IFRS…Global Accounting Standards are changing

IFRS -  International Financial Reporting Standards is a series of accounting standards, developed by the International Accounting Standards Board (IASB), that is becoming the global standard for the preparation of public company financial statements.

IFRS focuses on the standardization of financial reporting standards across international borders. This standardized reporting practice provides a uniform view of a corporations accounting statements. Companies with international subsidiaries can use consistent cross-company financial reporting.

More than 12,000 companies in approximately 113 nations have adopted IFRS, including listed companies in the European Union.  Other countries, including Canada and India, are expected to transition to IFRS by 2011.  Mexico plans to adopt IFRS for all listed companies starting in 2012.  Other countries, such as Japan and Mexico, have plans to converge (eliminate significant differences) their national standards to meet IFRS.

Over the years Enterprise applications such as Oracle eBusiness, Peoplesoft, and SAP, have evolved to embed more and more, of the local accounting standards and regulations. Embedding functionality to support GAPP, SOX, etc.

Whilst these applications are exceptional an keeping up with the continually changing landscape of Financial/Accounting regulations, conforming to IFRS has may people befuddled.

IFRS represents a series of guidelines, unlike GAAP, which provides exceptional detail in accounting practices. GAAP consists of volumes of detailed instructions, whilst OIFRS can be consolidated down to the size of a paperback novel.

As these guidelines are incorporated and consolidated into the current GAAP construct, companies face what seems like an impossible task on once again changing their accounting practices to ensure compliance.

Oracle eBusiness Release 12 introduces the concept of Sub Ledger Accounting (SLA). Sub Ledger Accounting provides a interim step to translate, and derive accounting logic, prior to recording GL Entries. Whilst SLA continues to be a buzz word, in the Oracle community, it’s regarded with both awe, and disdain. However, SLA proves to provide the most expedient  roadmap for corporations to start converting to IFRS.

SLA introduces a very powerful feature called Multiple Representation : A Single accounting entry can be represented for multiple reporting requirement. Organizations are able to have a primary ledger to represent primary accounting requirements such as GAAP. Accounting representations can be created to represent additional/secondary reporting requirement such as IFRS. Each secondary ledger can have a different subledger accounting method.

As IFRS becomes more widely adopted, expect to see greater adoption of SLA as a path to achieving global accounting compliance.

Oracle eBusiness Release 12 introduces the concept of Subledger Accounting (SLA). Subledger Accounting provides an interim step to translate, and derive accounting logic, prior to recording GL entries. SLA is designed to provide an extremely flexible solution to facilitate the accounting needs of a corporation. Whilst SLA continues to be a buzz word, in the Oracle community, it’s regarded with both awe, and disdain.

In the old days, Oracle provided Auto-Accounting, and Account Generator as the options available for deriving accounts. Both were somewhat limited. Any accounting logic outside of a set of predefined rules required customization. Splitting a single accounting entry into multiple accounts required major customizations.

The transition from the individual sub-ledgers to the General Ledger was a single step process. Accounting entries were derived/recorded in the sub ledger, once the entries where completed, they were posted to the General Ledger.

The major concepts within SLA are :

• Rule Based Accounting Engine : With the introduction of SLA, an additional layer has been created. Accounting entries were derived/recorded in the sub ledger, once the entries where completed, they are posted to SLA. During the posting to SLA, the SLA engine derives the accounting entries based on the rules established within SLA. The SLA engine has the ability to derive each segment of the chart of account from any defined location with the Enterprise. The rules can be defined based on pre-populated data, or customized using PL*SQL hooks to the database.
• Multiple Representation : A Single accounting entry can be represented for multiple reporting requirement. Organizations are able to have a primary ledger to represent primary accounting requirements such as GAAP. Accounting representations can be created to represent additional/secondary reporting requirement such as IFRS. Each secondary ledger can have a different subledger accounting method.
• Straight Through accounting processing : Subledger Journal entries can be posted to the GL directly form the transactions screen

SLA whilst on the surface seems to be the holy grail for managing accounting processes, it does hold some drawbacks:

• Visibility of Accounts : Accounting entries generated via the rules engine are only visible in the SLA. The data in the sub ledgers (INV, RA, AP etc.) may not represent the same set of accounts as within SLA
• Debugging : Due to the flexibility of the rules engine, debugging accounting derivations can be a complex and involved process. The rules engine provides both configuration, and SQL based derivation rules. Requiring a combination of functional, and technical knowledge to debug issues.
• Adoption : Industry knowledge of SLA is still very limited, outside of the marketing and sales material. Educational, and professional services knowledge of SLA is sparse, making deployment of SLA a risk for many organizations.

As knowledge of SLA expands, and the continuing changes in accounting practices force more and more corporations to abide by Nations, and International accounting practice, SLA will prove a valuable asset. Oracle is well poised with SLA to meet the future reporting needs.