Ifrs at Sap: Transition To IFRS: Implementation of IFRS As An Additional Set of Accounting Standards Alongside US GAAP

IFRS @ SAP
Transition to IFRS:
Implementation of IFRS as an
additional set of accounting
standards alongside US GAAP
June 15th
SAP EcoHub Webinar
Christiane Ohlgart
Corporate Financial Reporting
SAP AG, Walldorf (Germany)
Agenda
1 Background: SAP„s Financial Reporting

a. SAP‟s Financial Reporting History
b. Reporting Requirements and Output
c. Characteristics of SAP„s Financial Reporting
2
SAP‟s IFRS Introduction
a. From Strategy to Project Execution
b. Timetable, Roles & Responsibilities, Impacted Processes
c. US GAAP – IFRS Differences @ SAP
d. Learnings
3 SAP„s Full IFRS Transition
4 Outlook
© Corporate Financial Reporting, SAP 2010 Page 1

The History of SAP‘s Financial Reporting
1988: SAP starts to report consolidated financials under German GAAP (HGB)
 German requirement due to size and existence of subsidiaries
1999: SAP starts to report consolidated financials under U.S. GAAP

 Obligation due to U.S. listing
 Most major competitors located in the U.S.
=> U.S. GAAP as the accounting language of the industry
 IFRS (IAS) no alternative at that time
2002: European Union requires all publicly listed European companies to report under IFRS
from 2005 onwards (U.S. listed companies to start latest for fiscal 2007)
2003: SAP starts preparation for IFRS

2004-
2008: Increasing U.S. GAAP/IFRS convergence and increasing IFRS acceptance worldwide

The History of SAP‘s Financial Reporting
2008: SAP issues first IFRS financials for fiscal 2007 with comparatives for 2006
 Minimal differences to U.S. GAAP financials
 No differences in revenue except for different classification of discontinued operations
SEC accepts IFRS financials from foreign issuers without U.S. GAAP reconciliation
SEC proposes roadmap to converge all U.S. issuers to IFRS until 2014
SAP collects feedback from investors regarding full conversion to IFRS

 Overall very mixed feedback
 Several investors asked for the migration not to be done short-term per end of 2008 but asked
SAP to report U.S. GAAP and IFRS in parallel during 2009
2009: SAP announces full transition to IFRS and discontinuance of U.S. GAAP per January 1, 2010
 2009 as the year of transition:
 Gradually shift the focus of SAP‘s financial communication from U.S. GAAP to IFRS to
accustom the capital markets to SAP reporting under IFRS
 Increase the prominence of IFRS information in SAP‘s financial reports
 Explain relevant U.S. GAAP/IFRS differences and familiarize capital markets with Non-IFRS
figures
 Commitment to continuing minimization of IFRS/U.S. GAAP differences
 SAP is the foreign private issuer to provide IFRS XBRL financials
(which was a separate project in 2009 and required modifications regarding the presentation and
labeling of financial statement positions)
2010: SAP discontinues US GAAP for internal and external reporting

Why Does SAP Have to Prepare Financial
Reports?
SAP AG is a legal entity Under German law corporations

incorporated under must prepare and disclose certain Financial Reporting
German law financial reports by SAP AG
Under German law publicly listed

SAP AG’s shares are as a Group:
companies must prepare and IFRS (US GAAP)
publicly listed in Germany
disclose certain financial reports
as a stand-alone
Under U.S. law publicly listed entity:
SAP AG’s shares are
companies must prepare and German GAAP
publicly listed in the U.S.
disclose certain financial reports
Financial Reporting
SAP subsidiaries are legal Under most local laws by SAP
entities incorporated under corporations must prepare and subsidiaries
respective local law disclose certain financial reports following local
requirements

Key characteristics of SAP‘s financial reporting
 Uniform Global Accounting

 Uniform chart of accounts for all SAP companies
 Accounting of all SAP companies on one SAP system and one client
 Uniform Accounting Language

 All SAP entities record their transactions under primary group GAAP
 Financial statements under secondary group GAAP and local GAAP produced by reconciliation
 „Central Approach“: Corporate Financial Reporting responsible for

 group wide accounting guidelines  supporting subsidiaries‘ accounting
 consolidation (total SAP group and sub-groups)  monitoring subsidiaries’ accounting
 creation of new accounts for all company codes  all material non routine acc. decisions
 managing subsidiaries‘ closing processes  certain group wide postings
 High level of transparency & compliance on all levels

 Real time access to all postings in the entire group
 Consistent accounting in the entire group, no harmonization of accounting and valuation rules
 Easy group-wide analysis down to account entry level, no reclassification from different chart of
accounts

Agenda

2
d. Learnings
4 Outlook

Important considerations for every IFRS
implementation:
 Adoption and first time conversion rules for IFRS (IFRS 1)

 Analyze carefully where you have hidden reserves or hidden losses and how you want to
treat them in your IFRS opening balance sheet
 define your IFRS strategy!
 If there is no specific IFRS guidance IAS 8.12 allows you to refer to

pronouncements of other standard setters (e.g. US GAAP) as long as
these do not conflict with IFRS
 If you continue US GAAP policies and the respective US GAAP guidance changes the
change can be applied under IFRS (IAS 8.21) but the US GAAP transition rules may not
be applicable
 risk that new guidance must be applied retrospectively despite US GAAP transition rules with
prospective application
 Do you want to implement XBRL-compliant IFRS financial statements?

 If yes, you should already create your financial statements considering the IFRS
taxonomy. Please be aware this could create more presentation differences than would
otherwise be required.

Introduction of IFRS:
From Strategy to Project Execution
Definition of Decision on Project Project

IFRS Strategy External Support Planning Execution
Alternatives Considered IFRS Strategy Established
 Multi-GAAP  Continue to prepare and file U.S. GAAP financial

 US GAAP and IFRS statements in parallel
statements until financial community understands
 IFRS statements and US GAAP reconciliation
comparability of SAP‘s IFRS reporting with
competitors‘ U.S. GAAP reporting
 IFRS Accounting Policies
 „Use the Opportunity“: Revisit all accounting
 No „independent“ IFRS accounting strategy.
policies and select as best for SAP‘s future Objective: Minimize the U.S. GAAP / IFRS
 „Minimize the Differences“: Continue established
differences
US GAAP policies wherever possible  Focus of communication to capital markets
 Communication Focus continues to be on U.S. GAAP
 Move Focus to IFRS or continue focus on US  Prepare IFRS financial statements in accordance
GAAP with legal requirements  no proactive
 IFRS Start Date communication beyond legal requirements
 Earlier than required or latest possible date  No voluntary IFRS financial statements
 Management Reporting prior to 2007
 Change to IFRS or continue with US GAAP  Internal Reporting continues to be based
on U.S. GAAP

Alternatives Considered Decision on External Support Made

 External accounting support  Engage audit firm other than external
 No external support auditor
 External Auditor as external support  Tasks
 Other audit firm as external support  Review research done by SAP
 Scope of external support  Perform research in areas where SAP
 Limited to review of research done by SAP believes external research is appropriate
 Performance of research  Support SAP in preparing trainings but
 Performance of trainings trainings to be held by SAP
 Drafting of guidelines  Support SAP in drafting guidelines but
guideline ownership stays with SAP
 Engage external auditor for review and
clearance of research results


Project Streams Project Setup

 Stream 1: Knowhow development  Steering Committee with
 Identification of differences between US-  Group CFO
 Chief Accountant and Corporate Controller
GAAP and IFRS
 One Regional CFO and one local CFO
 Preparation of IFRS Accounting Policy
 Representative from SAP ERP Development
 Training of relevant employees
 Fully dedicated project lead with strong skills in
 Stream 2: Technical preparation  Accounting (IFRS, US GAAP)
 Preparation of IFRS chart of accounts  SAP processes and systems
 Set-up of accounts/structures  project and people management
 Determination of additional accounting
 Project team members recruited from
objects  Corporate Financial Reporting
 Stream 3: Organizational Support  Other Corporate Departments
 Rollout to subsidiaries
(Controlling, Tax etc.)
 Subsidiaries (including Australia (early adopter))
 Establish an IFRS network
 SAP ERP development and SAP IT
 Definition of roles & responsibilities & timetable
Project Timetable
2003 2004 2005 2006 2007 2008
HY1 HY2 HY1 HY2 HY1 HY2 HY1 HY2 HY1 HY2 HY1 HY2
Implemen-
tation Prepare IFRS chart of accounts
Strategy
Decision on Determine add.

external accounting
support objects
Identification of initial relevant differences

U.S. GAAP/IFRS
IFRS Rollout of IFRS

Accounting to subsidiaries
Guideline (incl. training)
2004/2005 IFRS
Data for
SAP Australia
2006 IFRS 2007 IFRS
Data for Data for
SAP SAP Group
Group
knowhow technical/IT organizational

IFRS Introduction:

Typical tasks and steps taken for

each topic:
 Identification and classification of
differences (presentation, valuation or
disclosure difference)
 Suggestion of IFRS Policies
 Engagement of IT where required
 Discussion of IFRS policies with external
accounting firm and auditor
 Determination of Group-wide impact
 Obtain approval from Steering committee

Assignment of Responsibilities
Corporate Financial Reporting Local SAP Entities

 Provides guidance and training  Identify reconciling items (i.e., differences
 Provides posting infrastructure IFRS/U.S. GAAP)
 Performs certain reconciliation postings for  Perform all reconciliation postings except
all company codes those performed by CFR
 Collects data for disclosures (via expanded  Bring open issues to the attention of
reporting package) regional IFRS Specialist
 Supports identification of IFRS/  Complete expanded reporting package
U.S. GAAP differences certify accuracy and completeness of
 Suggests accounting policies to be decided reconciling entries and disclosures
by Steering Committee if critical Introduction  Support KPMG‘s audit
of IFRS
@
Regional IFRS Specialists KPMG
 Audit
 Collect all ambiguous issues from individual
 IFRS opening balance sheet
entities in the respective region
 IFRS reconciliation 2006
 Provide guidance to solve ambiguous issues
 IFRS reconciliation 2007 and beyond
 Discuss complex issues with CFR (single
point of contact in CFR for each IFRS  IFRS consolidated financial statements
Specialist) 2007 and beyond

Classification of US GAAP – IFRS Differences
- Classification
Differences between - Measurement
IFRS and U.S. GAAP - Presentation
- Disclosures
Avoidable differences Unavoidable differences
 Avoided via accounting

policy choice „as close as Differences Differences
possible to U.S. GAAP“ not relevant to SAP relevant to SAP
Insignificant Significant
differences differences
 Documentation required to support that there
is no difference (R&D, component approach)
 Differences that just required change in
documentation to comply with IFRS (e.g. for
Closely monitored but not
hedging, but no accounting impact; Goodwill
considered as long as
impairment testing)
clearly inconsequential

Discussed Differences
The following potentially significant differences between U.S. GAAP and IFRS were
discussed in detail in before the implementation of IFRS …
 Research & Development,  Difference not relevant (documentation)

 Fixed Assets (Component Approach)  Component Approach applied prospectively
 Financial Assets and Marketable  Differences not relevant; not material
Securities, impairments,
 Provisions,  Relevant, unavoidable difference
 Employee related liabilities and  Relevant difference, minimize difference by
liabilities for Pension Plans, establishing respective accounting policies
 Revenue Recognition,  Unavoidable differences that were insignificant,
 Share-based Payments,  Only relevant for opening balance sheet
 Financial Derivatives,  Difference not relevant, adjusted documentation
 Taxes,  Unavoidable differences
 Business Combinations and  Significant unavoidable differences until SFAS
measurement of Intangible Assets, 141R was issued.
 Impairment Testing of Goodwill and  Difference not relevant (documentation and
other Assets process was adjusted)

Discussed Differences
… and the most significant differences were finally identified and have to continuously
be monitored for …
 Provisions, Pensions and Termination  Constant monitoring on item or program level

Liabilities
 Business Combinations  Most significant differences until issuance of
SFAS 141R
 Presentation of certain balance sheet  Change US GAAP balance sheet presentation
items (i.e. deferred taxes, minorities) align US GAAP and IFRS as much as possible
 Discontinued operations (scope)  Initially not discussed, but when SAP
discontinued the operations of one entity, the
difference resulted in significant unavoidable
difference
 Hedging (primarily documentation)  Hedging documentation adjusted, certain ICo
FX hedges seized to qualify under IFRS
 Disclosures  Unavoidable differences impacting processes
 IFRS 7 (Financial Instruments)
 Provision development schedule
 Disclosures for non-significant
acquisitions
Introduction to IFRS:
Impacted Accounting Objects and Processes
 New IFRS Accounting Guideline and/or update of US GAAP Accounting Guideline

 Additional accounts and reporting structures (for segment reporting, balance sheet,
comprehensive income, fixed asset classes etc)
 Additional CO objects (like cost and profit centers) to capture IFRS deviations (for differences
of personnel expenses like pensions, other benefits or share based payments, etc)
 Introduction of transaction types for provision development (addition, release, utilization, FX,
interest accretion, etc)
 Automation of certain standard US GAAP / IFRS differences:
 US GAAP requires recognition of services according to proportional performance method
 IFRS requires application percentage of completion method for service revenues
 Difference when project is operating at a loss
 Automation of related accounting entries by expanding the logic for certain project related
sales order types that calculate the stage of completion and generate postings
automatically
 Expansion of annual reporting package to include IFRS disclosure obligations
 Additional consolidation processes (IFRS, Segment Reporting)

SAP’s Financial Reporting Output (2007-2009):
Parallel Reporting @ SAP
Reporting of SAP AG and SAP Group

 Annual reporting in 2008
 Annual Report to Shareholders with consolidated
financial statements and consolidated Review of Operations  IFRS
< 6 weeks before shareholder meeting (i.e. in March) – German & English
 Annual Report on Form 20F with consolidated
financial statements  US GAAP
With Annual Report – English
 SAP AG standalone German GAAP financial statements
< 6 weeks before shareholder meeting (i.e. in March) – German
 Quarterly reporting in 2009

 Press Release (Q1 - Q4)
< 4 weeks after end of quarter – German & English  US GAAP and IFRS
 Quarterly Report (Q1 - Q3)
< 45 days after end of quarter – German & English  IFRS
 Ad-hoc reporting
 Whenever required under German law or Regulation FD
Reporting of SAP Subsidiaries

 Most of the subsidiaries
 Individual financial statements under local GAAP

Learnings
 Key Success Factors

 Early Start of the Project
 Early Clarity regarding IFRS strategy
 Management attention
 Dedicated project lead
 Involvement of all levels in the organization
 Centralized approach
 Engagement of Audit Form other than external auditor
 Involvement in IFRS standard setting
 Difficulties
 Advising audit firm unable to fully act as advisor rather than auditor
 Complexity of alignment efforts of two sets of financial statements in two languages
underestimated
 Risk of non-endorsement of individual IFRS in European Union not manageable

Agenda

2
d. Learnings
4 Outlook

Benefits and Risks of Full IFRS Transition for
SAP in 2010
Benefits Risks
 Communication to capital markets  Concern that SAP‘s financials change

based on single accounting regime significantly
eliminates confusion that reporting  Concern that comparability to
under multiple GAAPs creates U.S. competitors is impaired
 Use of a global accounting standards  IFRS revenue recognition rules
fits better to SAP as a global provide more flexibility
European company
 Differences in U.S. GAAP and IFRS
 IFRS is increasingly applied as local rules regarding non-revenue
GAAP across the world => Reduction transactions
in local GAAPs to be applied by SAP
 IFRS as a principle based standard
subsidiaries
is less strict
 IFRS are principle based, as a result
application to similar transactions
across the world is possible

Risk Mitigation Measures
 Board Resolution to apply U.S. GAAP revenue recognition rules unless

specifically prohibited by IFRS
 Reference to application of U.S. GAAP revenue recognition rules in the notes to the
financials  audited by KPMG
 Four years (2006-2009) of parallel U.S. GAAP and IFRS reporting to

evidence “insignificance” of differences
 IFRS requirement to consistently apply accounting policies  obligation to continue
current accounting policies
 SAP is extensively supporting convergence of IFRS/U.S. GAAP through

involvement in national and international organizations
 Further reduction of differences on Non-GAAP and Non-IFRS level
 Training and information material was made available to financial

community

Agenda

2
d. Learnings
3 SAP„s Full IFRS Migration
4 Outlook

Outlook:
What will we be faced with in the future?
Fair values and expectations will drive recognition and valuations

 A/R (= financial asset to be recognized at amortized cost)
will not be recorded at contract value but credit losses will have to be factored in on initial recognition
( expected loss model)
 Provisions
 Changes of the presentation of financial information
 Additional reconciliation schedules / disclosures
that clearly show the coherence of
balance sheet, income statement, cash flow statement and shareholder‘s equity
 Investments (= financial assets at fair value through profit and loss or other comprehensive income)
 Accounting will be more principle based with added complexity.

 Internal and external transparency will be necessary.

Outlook:
Why should you get involved with IFRS?
 IFRS might become applicable or mandatory in the US, depending on the outcome
of the SEC’s work plan
 IFRS are or will be allowed or even required in many countries under local GAAP
(certain European countries, Canada, Brazil, Venezuela, many Asian countries, etc)
 You do not want your subsidiary to potentially influence Group reporting policies by setting their own
policies when applying IFRS locally
 Get involved in local IFRS implementation projects
 Group-wide you can have tremendous savings, if you concentrate IFRS expertise and coordinate
accounting policies
 Significant projects are currently not done independently by the IASB and FASB
but as joint projects with the clear intention to converge US GAAP and IFRS
(revenue recognition, financial presentation, lease accounting)
 High risk that you will be faced with IFRS thinking even if the SEC will not require or allow IFRS in the
US
 Even if the EU might not endorse certain IFRS standards, the IASB and FASB could decide to proceed
with their work plan.

Resources
 Read our IFRS whitepapers:

 http://www.sap.com/solutions/sapbusinessobjects/large/enterprise-
performance-management/fincons/brochures/index.epx
 "Streamlining Your Conversion to IFRS"
Take an in-depth look at how organizations worldwide are adopting IFRS - both for regulatory compliance and to take
advantage of the opportunities this transition provides. Read about what the experts are saying, critical decision points to
be addressed, and technology solution that can help smooth the way. Log-in required. "Streamlining Your Conversion
to IFRS“
 "Complying with International Financial Reporting Standards (IFRS)"

Read this in-depth discussion of the considerations for effecting a smooth transition to IFRS. Co-authored by SAP and
PwC, the paper provides an independent review of why SAP BusinessObjects Planning and Consolidation is so well
suited to addressing IFRS requirements. Log-in required. "Complying with International Financial Reporting Standards
(IFRS)" (161 KB)
 Join the Business Process Expert (BPX) Community:

 For sharing IFRS on SAP knowledge https://www.sdn.sap.com/irj/bpx/ifrs
 Contribute to IFRS on SAP Ideas, Best Practices, Tips and Tricks -
https://wiki.sdn.sap.com/wiki/display/IFRS/IFRS+on+SAP+-+Best+Practices
 Attend next webcast on IFRS Parallel Reporting
 http://bit.ly/aVqpbC
 Listen to the IFRS Webinars and Other Resources from SAP Ecohub
 http://ecohub.sdn.sap.com/irj/ecohub/ifrs
 http://bit.ly/f4EuG
© Corporate Financial Reporting, SAP 2010 Page 26 © SAP

IFRS on SAP Community: sdn.sap.com/irj/bpx/ifrs
Have an idea? Write

a blog
Get your questions

answered on the
IFRS Forum …
… at …
https://www.sdn.sap.c
om/irj/scn/forum?foru
mID=400
© Corporate Financial Reporting, SAP 2010 Page 27 © SAP

Thank you for your attention!

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IFRS @ SAP

1 Background: SAP„s Financial Reporting

3 SAP„s Full IFRS Transition

© Corporate Financial Reporting, SAP 2010 Page 1

1999: SAP starts to report consolidated financials under U.S. GAAP

2003: SAP starts preparation for IFRS

© Corporate Financial Reporting, SAP 2010 Page 2

SAP collects feedback from investors regarding full conversion to IFRS

2010: SAP discontinues US GAAP for internal and external reporting

© Corporate Financial Reporting, SAP 2010 Page 3

SAP AG is a legal entity Under German law corporations

Under German law publicly listed

© Corporate Financial Reporting, SAP 2010 Page 4

 Uniform Global Accounting

 Uniform Accounting Language

 „Central Approach“: Corporate Financial Reporting responsible for

 High level of transparency & compliance on all levels

© Corporate Financial Reporting, SAP 2010 Page 5

1 Background: SAP„s Financial Reporting

3 SAP„s Full IFRS Transition

© Corporate Financial Reporting, SAP 2010 Page 6

 Adoption and first time conversion rules for IFRS (IFRS 1)

 If there is no specific IFRS guidance IAS 8.12 allows you to refer to

 Do you want to implement XBRL-compliant IFRS financial statements?

© Corporate Financial Reporting, SAP 2010 Page 7

Definition of Decision on Project Project

Alternatives Considered IFRS Strategy Established

 Multi-GAAP  Continue to prepare and file U.S. GAAP financial

Definition of Decision on Project Project

Alternatives Considered Decision on External Support Made

© Corporate Financial Reporting, SAP 2010 Page 9

Definition of Decision on Project Project

Project Streams Project Setup

Decision on Determine add.

Identification of initial relevant differences

IFRS Rollout of IFRS

knowhow technical/IT organizational

Definition of Decision on Project Project

Typical tasks and steps taken for

© Corporate Financial Reporting, SAP 2010 Page 12

Corporate Financial Reporting Local SAP Entities

© Corporate Financial Reporting, SAP 2010 Page 13

Avoidable differences Unavoidable differences

 Avoided via accounting

© Corporate Financial Reporting, SAP 2010 Page 14

 Research & Development,  Difference not relevant (documentation)

© Corporate Financial Reporting, SAP 2010 Page 15

 Provisions, Pensions and Termination  Constant monitoring on item or program level

 New IFRS Accounting Guideline and/or update of US GAAP Accounting Guideline

© Corporate Financial Reporting, SAP 2010 Page 17

Reporting of SAP AG and SAP Group

 Quarterly reporting in 2009

Reporting of SAP Subsidiaries

© Corporate Financial Reporting, SAP 2010 Page 18

 Key Success Factors

© Corporate Financial Reporting, SAP 2010 Page 19

1 Background: SAP„s Financial Reporting

3 SAP„s Full IFRS Transition

© Corporate Financial Reporting, SAP 2010 Page 20

 Communication to capital markets  Concern that SAP‘s financials change

© Corporate Financial Reporting, SAP 2010 Page 21

 Board Resolution to apply U.S. GAAP revenue recognition rules unless