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Microsoft Dynamics AX and IFRSS for First Time Adopters: Part 1 of Financial Excellence in Microsoft Dynamics AX 2012

July 6th, 2011 Sandeep Walia No comments

The IFRS presents a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. The IFRS is developed by a global body called the International Accounting Standards Board (IASB) – a body formed in 2001. The globally accepted part of the IFRS makes it most appealing.

The EU has adopted virtually all IFRSs, though there is a time lag in adopting several recent IFRSs and one aspect of IAS 39 (Financial instruments: recognition and measurement) was modified. Most of the EU countries have adopted the IFRS in a form known as the IFRS as adopted by the EU. Countries such as Australia and South Africa have adopted the IFRS with local adaptations.

The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRSs and US generally accepted accounting principles (GAAP). In September 2002 the IASB and the FASB agreed to work together to remove the differences between international standards and US GAAP. This decision was embodied in a Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement. In 2007, the FASB removed the requirement for foreign issuers operating in the United States to reconcile their statements to the US GAAP as long as the organization met the IFRS standards as published by the IASB. The IASB and FASB have set 2011 as their target year for substantial convergence between the IFRS and the US GAAP and decision about possible adoption for US companies is expected in 2011.

While progress on the convergence between GAAP and IFRS has been slower than hoped, the direction towards global convergence is clear. The IFRS is here to stay and will become the global financial reporting standard of the future. The table below shows the adoption of IFRS by major economies for listed companies as of April 2010

Country

Status for listed companies as of April 2010

Argentina

Required for fiscal years beginning on or after 1 January 2011

Australia

Required for all private sector reporting entities and as the basis for public sector reporting since 2005

Brazil

Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008

Canada

Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organizations

China

Substantially converged national standards

European Union

All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005

France

Required via EU adoption and implementation process since 2005

Germany

Required via EU adoption and implementation process since 2005

India

India is converging with IFRSsat a date to be confirmed.

Indonesia

Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012

Italy

Required via EU adoption and implementation process since 2005

Japan

Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012

Mexico

Required from 2012

Republic of Korea

Required from 2011

Russia

Required for banking institutions and some other securities issuers; permitted for other companies

South Africa

Required for listed entities since 2005

Turkey

Required for listed entities since 2005

United Kingdom

Required via EU adoption and implementation process since 2005

United States

Allowed for foreign issuers in the US since 2007; target date for substantial convergence with IFRSs is 2011 and decision about possible adoption for US companies expected in 2011.

NOTE: The list refers to listed companies only. The table is not an authoritative assessment of the use of IFRS in those countries. In the majority of cases, the information has been provided by the relevant national authorities or is based on information that is publicly available. For definitive information on the use of IFRSs in any particular country or countries contact the relevant national authority or authorities directly.

Microsoft Dynamics AX provides rich support for IFRS wherever it is distributed and Microsoft makes localizations and/or translations for Microsoft Dynamics AX generally available. The map below shows another view with color coding of the adoption status of IFRS where Microsoft Dynamics AX is generally available.

IFRS Adoption Status by countries where Microsoft Dynamic AX is generally available. Canada and Mexico have adopted the IFRS as published by the IASB. Countries such as USA, India and Indonesia are adopting the IFRS with local convergence of IFRS and local standards such as USA GAAP and India GAAP while other countries such as Australia and South Africa have adopted the IFRS with local adaptations. Most of the European Union (EU) countries have adopted the IFRS as adopted by the EU

Figure: IFRS Adoption Status by countries where Microsoft Dynamic AX is generally available. Canada and Mexico have adopted the IFRS as published by the IASB. Countries such as USA, India and Indonesia are adopting the IFRS with local convergence of IFRS and local standards such as USA GAAP and India GAAP while other countries such as Australia and South Africa have adopted the IFRS with local adaptations. Most of the European Union (EU) countries have adopted the IFRS as adopted by the EU.

Companies that plan to report under IFRS and have not being doing so may have significant work ahead for them. Most significantly there will be impact on the enterprise business systems and financial systems put in place. Companies can expect to need the following

- Parallel reporting requirements: This is going to be most commonly required by multi-jurisdiction companies. Companies in the United States with significant EU operations may find themselves reporting under both IFRS and US GAAP. Many ERP and financial systems do not support this.

- Consolidation and Reporting changes: Changes will be required in the way companies consolidate their books and present financial statements. As a simple example US companies are used to presenting Operating Income in the form of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) while the IFRS standard uses PBT (Profit Before Tax) as its measure of Operating Income. As an example a presentation of a consolidated statement of comprehensive income (Alternative 1 – illustrating the classification of expenses by function) is shown below and it reflects a significant difference from the US GAAP presentation of a similar financial statement.

- System Impacts at all levels: AR, AP, Fixed Assets, Invoicing and Revenue Recognition, GL etc.

Example of a Consolidated Statement of Operations per the IFRS. Note the significant difference in presentation from a US GAAP financial statement. Source is the IFRS Implementation guide for Small to Medium Enterprises

Figure: Example of a Consolidated Statement of Operations per the IFRS. Note the significant difference in presentation from a US GAAP financial statement. Source is the IFRS Implementation guide for Small to Medium Enterprises.

So how does one make this easier?

1. Choose a system that supports parallel reporting standards

2. Get it right the first time. Plan for IFRS as you put in a new financial system

3. Choose a system that is adaptable and flexible: As some of the IRFS standards are not finalized there will still be changes required in areas around leases, financial instruments, consolidation, revenue recognition etc. In addition, if you are in the United States most of the convergence work between the GAAP and IFRS is yet to be published and may require significant changes. You need a system that has flexibility to meet these changes as needed. The table below shows the IASB work plan and the projected timetable as of June 30th, 2011 on the IFRS standard.

IASB work plan – projected timetable as of 30 June 2011

Financial Crisis related projects

2011
Q3

2011
Q4

2012
H1

MoU

Joint

IFRS 9 : Financial instruments (replacement of IAS 39)

         

Impairment

Re-exposure or Review draft

 

Hedge accounting

         

General hedge accounting

Ballot (target IFRS Q4)

 

 

Macro hedge accounting

 

Publish ED

     

Asset and liability offsetting

Ballot

   

Consolidation - Investment companies [1]

Publish ED

     

[1] The IASB will have completed formal voting requirements by 30 June 2011. However, the exposure draft will be published in July so that it can be published on the same day as the equivalent FASB proposal.

Memorandum of Understanding projects

2011
Q3

2011
Q4

2012
H1

MoU

Joint

Leases

Re-exposure or Review draft

 

Target IFRS

Revenue recognition

Re-exposure

 

Target IFRS

       

Other Projects

2011
Q3

2011
Q4

2012
H1

MoU

Joint

Insurance contracts

 

Re-exposure or Review draft

Target IFRS

 

Annual improvements 2009-2011 [ED, comments due 21 October 2011]

Comment period

     
       

Agenda consultation

2011
Q3

2011
Q4

2012
H1

MoU

Joint

Three-yearly public consultation

Publish
RV

       

Essentially this can create the need for reconfiguration, recalculation of many algorithms, implementation of new functionality and possibility significant modifications to a system that doesn’t have rich IFRS support. The transitional period from now till the time we have full adoption of IFRS will require many businesses to maintain parallel accounting and management will have to review to assess whether they will have parallel accounting done at local subsidiaries or at the consolidated level and who will perform the parallel accounting – local finance teams or the corporate finance teams. In addition there will be retroactive adjustments required to be able to do year on year comparison and whether organizations will do full restatements or just post adjustments. In addition, will your financial system support real-time parallel posting practice (least pain and most automated) or just retrospective adjustments for the period (more manual work). Finally when businesses cut over to the new standard – they will have to finalize a cut over approach and load opening balances adjustments for IFRS if they have not adopted automated parallel accounting before the cut over.

IAS 1 requires companies transitioning to IFRS to present one comparative year. However the SEC has indicated it may require 2 comparative years and that means significant restatement unless you start automated parallel accounting early. Microsoft Dynamics AX provides comprehensive support for IFRS including Parallel Accounting, First Time Adoption of IFRS; Presentation of Financial Statements; Consolidation; Changes in Foreign Exchange Accounts; Property, Plant and Equipment; and XBRL and IFRS standard XBRL (iXBRL) support. Let’s deep dive into these areas a little bit

Native Support for Parallel Accounting for transition to IFRS

Microsoft Dynamics AX have posting layers in the General Ledger and for consolidation that allow it to be one of the unique ERPs that allow for parallel accounting that is needed as part of a transition to IFRS. Microsoft Dynamics AX has 3 layers – one primary and two adjustment layers. The layers are Current, Operations and Tax. For example, the diagram below represents a USA public company listed in the United States that has a public holding company in Europe and needs to report in 3 formats: Tax for the IRS, US GAAP for the SEC and public filings in the United States and IFRS as adopted by the EU for group external reporting. Layer 1 is the ‘Current’ Layer in Microsoft Dynamics AX holds the US GAAP postings. Layer 2 is the Operations Layer and has any IFRS Delta postings. Fixed Asset can be posted in full for all layers so those do not require any deltas as they can automatically post into multiple layers by setting up a dependency through Value models. Effectively this allows the Fixed Asset Sub Ledger to have a full US GAAP, IFRS and Tax set of books in it. Any Tax adjustments or other Tax posting are made in the Tax Layer e.g. Section 179 accelerated depreciation for qualifying assets.

Microsoft Dynamics AX provides support for multiple posting layers such as current, operations and tax that provide it with unique capability to have native support for parallel accounting. Source of this screen shot is Microsoft Corporation

Figure: Microsoft Dynamics AX provides support for multiple posting layers such as current, operations and tax that provide it with unique capability to have native support for parallel accounting. Source of this screen shot is Microsoft Corporation.

Microsoft Dynamics AX has the ability to have different journals post to different layers. For example, I can have a regular GL Journal that posts to the Current (US GAAP layer in our example) and an IFRS General Ledger Journal that posts to the Operations (IFRS Layer in our example)

Microsoft Dynamics AX support the transition to IFRS with ability to support parallel accounting with different posting layers. In this screenshot, the IFRS GL Journal is posting to the Operations Layer for any IFRS Delta postings

Figure: Microsoft Dynamics AX support the transition to IFRS with ability to support parallel accounting with different posting layers. In this screenshot, the IFRS GL Journal is posting to the Operations Layer for any IFRS Delta postings

The reporting structure in Microsoft Dynamics AX then allows you to define on the report where you would like the numbers to come from. We can setup a report for US GAAP by choosing the layer as Current and then we can use the same report or a copy of it by setting the source posting layer as Operations plus current and it would show us the IFRS numbers.

Cash Flow report in Microsoft Dynamics AX showing that the posting layer can be selected on the report definition allowing the same report definition to be used to get numbers in different accounting standards such as US GAAP, IFRS and Tax thus simplifying accounting and reporting greatly

Figure: Cash Flow report in Microsoft Dynamics AX showing that the posting layer can be selected on the report definition allowing the same report definition to be used to get numbers in different accounting standards such as US GAAP, IFRS and Tax thus simplifying accounting and reporting greatly.

First Time adoption of IFRS (IAS 1)

IAS 1 requires that businesses adopting IFRS maintain a comparative year and also requires that an ERP system should be able to load or post manual adjustments for the IFRS opening balance in either the last period before the transition date and then roll-forward the IFRS opening balance or in the period of the transition date with a specific identifier in order to track and distinguish the opening balance adjustments for IFRS from regular transactions.

From a Financial system stand-point this requires the following

- Recording of opening balances

- Multiple year over year reporting required

- Adjusting of opening balances under IFRS

- Ability to separately identify normal accounting transactions from those for IFRS adjustments

In Microsoft Dynamics AX 2012, the opening transactions can be posted to a unique period (the opening period) of the fiscal year through import of transactions of by transferring prior year ending balances. Prior year ending balances are transferred to the opening period. The opening period is a special period compared with the normal transaction periods. The opening period is usually the first period of a new fiscal year (for example,it covers only the first day).

Microsoft Dynamics AX 2012 alsohas a closing periodwhere the closing transactions can be posted. A closing sheet can be created to create closing transactions. When creating the closing sheet, manual adjustments can be created and posted. Multiple closing sheets can be created for different purposes, and each can be uniquely identified. E.g. you can have a regular closing sheet and then another one to record the IFRS transition adjustments. For example, the screen shot below shows that the GAAP Closing sheet is posted in the current layer while the IFRS Closing sheet with relevant adjustments is posting to the Operations Layer.

The Closing Sheet in Microsoft Dynamics AX can post to different layers to record adjusting transactions for the IFRS and be able to identify them separately

Figure: The Closing Sheet in Microsoft Dynamics AX can post to different layers to record adjusting transactions for the IFRS and be able to identify them separately

In addition IAS1 specifies the need for two statements of comprehensive income, two separate income statements, two statements of cash flows, two statements of changes in equity, related notes, including comparative information. All of this is achieved by having the different layers and running reports either via Management Reporter or the Dynamics AX Financial Statements and selecting the appropriate layer or combination of layers as illustrated in the Cash flow example above.

XBRL Support:

The IFRS has adopted the XBRL Taxonomy as its standard for electronic exchange of financial data prepared in accordance with the IFRSs. The IFRS Foundation XBRL Team is responsible for developing and maintaining the XBRL representation of the IFRSs, known as the IFRS Taxonomy. Both IFRSs and XBRL are intended to standardize financial reporting in order to promote transparency and to improve the quality and comparability of business information, therefore the two form a perfect partnership. As shown in the screen shot below, Microsoft Dynamics AX has native support for XBRL with the ability to natively to import an XBRL taxonomy and use it very quickly. The IFRS in March 2011 published 12 sample XBRL samples including Statements of Financial Position,Comprehensive Income, andChanges in Equity, Statement of Cash Flows, Employee benefits obligations, Consolidated and separate Statements of Financial Position. Microsoft Dynamics AX 2012 can very quickly allow you to take these examples and start reporting in XBRL.

Microsoft Dynamics AX provides native support for XBRL

Figure: Microsoft Dynamics AX provides native support for XBRL

In addition Microsoft Dynamics AX 2012 provides support for drag and drop type editors for the presentation of reports, calculations, labels etc. that make XBRL a fairly straight forward process.

XBRL Taxonomy details for the Presentation of Financial Statements in Microsoft Dynamics AX 2012

Figure: XBRL Taxonomy details for the Presentation of Financial Statements in Microsoft Dynamics AX 2012

Formulas in XBRL Taxonomy for Calculation for Financial Statements in Microsoft Dynamics AX 2012

Figure: Formulas in XBRL Taxonomy for Calculation for Financial Statements in Microsoft Dynamics AX 2012

The imported XBRL Taxonomy works with the Microsoft Dynamics AX Reports Structure Designer and the Management Reporter Tool that can be used to generated reports. The screen shot below shows the native structure designer with the XBRL Income Statement.

Microsoft Dynamics AX Report Row Structure Designer showing the XBRL Taxonomy

Microsoft Dynamics AX Report Row Structure Designer showing the XBRL Taxonomy

Figure: Microsoft Dynamics AX Report Row Structure Designer showing the XBRL Taxonomy that was imported from the xbrl.org. The first screen shot shows the row definition and the second one show the simulation with the row labels (notice the simulate check box is checked which forces it to simulate the structure of a published report)

For more information on how Microsoft Dynamics AX 2012 can help you with your financial reporting, performance management and IFRS adoption please email us at dynamics@ignify.com

Sandeep Walia is CEO of Ignify. Ignify is a leading provider of Microsoft Dynamics ERP solutions to mid-market and Enterprise businesses. Ignify has been ranked as Microsoft Partner of the Year Winner in 2011 and 2010 and in the Microsoft Dynamics Inner Circle, Microsoft Dynamics Presidents Club in 2009. Ignify has offices and team members in Southern California, Northern California, Arizona, Tennessee, Illinois, Washington, Canada, Malaysia, India, Philippines.