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Achieve automated IFRS compliance with SAP S/4HANA

Most of the enterprise and businesses all over the world are mandated to follow IFRS (International Financial Reporting Standards) as an accounting framework to report their financial results. IFRS ensures uniformity in the financial reporting of all enterprises, which makes comparison of the financial results easier and effective

Ever growing volume of businesses, high complexity of transactions and ever changing complex regulatory environment pose considerable challenges for enterprises in ensuring effective compliance with IFRS. The CFOs and Finance departments are always in search of a fully automated system based solutions to guarantee effective IFRS compliance while ensuring full auditability and traceability. Any non adherance or incorrect adherance to IFRS would result in misrepresentation of information in Financial statements which could have serious implications on the trust of investors and shareholders in the enterprises. SAP with its next generation ERP platform- S/4HANA provides many solutions in Finance to ensure effective and automated IFRS compliance. In this blog we will look at some of these key automated solutions in SAP S/4HANA along with the key requirements of corresponding IFRS or relevant IAS (International Accounting Standards) which are supported


I. IFRS 9 Financial Instruments: This IFRS relates to measurement of financial liabilities and assets along with buying or selling contracts related to non-financial items. IFRS 7 Financial Instruments: Disclosures relates to disclosures on financial instruments by corporations in their Financial statements to enable the shareholders to evaluate their significance to financial performance along with evaluation of the extent of risk from the financial instruments

Below are solutions with SAP S/4HANA to ensure compliance with IFRS 9 and IFRS 7

S/4HANA Financial Product Sub Ledger (FPSL) solution: Primarily relevant for handling complex reporting and regulatory requirements for Banks, Financial institutions and insurance companies. The sub ledger covers the accounting for Financial instruments and insurance contracts. It combines financial accounting and controlling in Universal Journal in S/4HANA and includes end to end best practice templates and configuration for IFRS 9 and IFRS 7 compliance

SAP Treasury and Risk Management solutions (SAP TRM): SAP Treasury and Risk management, impairment accounting extension for expected losses for SAP S/4HANA allows to handle impairments for financial instruments based on the expected loss model. Fiori based Hedge management cockpit and Hedge accounting solution supports finalization of foreign currency hedge management and accounting as per IFRS 9. Also revised approach in accordance with IFRS 9 for classifying and measuring all financial assets and liabilities is supported with change of categories delivered in SAP Treasury and Risk management solution

II. IFRS 15 Revenue from contracts with customers:  This IFRS specifies the principles to be applied in revenue recognition from goods or services sale to customer. It prescribes a five step model which needs to be followed for recognition of revenues for contracts with customers. SAP Revenue Accounting and Reporting (RAR) solution in S/4HANA supports the single five-step model for recognizing revenue. It supports different performance obligations and revenue recognition types eliminating the need for manual processes and spreadsheets. The solution supports multiple elements arrangements, parallel accounting with different recognition of revenues and costs as per different accounting principles, recognition of COGS with revenue and disclosures and reporting requirements of IFRS 15

III. IFRS 16 Leases: This IFRS relates to recognitions of leases by lessees which have a duration of more than 12 months as assets and liabilities. SAP Contract and Lease Management (CLM) solution, part of Flexible Real Estate (RE-FX) in S/4HANA Finance supports the automated compliance with the new IFRS 16. The key functionalities supported include

Contract Management- Supports lease contract management for different lease types for lease in and lease out with leasing partners. Includes functionalities of Lease payment cash flow with full integration, terms and conditions for notice and renewal options, critical dates and reminders and document management

Multi-GAAP posting- Supports multi-GAAP enabling while managing right of use assets and liabilities. Posts depreciation and repayments along with lease payments. Supports automated customer/vendor and controlling/profit center accounting

Valuation and Classification- Includes classification and evaluation rules, functionality to calculate and report on net present value, depreciation, repayment and interest rate. Revaluation and creation of link to fixed assets

IV. IFRS 8 Operating Segments: This IFRS relates to reporting of segments in financial statements and in interim financial report. The operating segments can be classified based on service line, products, geographical location etc. With SAP New General Ledger (New GL) and its document splitting functionality in S/4HANA the Segment reporting requirements of IFRS 8 can be met by automated allocation of Income statement and Balance sheet items to relevant Segments in real time

V. IFRS 10 Consolidated Financial Statements: This IFRS relates to rules for presentation of consolidated financial statements for a holding entity which controls single or multiple subsidiaries. SAP S/4HANA Group Reporting solution supports real time consolidation functionality within the ERP system. It supports  automation of the activities required as per IFRS 10 to prepare consolidated financial statements with functionalities like Collections and Validation of data from various subsidiaries for consolidation, currency translation, group share calculation, Interunit eliminations, consolidation of investments, intercompany reconciliation etc.

VI. IFRS 17 Insurance Contracts: IFRS17 requires insurers to calculate the value of liabilities in their insurance contracts on the basis of present value of future cash flows with account risk after factoring the time value of money. SAP S/4HANA Financial Product Sub Ledger (FPSL) solution supports IFRS 17 compliance by covering the accounting for insurance contracts with a calculation component that supports preparation of future/actuarial cash flows for further processing in the sub ledger component. It also includes end to end best practice templates and configuration for IFRS 17

VII. IAS 2 Inventories: This IFRS relates to valuation of inventories along with recognition of the cost as an expense, including any write-downs to net realizable value. It provides rules on the various cost formulas that calculate the costs of inventories

SAP S/4HANA Material ledger is the standard tool for material and inventory valuation in S/4HANA. It supports all valuation methods like standard price, moving average price, year end legal valuation based on FIFO, LIFO and actual cost based valuation


VIII. IAS 7 Statement of Cash flows: This IAS relates to information presentation in cash flow statement of the changes related to a company's cash and cash equivalent during a period. SAP S/4HANA Cash and Liquidity Management solution supports the presentation of cash flows and changes through various Fiori based apps like Actual Cash Flow, Cash Flow Analyzer, Cash Flow Comparison- Actual/Forecast, Cash Flow- Detailed Analysis, Reconcile and Release Cash Flows etc. which can ensure effective compliance with IAS 7

IX. IAS 16 Plant, Property and Equipment: This IAS establishes principles for recognizing equipment, plant and property assets, measuring their carrying amounts along with measurement of the related impairment losses and depreciation charges. S/4HANA New Asset Accounting solution supports compliance with IFRS 16 for recognition of assets as per multiple accounting principles in real time and also calculation of impairment losses

X. IAS 21 Effect of changes in Foreign Exchange Rates: This IAS relates to accounting of foreign currency transaction for an enterprise along with translation of Financial statements for foreign operations of an enterprise into the functional currency and presentation currency. Foreign currency valuation solution in SAP S/4HANA based on parallel valuation areas linked to parallel ledgers in New GL, based on multiple accounting principles along with currency translation solutions in S/4HANA Group Reporting for consolidation meet the compliance requirements of IAS 21


Comments

Thanks for sharing the information. It is very useful.

Hi, Thanks for posting this. it is very useful, but I would like to understand specific query on how feasible it is to implement Russian Accounting Standards on S4HC.

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