Accounting Change as per IFRS

7. Income Taxes

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).

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.

SAP Solution- 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 asset accounting functionality from SAP enables correct tax application of various cost bases, depreciation methods, and useful lives.

8. Leasing

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: 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 inventory costs. Leasing rules under IFRS could also influence the structure of future lease agreements.

SAP Solution – (IAS 17) 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-accounting functions for lessees, SAP software supports accounting for both operating and finance leases. It further offers a complete leasing solution (the SAP Leasing application) that includes contract management and accounting for lessors that can help automate the administration of all agreements.

9. Valuations

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 accounting 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 accounting information for proper capitalization and amortization based on feasibility and other project milestones that might be relevant. Hedge accounting 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.

SAP Solution - (IAS 38 & 39). 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 accounting, using predefined rules in parallel valuation areas. Also supported are comprehensive functions for hedge accounting under IFRS 39 and FASB 133.