a significant impact on the balance sheet and profit and loss account respectively. As such, adjustments cannot be made lightly and should be subject to detailed consideration and control if unexpected earnings volatility is to be avoided. This is where user definable workflow, a major enhancement to the latest release of AGRESSO Business World, provides very helpful support.
Using workflow to create a user definable approval process
Using workflow functionality, a user definable approval process can be established at the attribute level. For example, if multi-GAAP adjustments are implemented using attributes (as explained above) a separate workflow or process sequence can be defined for all adjustments or particular categories of adjustment - perhaps one class for each IAS.
The workflow is created in a flowcharting tool which describes the activities, decisions and actions to be taken at each stage of the process. The workflow engine is integrated with Microsoft Outlook so that emails seeking approval for IFRS adjustments can be passed automatically along a 'chain of command' showing the nature of the approval required and the individual seeking permission. Reviewers can, depending on the set-up of the system, approve the request, reject the request or change the data before passing it on to the next person. At each stage, relevant emails can be automatically generated to notify users of the actions taken and the status of the workflow. Using the system in this way, it is possible to build a completely auditable account of the changes that have taken place and the authorisations given. Also, by limiting the process to certain types of adjustment journal, (attribute values), time need only be spent reviewing those transactions considered to represent a risk to the organisation.
Enhancing business understanding through reporting in AGRESSO
The capability to define relationships between attributes is a key differentiator for AGRESSO Business World and a major reason why it is self sufficient, i.e. often unnecessary to employ an external multi-dimensional reporting tool. Essentially, the definition of relationships in the system allows the systems administrator to create reporting hierarchies which are broadly equivalent to the dimensions in a data warehouse. Powerfully, the same hierarchy can be used in reporting and enquiries to examine different data. Alternatively, different users can define their own hierarchy for viewing information in the database. These views on the database, (which can straddle the entire AGRESSO Business World database as well as external sources of data, if necessary) are created using "Balance Tables". In broad terms the process of defining a balance table requires the user to define which attributes are to be used to view the data together with which amounts are to be reported. The balance table enquiry is linked to the reporting hierarchy and is generated rapidly. From this the user can drill down through the enquiry taking different drill down paths as appropriate, by defining filter options 'on the fly'.
Drilling down to documents in AGRESSO Business World
Balance Tables are a supremely easy way of extracting information quickly and precisely to a user's requirements. So, in an IFRS context, Balance Table enquiries could be tailored to individuals with responsibility for different GAAP reports. However, IFRSs also create a number of presentational and reporting challenges and Balance Tables have a vital role in assisting management to quantify and understand the impact of changes in accounting policy, principles or measurement. For example, they can be used to assemble management accounts in local GAAP alongside statutory numbers in IFRS, highlighting any variances for further drill down and enquiry. Similarly, one could generate local GAAP, IFRS results and the adjustments between them, all in columnar format, in order to derive reconciliation between them. With the diligent use of attributes, (as described earlier), one could drill into the adjustment column to determine the precise make up of the reconciling items and, with the benefit of workflow, who authorised which transactions. AGRESSO's broad facilities for document management also provides opportunities to append key documents, such as (PowerPoint's, Word files and Excel worksheets) to transactions as a record of the rationale behind them. But Balance Tables are also ideally suited to a wide range of ad-hoc reconciliations which are peppered throughout the IFRS standards.
Reconciling Local GAAP to IFRS using Balance Tables
The 'Presentation of Financial Statements', IAS 1, prescribes the manner in which financial results are to be displayed and published. These are often subtly different from local GAAP, for example, the sub-totalling that is allowed, the nomenclature of certain line items or the items that may be included in, say, profit or loss or have to be excluded, such as 'extraordinary' items. One way of handling these presentational issues in AGRESSO Business World is to use its reporting engine, called Excelerator, which allows the output to be surfaced in Excel (or Word) whilst retaining the underlying financial intelligence. This means that the Excel workbook it creates is 'live' on the AGRESSO database so that drill downs, queries and modifications are supported and updated on demand with the latest figures in the database. In IFRS terms this means that anyone with reasonable Excel skills can quickly and flexibly develop a report that conforms to the permitted IAS 1 presentation formats or a specific reconciliation report with as much formatting as desired. Alternatively, for even more control over presentation, AGRESSO Report Creator provides a Crystal Report type interface for pixel perfect results
Complying with international accounting standards presents management with significant challenges. In the transitional period and beyond, companies with multinational operations will have to cope with a variety of local GAAP to IFRS issues against a constantly changing regulatory background. Not only will managers need to absorb the technical impact of standards on the presentation of their results but they will also need to capture the relevant data required by new standards, organise it to comply with permitted disclosure requirements and process it in their stride.
The inherent flexibility of AGRESSO Business World places its users at a distinct advantage. Its database structure, and seemingly endless analytical capability made up of attributes, hierarchies and relationships allows users to satisfy complex multi-GAAP processing or segmental reporting with little more than re-configuration of standard functionality. The agility of Balance Tables, drill through and reporting more generally permits a variety of published and ad-hoc presentation of results which adds to business insight and understanding. Finally, the latest innovations in workflow technology which are embedded deep in the latest release of the product envelop all of the processing in a rigorous, controllable and auditable environment.
Overall, users of AGRESSO Business World can be confident that they are well placed to meet the challenges of IFRS.
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.
www.fsn.co.uk
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.
