Microsoft Dynamics AX 2012 R3 - Support for IFRS by ANEGIS - Microsoft Dynamics Partner

Microsoft Dynamics AX 2012 R3 Support for IFRS Publish date: May 2014

http://www.microsoft.com/dynamics/ax

Table of Contents Executive Summary ..................................................................................................................................................................................................... 4 IFRS Overview ................................................................................................................................................................................................................. 5 IFRS requirements applicable to Microsoft Dynamics AX .......................................................................................................... 6 Financial reporting ...................................................................................................................................................................................................... 6 IAS 1, “Presentation of Financial Statements” .................................................................................................................................. 6 IAS 7, “Statement of Cash Flows” ............................................................................................................................................................ 9 IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors” .................................................................... 10 IAS 10, “Events After the Reporting Period” .................................................................................................................................... 12 IAS 34, “Interim Financial Reporting” .................................................................................................................................................. 12 IFRS 1, “First time Adoption of International Financial Standards” ...................................................................................... 13 IFRS 8, “Operating Segments” ................................................................................................................................................................ 15 IFRS 10, “Consolidated Financial Statements” ................................................................................................................................ 17 IFRS 3, “Business Combinations” ........................................................................................................................................................... 18 IFRS 11, “Joint Arrangements” ................................................................................................................................................................... 18 Assets and inventory ............................................................................................................................................................................................... 19 IAS 2, “Inventories” ....................................................................................................................................................................................... 19 IAS 16, “Property, Plant and Equipment” .............................................................................................................................................. 20 IAS 17, “Leases” .............................................................................................................................................................................................. 21 IAS 36, “Impairment of Assets” .............................................................................................................................................................. 22 IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” ........................................................................................... 23 IAS 38, “Intangible Assets” ....................................................................................................................................................................... 24 IAS 40, “Investment Property” ................................................................................................................................................................ 26 IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations” ...................................................................... 27 Foreign currency ........................................................................................................................................................................................................ 28 IAS 21, “The Effects of Changes in Foreign Exchange Rates”.................................................................................................. 28 Revenue recognition ................................................................................................................................................................................................ 29 IAS 11, “Construction Contracts” .......................................................................................................................................................... 29 IAS 18, “Revenue” ......................................................................................................................................................................................... 30 IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance” ....................................... 31 IAS 23, “Borrowing Costs” ........................................................................................................................................................................ 32

General ledger concepts in Microsoft Dynamics AX ................................................................................................................................ 32 U.S. GAAP........................................................................................................................................................................................................................ 33 Overview of U.S. GAAP, and identification of ERP differences between U.S. GAAP and IFRS ......................................... 33 How Microsoft Dynamics AX supports the compliance initiative .................................................................................................... 34 Overview of Sarbanes-Oxley ...................................................................................................................................................................... 34 General overview of Microsoft Dynamics AX and the compliance initiative .......................................................................... 34 Compliance with corporate policies and procedures ...................................................................................................................... 34 Contacts page ............................................................................................................................................................................................................... 37 Appendix ......................................................................................................................................................................................................................... 38 Disclaimer ....................................................................................................................................................................................................................... 39

Executive Summary The globalization of business and finance has led to the mass adoption of International Financial Reporting Standards (IFRS) by over 12,000 companies. IFRS have been designed and implemented across the world as a standard format for companies to report their financial results in an easily understandable and comparable nature. Similarly in the United States, Sarbanes-Oxley is designed to restore/enhance public confidence in the financial reporting and disclosure process and improve executive responsibility and accountability. Companies continue to find themselves in an environment of economic uncertainty and under pressure to become more efficient while reacting to a volume of complex regulatory requirements. Performance expectations, increasing stakeholder demands, and changing market conditions are forcing business leaders to search for cost-effective ways to enforce compliance adoption without jeopardizing organizational agility and business growth. Technology is a key enabler to address the change and complexity in an organization’s compliance environment. It is crucial to understand how your underlying technology environment can support your business process, compliance, and regulatory requirements such as IFRS and Sarbanes-Oxley. Microsoft Dynamics AX is an enterprise resource planning (ERP) solution for midsize and large organizations that empowers people to work effectively, manage change, and compete globally. It makes it easy to operate across locations and countries/regions by standardizing processes, providing visibility across your organization, and helping simplify compliance. While the dimensions of IFRS and Sarbanes-Oxley are far reaching and can be complicated, Microsoft Dynamics AX has been designed with the capabilities to help organizations meet their compliance obligations in a flexible, adaptable, and scalable fashion. This whitepaper discusses IFRS standards and the relevant Microsoft Dynamics AX capabilities to address IFRS compliance. By deploying Microsoft Dynamics AX, you can be confident that your business management solution is and will remain relevant to the needs of your people, the needs of regulation and compliance, and to the demands of your industry and business. This document was prepared by PricewaterhouseCoopers LLP (“PwC”) and Microsoft. It provides information for current and prospective customers to evaluate the reporting and compliance capabilities of Microsoft Dynamics AX. Microsoft Dynamics AX 2012 R3 was used as the basis for evaluating how the software supports IFRS requirements out-of-the-box. The statements made in this document are generally applicable to other versions of Microsoft Dynamics AX 2012. Each implementation of Microsoft Dynamics AX is unique, and the way that the software is deployed might affect an organization’s ability to meet its IFRS, U.S. generally accepted accounting practices (GAAP), or Sarbanes-Oxley (SOX) compliance requirements. Customers should evaluate these implications and consult a professional advisor based on their business processes and needs.

IFRS Overview International Financial Reporting Standards (IFRS) have been designed and implemented across the world as a standard format for companies to report their financial results in an easily understandable and comparable nature. IFRS and accounting determinations are slowly replacing many different national accounting standards to maintain consistency and comparability for global investors. In fact, more than 100 countries require, permit, or are converging or converting to IFRS for public company reporting. Companies are and will be affected by IFRS at varying times and to varying degrees of magnitude, driven by factors such as size, industry, geography, merger and acquisition activity, and global expansion. Although IFRS remain relevant to many U.S. businesses, as of the publication date of this white paper, there was no defined adoption timeline by the Securities Exchange Commission (SEC). The potential impact of accounting changes resulting from the joint efforts of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) might be significant and have broad-based implications. IFRS are in use in most capital markets around the world and have already significantly affected U.S. companies, because it: 

Influences the direction of convergence.

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Is used by foreign subsidiaries of U.S. companies.

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Stimulates questions from investors who compare U.S. companies to foreign competitors.

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Influences the transaction structuring by foreign counterparties (customers, vendors, and capital providers) who report under IFRS.

Technology is a key enabler to address IFRS compliance. Microsoft Dynamics AX is an enterprise resource planning (ERP) solution for midsize and large organizations that empowers people to work effectively, manage change, and compete globally. Microsoft Dynamics AX makes it easy to operate across locations and countries/regions by standardizing processes, providing visibility across your organization, and helping simplify compliance. The compliance and internal controls capabilities in Microsoft Dynamics AX provide a means for companies to enforce compliance in a consistent, cost-effective way, while streamlining business processes and improving efficiency across the organization.

IFRS requirements applicable to Microsoft Dynamics AX This section discusses IFRS requirements that are applicable to software systems, such as Microsoft Dynamics AX, for the management of enterprise financial resources. For each standard, the section provides an overview of the requirement followed by information about how Microsoft Dynamics AX can support the standard.

Financial reporting IAS 1, “Presentation of Financial Statements” Overview: The objective of financial statements is to provide information that is useful in making economic decisions. IAS 1’s objective is to provide comparability of presentation of that information with the entity’s financial statements of previous periods and with the financial statements of other entities. Financial statements are prepared on a going concern basis unless management intends either to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Management prepares its financial statements, except for cash flow information, under the accrual basis of accounting. There is no prescribed format for the financial statements. However, there are minimum disclosures to be made in the primary statements and the notes. The implementation guidance to IAS 1 contains illustrative examples of acceptable formats. Financial statements disclose corresponding information for the preceding period (comparatives) unless a standard or interpretation permits or requires otherwise. Statement of financial position (balance sheet): The statement of financial position presents an entity’s financial position at a specific point in time. Subject to meeting certain minimum presentation and disclosure requirements, management may use its judgment regarding the form of presentation, such as whether to use a vertical or a horizontal format, which subclassifications to present and which information to disclose in the primary statement or in the notes. The following items, as a minimum, are presented on the balance sheet: 

Assets – property, plant and equipment; investment property; intangible assets; financial assets; investments accounted for using the equity method; biological assets; deferred tax assets; current tax assets; inventories; trade and other receivables; and cash and cash equivalents

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Equity – issued capital and reserves attributable to the parent’s owners; and non-controlling interest

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Liabilities – deferred tax liabilities; current tax liabilities; financial liabilities; provisions; and trade and other payables

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Assets and liabilities held for sale – the total of assets classified as held for sale and assets included in disposal groups classified as held for sale; and liabilities included in disposal groups classified as held for sale in accordance with IFRS 5, ‘Non-current assets held for sale and discontinued operations’

Current and non-current assets and current and non-current liabilities are presented as separate classifications in the statement unless presentation based on liquidity provides information that is reliable and more relevant. Statement of comprehensive income The statement of comprehensive income presents an entity’s performance over a specific period. Entities have a choice of presenting this in a single statement or as two statements. The statement of comprehensive income under the single-statement approach includes all items of income and expense, and also includes each component of other comprehensive income. Under the two- statement approach, all components of profit or loss are presented in an income statement, followed immediately by a statement of comprehensive income. This begins with the total profit or loss for the period, displays all components of other comprehensive income, and ends with total comprehensive income for the period. Items to present in a statement of comprehensive income The following items, as a minimum, are presented in the statement of comprehensive income: 

Revenue

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Finance costs

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Share of the profit or loss of associates and joint ventures

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Tax expense

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Post-tax profit or loss of discontinued operations

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Profit or loss for the period

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Each component of other comprehensive income classified by nature

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Share of the other comprehensive income of associates and joint ventures

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Total comprehensive income

Profit or loss for the period and total comprehensive income are allocated in the statement of comprehensive income to the amounts attributable to non- controlling interest and to the parent’s owners. Additional line items and sub-headings are presented in this statement when such presentation is relevant to an understanding of the entity’s financial performance. Material items The nature and amount of items of income and expense are disclosed separately, where they are material. Disclosure may be in the statement or in the notes. Such income/expenses might include restructuring costs; write-downs of inventories or property, plant and equipment; litigation settlements; and gains or losses on disposals of non-current assets.

Other comprehensive income An entity presents each component of other comprehensive income in the statement either (a) net of its related tax effects, or (b) before its related tax effects, with the aggregate tax effect of these components shown separately. Effective for annual periods beginning on or after July 1, 2012, items of other comprehensive income are grouped into those that will be reclassified subsequently to profit or loss and those that will not be reclassified. Statement of changes in equity The following items are presented in the statement of changes in equity: 

Total comprehensive income for the period, showing separately the total amounts attributable to the parent’s owners and to non- controlling interest

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For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with IAS 8, ‘Accounting policies, changes in accounting estimates, and errors’

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For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from:

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Profit or loss

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Other comprehensive income

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Transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

Statement of cash flows Cash flow statements are addressed in Section 30 dealing with the requirements of IAS 7. Notes to the financial statements The notes are an integral part of the financial statements. Notes provide information additional to the amounts disclosed in the ‘primary’ statements. They include accounting policies and critical accounting estimates and judgments.

Support for IAS 1 in Microsoft Dynamics AX Management Reporter, included with Microsoft Dynamics AX, provides predefined Balance sheet, Income statement, and Cash flow report templates based on main account category. The statement of owner’s equity is not predefined but can be created in Management Reporter. The predefined financial statements can be modified to meet additional formatting requirements described in IAS 1.

In Microsoft Dynamics AX, the fiscal calendar supports any definition of the periods. When financial statements are generated in Management Reporter, the definitions of fiscal periods and years from the fiscal calendar are used. The year-end closing transactions must be generated, and then the period can be closed for all modules. Microsoft Dynamics AX provides the capability to control whether the period is in Open, On-hold, or Closed state. A period in the On-hold state can be reopened. Microsoft Dynamics AX enables transactions to be recorded in any period in the Open state. Microsoft Dynamics AX also provides the capability to restrict posting for a period to a specific user or group of users. These parameters can be used to control adjusting entries posted to the general ledger. Microsoft Dynamics AX enables dimensions to be used to cross over all general ledger accounts. Therefore, aggregation or disaggregation can be used to separate or detail out required data for nature or function, as needed. Management Reporter can filter on any combination of dimensions at the row, column, and tree level, and also its support of total accounts.

IAS 7, “Statement of Cash Flows” Overview The cash flow statement is one of the primary statements in financial reporting. It presents the generation and use of ‘cash and cash equivalents’ by category (operating, investing and finance) over a specific period of time. It provides users with a basis to assess the entity’s ability to generate and utilize its cash. Operating activities are the entity’s revenue-producing activities. Investing activities are the acquisition and disposal of long-term assets (including business combinations) and investments that are not cash equivalents. Financing activities are changes in equity and borrowings. Management may present operating cash flows by using either the direct method (gross cash receipts/payments) or the indirect method (adjusting net profit or loss for non-operating and non-cash transactions, and for changes in working capital). Cash flows from investing and financing activities are reported separately gross (that is, gross cash receipts and gross cash payments) unless they meet certain specified criteria. The cash flows arising from dividends and interest receipts and payments are classified on a consistent basis and are separately disclosed under the activity appropriate to their nature. Cash flows relating to taxation on income are classified and separately disclosed under operating activities unless they can be specifically attributed to investing or financing activities. The total that summarizes the effect of the operating, investing and financing cash flows is the movement in the balance of cash and cash equivalents for the period. Separate disclosure is made of significant non-cash transactions, for example, the issue of equity for the acquisition of a subsidiary or the acquisition of an asset through a finance lease. Non-cash transactions include

impairment losses/ reversals, depreciation, amortization, fair value gains/losses, and income statement charges for provisions.

Support for IAS 7 in AX 2012 R3 In Microsoft Dynamics AX, Management Reporter provides predefined Cash flow report templates based on main account category. The predefined cash flow statement contains each of the sections described for IAS 7. If necessary, the predefined cash flow statement can be updated. The cash flows of a foreign subsidiary can be translated by using exchange rates and can be viewed in any of the currencies based on the rates defined for the cash flow accounts in Microsoft Dynamics AX.

IAS 8, â&#x20AC;&#x153;Accounting Policies, Changes in Accounting Estimates and Errorsâ&#x20AC;? Overview An entity follows the accounting policies required by IFRS that are relevant to the particular circumstances of the entity. However, for some situations, standards offer a choice; there are other situations where no guidance is given by IFRSs. In these situations, management should select appropriate accounting policies. Management uses its judgment in developing and applying an accounting policy that results in information that is relevant and reliable. Reliable information demonstrates the following qualities: faithful representation, substance over form, neutrality, prudence and completeness. If there is no IFRS standard or interpretation that is specifically applicable, management should consider the applicability of the requirements in IFRS on similar and related issues, and then the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. Management may also consider the most recent pronouncements of other standard-setting bodies, other accounting literature and accepted industry practices, where these do not conflict with IFRS. Accounting policies should be applied consistently to similar transactions and events. Changes in accounting policies Changes in accounting policies made on adoption of a new standard are accounted for in accordance with the transition provisions (if any) within that standard. If specific transition provisions do not exist, a change in policy (whether required or voluntary) is accounted for retrospectively (that is, by restating all comparative figures presented) unless this is impracticable. Issue of new/revised standards not yet effective Standards are normally published in advance of the required implementation date. In the intervening period, where a new/revised standard that is relevant to an entity has been issued but is not yet effective, management discloses this fact. It also provides the known or reasonably estimable information relevant to assessing the impact that the application of the standard might have on the entityâ&#x20AC;&#x2122;s financial statements in the period of initial recognition.

Changes in accounting estimates An entity recognizes prospectively changes in accounting estimates by including the effects in profit or loss in the period that is affected (the period of the change and future periods), except if the change in estimate gives rise to changes in assets, liabilities or equity. In this case, it is recognized by adjusting the carrying amount of the related asset, liability or equity in the period of the change. Errors Errors may arise from mistakes and oversights or misinterpretation of information. Errors that are discovered in a subsequent period are prior-period errors. Material prior-period errors are adjusted retrospectively (that is, by restating comparative figures) unless this is impracticable.

Support for IAS 8 in Microsoft Dynamics AX Consistency of accounting policies Microsoft Dynamics AX uses accounting rules and application setup that together make up the accounting policy for a legal entity. The accounting rules are applied consistently for similar events, transactions, and conditions. Most accounting rules and setup can be applied consistently per user-defined categories when required, or when permitted by a standard or interpretation. Item groups and item model groups are two examples where accounting rules can be applied consistently per category. Categories of items with similar characteristics are assigned to user-defined item groups that, for example, are used to control main account determination for purchase accrual and inventory at receipt for a group of items. Items are also assigned to user-defined item model groups that, for example, are used to control whether purchase accrual should be recognized in the general ledger and what cost formula should be applied. Proper consideration should be taken when defining categories to validate that the applied accounting rules provide compliant financial reporting. Retrospective application of changes in accounting policies or errors The following capabilities are applicable when it is deemed practical to determine the period-specific effects or the cumulative effect of the change for one or more prior periods that are presented. This is a management decision and is performed outside Microsoft Dynamics AX. Before the final year-end close process in Microsoft Dynamics AX is performed and while the accounting periods are still on hold, it is possible to reopen the periods and create adjusting entries in the general ledger. These adjustments are included based on the report date when financial statements are generated in Management Reporter. After the final year-end close is performed, a user can define a specific legal entity to use for adjustments. Management Reporter can then be used to consolidate the entries from the legal entities. Changes in accounting estimates Current period adjustments or, if applicable, re-execution of automated adjustments for carrying amounts are supported by Microsoft Dynamics AX.

IAS 10, “Events after the Reporting Period” Overview It is not generally practicable for preparers to finalize financial statements without a period of time elapsing between the balance sheet date and the date on which the financial statements are authorized for issue. The question therefore arises as to the extent to which events occurring between the balance sheet date and the date of approval, that is, events after the reporting period, should be reflected in the financial statements. Events after the reporting period are either adjusting events or non-adjusting events. Adjusting events provide further evidence of conditions that existed at the balance sheet date, for example, determining after the year end the consideration for assets sold before the year end. Non-adjusting events relate to conditions that arose after the balance sheet date, for example, announcing a plan to discontinue an operation after the year end. The carrying amounts of assets and liabilities at the balance sheet date are adjusted only for adjusting events or events that indicate that the going- concern assumption in relation to the whole entity is not appropriate. Significant non-adjusting post-balance-sheet events, such as the issue of shares or major business combinations, are disclosed. An entity discloses the date on which the financial statements are authorized for issue and the persons authorizing the issue and, where necessary, the fact that the owners or other persons have the ability to amend the financial statements after issue.

Support for IAS 10 in Microsoft Dynamics AX Before the final year-end close process in Microsoft Dynamics AX is performed and while the accounting periods are still on hold, it is possible to reopen the periods and create adjusting entries in the general ledger. This allows for adjustment based on the adjusting events up to the point where financial statements are authorized for issue, at which time the reporting period is closed.

IAS 34, “Interim Financial Reporting” Overview At a minimum, current period and comparative figures, condensed or complete, are disclosed as follows: 

Balance sheet – as of the current interim period end with comparatives for the immediately preceding year end

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Statement of comprehensive income (and, if presented separately, income statement) – current interim period, financial year to date and comparatives for the same preceding periods (interim and year to date)

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Statement of changes in equity and statement of cash flow – financial year to date with comparatives for the same year to date period of the preceding year

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Explanatory notes

An entity generally uses the same accounting policies for recognizing and measuring assets, liabilities, revenues, expenses, and gains and losses at interim dates as those to be used in the current-year annual financial statements. There are special measurement requirements for certain costs that can only be determined on an annual basis, for example, items such as tax that is calculated based on an estimated full-year effective rate, and the use of estimates in the interim financial statements. An impairment loss recognized in a previous interim period in respect of goodwill, or an investment in either an equity instrument or a financial asset carried at cost, is not reversed. IAS 34 sets out some criteria to determine what information should be disclosed in the interim financial statements. These include: 

Materiality to the overall interim financial statements

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Unusual or irregular items

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Changes since previous reporting periods that have a significant effect on the interim financial statements of the current or previous reporting financial year

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Relevance to the understanding of estimates used in the interim financial statements

The overriding objective is to validate that an interim financial report includes all information that is relevant to understanding an entity’s financial position and performance during the interim period.

Support for IAS 34 in Microsoft Dynamics AX See IAS 1 for more information.

IFRS 1, “First time Adoption of International Financial Standards” Overview An entity moving from national GAAP to IFRS should apply the requirements of IFRS 1. It applies to an entity’s first IFRS financial statements and the interim reports presented under IAS 34, ‘Interim financial reporting’, that are part of that period. It also applies to entities under ‘repeated first-time application’. The basic requirement is for full retrospective application of all IFRSs effective at the reporting date. However, there are a number of optional exemptions and mandatory exceptions to the requirement for retrospective application. The exemptions cover standards for which the IASB considers that retrospective application could prove too difficult or could result in a cost likely to exceed any benefits to users. Any, all or none of the exemptions may be applied. The optional exemptions relate to:

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Business combinations

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Deemed cost

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Employee benefits

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Cumulative translation differences

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Compound financial instruments

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Assets and liabilities of subsidiaries, associates and joint ventures

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Designation of previously recognized financial instruments

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Share-based payment transactions

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Fair value measurement of financial assets or financial liabilities at initial recognition

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Insurance contracts

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Decommissioning liabilities included in the cost of property, plant and equipment

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Leases

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Service concession arrangements

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Borrowing costs

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Investments in subsidiaries, jointly controlled entities and associates

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Transfers of assets from customer

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Extinguishing financial liabilities with equity instruments

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Severe hyperinflation

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Joint arrangements

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Stripping costs

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The exceptions cover areas in which retrospective application of the IFRS requirements is considered inappropriate. The following exceptions are mandatory, not optional:

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Hedge accounting

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Derecognition of financial assets and liabilities

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Estimates

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Non-controlling interests

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Classification and measurement of financial assets

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Embedded derivatives

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Government loans

Comparative information is prepared and presented on the basis of IFRS. Almost all adjustments arising from the first-time application of IFRS are against opening retained earnings of the first period that is presented on an IFRS basis. Certain reconciliations from previous GAAP to IFRS are also required.

Support for IFRS 1 in Microsoft Dynamics AX When IFRS is adopted for the first time, the following areas typically require careful consideration: 

PPE

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Asset impairments

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Inventories

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Revenue recognition

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Business combination

To recognize all assets and liabilities whose recognition is required by IFRS, Microsoft Dynamics AX supports the capability to create new fixed assets resulting from the adoption of IFRS. To derecognize items as assets or liabilities if IFRS do not permit recognition, Microsoft Dynamics AX supports the capability to dispose of or scrap existing fixed assets resulting from the adoption of IFRS. To reclassify items that are recognized in accordance with previous GAAP as a different type of asset, liability, or component of equity, Microsoft Dynamics AX enables reclassification and transfer into new assets. To apply IFRS in the measurement of all recognized assets and liabilities, Microsoft Dynamics AX supports the standard cost accounting method conversion through an automated process. For any other accounting method conversion, tailored procedures that restate inventory can be applied. If there is a requirement for parallel reporting, Microsoft Dynamics AX provides the capability to utilize posting layers to reflect changes between IFRS and GAAP. Microsoft Dynamics AX fixed asset accounting supports an automated process for posting to IFRS and GAAP layers. All other automated transactions will be posted into a single layer, whereas the differences between one GAAP and IFRS can be posted to another posting layer by using a manual journal, resulting in a delta approach. An additional alternative to consider when parallel reporting is required is to calculate and post IFRS adjustments into a specific legal entity, and use Management Reporter for reporting with or without adjustments. Microsoft Dynamics AX also supports parallel general ledger accounts for local and IFRS purposes. In this approach, different accounts will be used instead of different posting layers. With respect to retrospective application, see IAS 8. If the first-time adoption is known when the year end is completed for the reporting period prior to the adoption, it is possible to use a posting layer for IFRS adjustments of that period as part of the year-end process.

IFRS 8, “Operating Segments” Overview Only certain entities are required to disclose segment information. These are entities with listed or quoted equity or debt instruments or entities that are in the process of obtaining a listing or quotation of debt or equity instruments in a public market.

Operating segments are components of an entity, identified based on internal reports on each segment that are regularly used by the entityâ&#x20AC;&#x2122;s chief operating decision-maker (CODM) to allocate resources to the segment and to assess its performance. Operating segments are separately reported if they meet the definition of a reportable segment. A reportable segment is an operating segment or group of operating segments that exceed the quantitative thresholds set out in the standard. However, an entity may disclose any additional operating segment if it chooses to do so. For all reportable segments, the entity is required to provide a measure of profit or loss in the format viewed by the CODM, as well as disclosure of a measure of assets and liabilities if such amounts are regularly provided to the CODM. Other segment disclosures include the revenue from customers for each group of similar products and services, revenue by geography and dependence on major customers. Other detailed disclosures of performance and resources are required if the CODM reviews these amounts. A reconciliation of the totals of revenue, profit and loss, assets and liabilities and other material items reviewed by the CODM to the primary financial statements is required.

Support for IFRS 8 in Microsoft Dynamics AX Measurements and operating segments Microsoft Dynamics AX supports IFRS 8 by providing the capability to define an unlimited number of segments, called financial dimensions, which can be used for reporting purposes for all general ledger accounting entries. Account structures can be used to ensure that a value is always provided for the segments used for operating segments. The allowed values for these segments can be constrained based on values for other segments, including main accounts. The segments defined for operation segment reporting is leveraged in the consolidated reporting provided by Microsoft Dynamics AX. This will ensure that consolidated financial statements properly reflect the operating segments. Microsoft Dynamics AX also provides the option to select one segment used for segmented reporting as a balancing segment. This will reduce the need for manual adjustments to validate that assets and, if applicable, liabilities properly reflect the operating segments structure. Management Reporter can be leveraged when measurements and operating segments are identified. The actual determination of measurements and operating segments is a management decision and is performed outside Microsoft Dynamics AX. Reconciliation Microsoft Dynamics AX provides audit trail functionality that can be used when the segment amounts are based on the entityâ&#x20AC;&#x2122;s IFRS accounting policy. Reconciliation of consolidated statements can be performed by using Management Reporterâ&#x20AC;&#x2122;s built-in drill-down capabilities.

IFRS 10, “Consolidated Financial Statements” Overview New principles concerning consolidated financial statements are set out in IFRS 10, which was issued by the IASB in May 2011. IFRS 10’s objective is to establish principles for presenting and preparing consolidated financial statements when an entity controls one or more entities. IFRS 10 sets out the requirements for when an entity should prepare consolidated financial statements, defines the principles of control, explains how to apply the principles of control and explains the accounting requirements for preparing consolidated financial statements. The key principle in the new standard is that control exists, and consolidation is required only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. The new standard will affect some entities more than others. The consolidation conclusion is not expected to change for most straightforward entities. However, changes can result where there are complex group structures or where structured entities are involved in a transaction. Entities that are most likely to be affected potentially include investors in the following entities: 

Entities with a dominant investor that does not possess a majority voting interest, where the remaining votes are held by widely-dispersed shareholders (de facto control)

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Structured entities, also known as special purpose entities

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Entities that issue or hold significant potential voting rights

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Asset management entities

In difficult situations, the precise facts and circumstances will affect the analysis under IFRS 10. IFRS 10 does not provide ‘bright lines’ and requires consideration of many factors, such as the existence of contractual arrangements and rights held by other parties, in order to assess control.

Support for IFRS 10 in Microsoft Dynamics AX In Management Reporter, consolidated reports are created by using reporting trees that roll up subsidiaries into the parent. These reporting trees can be used on any of the financial statements. Intragroup balances and transactions can be eliminated by specifying the elimination accounts and subtracting them from the consolidated amounts. Calculations can also be created to report non-controlling interests in subsidiaries separately from the parent’s equity. It is also possible to use a separate legal entity for adjustment and elimination purposes. Management Reporter provides financial reporting support for IFRS 10 through the capability to report on the recognized value of acquired identifiable assets and liabilities assumed. It supports the capability to measure any non-controlling interest in an acquisition at fair value or as the non-controlling interest’s proportionate share, by entering a percentage of the acquiree’s net identifiable assets.

For top-side adjustments, changes might be appropriate at the transaction level in Microsoft Dynamics AX, because Management Reporter adjustments at the consolidation level might not be sufficient.

IFRS 3, “Business Combinations” Overview A business combination is a transaction or event in which an acquirer obtains control of one or more businesses (‘acquiree(s)’). Business combinations occur in a variety of structures. IFRS 3 focuses on the substance of the transaction, rather than the legal form. The overall result of a series of transactions is considered if there are a number of transactions among the parties involved. For example, any transaction contingent on the completion of another transaction may be considered linked. All business combinations, excluding those involving businesses under common control, are accounted for using the acquisition method. The acquisition method can be summarized in the following steps: 

Identify the acquirer

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Determine the acquisition date

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Recognizes and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree

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Recognize and measure the consideration transferred for the acquire

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Recognize and measure goodwill or a gain from a bargain purchase

Support for IFRS 3 in Microsoft Dynamics AX See IFRS 10 for more details.

IFRS 11, “Joint Arrangements” Overview A joint arrangement is a contractual arrangement in which at least two parties agree to share control over the activities of the arrangement. Unanimous consent over decisions about relevant activities is required in order to meet the definition of joint control. Joint arrangements can be joint operations or joint ventures. The classification is principle-based and depends on the parties’ exposure to the arrangement. When the parties’ exposure to the arrangement only extends to net assets of the arrangement, the arrangement is a joint venture. Joint operations are often not structured through separate vehicles. Each operator has rights to assets and obligations to liabilities, which is not limited to their capital contribution.

When a joint arrangement is disconnected from the parties and included in a separate entity, it can be either a joint operation or a joint venture. In such cases, further analysis is required of the legal form of the separate entity, the terms and conditions included in the contractual agreement and, sometimes, other facts and circumstances. Joint operators account for their rights to assets and obligations for liabilities. Joint venturers account for their interest by using the equity method of accounting.

Support for IFRS 11 in Microsoft Dynamics AX See IFRS 10 for more details.

Assets and inventory IAS 2, “Inventories” Overview Inventories are initially recognized at cost. Inventory costs include import duties, non-refundable taxes, transport and handling costs, and any other directly attributable costs less trade discounts, rebates and similar items. Inventories are valued at the lower of cost and net realizable value (NRV). NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated selling expenses. IAS 2, ‘Inventories’, requires the cost of items that are not interchangeable or that have been segregated for specific contracts to be determined on an individual-item basis. The cost of other items of inventory used is assigned by using either the first-in, first-out (FIFO) or weighted average cost formula. Last-in, first-out (LIFO) is not permitted. An entity uses the same cost formula for all inventories that have a similar nature and use to the entity. A different cost formula may be justified where inventories have a different nature or use. The cost formula used is applied on a consistent basis from period to period.

Support for IAS 2 in Microsoft Dynamics AX Inventory cost – Measurement of inventories Microsoft Dynamics AX supports accumulating costs, such as costs of purchase, costs of conversion, or costs incurred when inventories are brought to their present location. These costs are included in inventory valuation. Proper configuration of Microsoft Dynamics AX will validate that only applicable costs are accumulated and recognized as inventory costs. Direct and indirect costs can be recognized during the procurement process and accumulated during the conversion process. Indirect cost, including overhead, is absorbed based on rate or surcharge. Microsoft Dynamics AX supports the use of the following cost formulas: standard cost; weighted average, both perpetual and periodic; FIFO perpetual and retrospective; and specific identification costing based on batch or serial number. Inventory items can be correctly classified as, for example, finished goods, work in process (WIP), and raw material. Cost can be maintained per site within a legal entity.

Expense recognition Microsoft Dynamics AX supports perpetual recognition of cost of goods sold (COGS) when inventory is sold. Net realizable value Microsoft Dynamics AX supports write-down of individual inventory items or groups of inventory items. Comparing and identifying net realizable value is a management decision, and is performed outside Microsoft Dynamics AX.

IAS 16, â&#x20AC;&#x153;Property, Plant and Equipmentâ&#x20AC;? Overview: Property, plant and equipment (PPE) is recognized when the cost of an asset can be reliably measured and it is probable that the entity will obtain future economic benefits from the asset. PPE is measured initially at cost. Cost includes the fair value of the consideration given to acquire the asset (net of discounts and rebates) and any directly attributable cost of bringing the asset to working condition for its intended use (inclusive of import duties and non-refundable purchase taxes). Directly attributable costs include the cost of site preparation, delivery, installation costs, relevant professional fees and the estimated cost of dismantling and removing the asset and restoring the site (to the extent that such a cost is recognized as a provision). Classes of PPE are carried at historical cost less accumulated depreciation and any accumulated impairment losses (the cost model), or at a revalued amount less any accumulated depreciation and subsequent accumulated impairment losses (the revaluation model). The depreciable amount of PPE (being the gross carrying value less the estimated residual value) is depreciated on a systematic basis over its useful life. Subsequent expenditure relating to an item of PPE is capitalized if it meets the recognition criteria. PPE may comprise parts with different useful lives. Depreciation is calculated based on each individual partâ&#x20AC;&#x2122;s life. In case of replacement of one part, the new part is capitalized to the extent that it meets the recognition criteria of an asset, and the carrying amount of the parts replaced is derecognized.

Support for IAS 16 in Microsoft Dynamics AX Microsoft Dynamics AX provides the capability to create and maintain fixed asset records. Costs associated with the acquisition of assets can be recorded in a project, in a vendor invoice, in inventory, or directly in fixed assets. Acquisition adjustments can be made to record additional costs that are incurred to make the fixed asset ready for service. Depreciation entries can be automatically generated based on user-defined depreciation profiles that control the systematic allocation of the depreciable amount of an asset over its useful life. Posting policies for each asset are used to determine the correct accounts for financial reporting. For cost-based accounting, Microsoft Dynamics AX supports carrying the asset at cost less any accumulated depreciation and impairment losses.

For fair value accounting, Microsoft Dynamics AX supports carrying the asset at fair value and the capability to record revaluation. Determining fair value is a management decision and is performed outside Microsoft Dynamics AX. Fixed assets can be disposed of when the asset is sold or scrapped, or when it no longer provides future economic benefits. The carrying amount of the fixed asset is removed, and any gain or loss is recognized.

IAS 17, “Leases” Overview A lease gives one party (the lessee) the right to use an asset over an agreed period of time in return for payment to the lessor. Leasing is an important source of medium and long-term financing; accounting for leases can have a significant impact on lessees’ and lessors’ financial statements. Leases are classified as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. Under a finance lease, the lessee has substantially all of the risks and reward of ownership. All other leases are operating leases. Leases of land and buildings are considered separately under IFRS. Under a finance lease, the lessee recognizes an asset held under a finance lease and a corresponding obligation to pay rentals. The lessee depreciates the asset. The lessor recognizes the leased asset as a receivable. The receivable is measured at the ‘net investment’ in the lease – the minimum lease payments receivable, discounted at the internal rate of return of the lease, plus the unguaranteed residual which accrues to the lessor. Under an operating lease, the lessee does not recognize an asset and lease obligation. The lessor continues to recognize the leased asset and depreciates it. The rentals paid are normally charged to the income statement of the lessee and credited to that of the lessor on a straight-line basis. Linked transactions with the legal form of a lease are accounted for on the basis of their substance, for example, a sale and leaseback where the seller is committed to repurchase the asset may not be a lease in substance if the ‘seller’ retains the risks and rewards of ownership and substantially the same rights of use as before the transaction. Equally, some transactions that do not have the legal form of a lease are in substance leases if they are dependent on a particular asset that the purchaser can control physically or economically.

Support for IAS 17 in Microsoft Dynamics AX The lessee can use acquisition journals to capitalize finance leases. Classifying leases as financial or operating, determining the correct value, and lowering the fair value and/or lease payments are management decisions, and are performed outside Microsoft Dynamics AX. Application of payments can be split into reduction of liability and finance charges. Configurable depreciation profiles are used to calculate depreciations. Determining the correct depreciation period is a management decision and is performed outside Microsoft Dynamics AX. Standard vendor invoice processing can be used to expense operating lease payments.

Standard customer invoice processing can be used to record receivables for the lessor. After it is determined, lease income, finance income, or accrual can be recognized for the invoice or through journal entry adjustments.

IAS 36, “Impairment of Assets” Overview Nearly all assets, current and non-current, are subject to an impairment test to confirm that they are not overstated on balance sheets. The basic principle of impairment is that an asset may not be carried on the balance sheet at above its recoverable amount. Recoverable amount is defined as the higher of the asset’s fair value less costs to sell and its value in use. Fair value less costs to sell is the amount obtainable from a sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. Value in use requires management to estimate the future cash flows to be derived from the asset and discount them using a pre-tax market rate that reflects current assessments of the time value of money and the risks specific to the asset. All assets subject to the impairment guidance are tested for impairment where there is an indication that the asset may be impaired. Certain assets such as goodwill, indefinite lived intangible assets and intangible assets that are not yet available for use, are also tested for impairment annually even if there is no impairment indicator. When considering whether an asset is impaired, both external indicators, for example, significant adverse changes in the technological, market, economic or legal environment or increases in market interest rates, and internal indicators, for example, evidence of obsolescence or physical damage of an asset or evidence from internal reporting that the economic performance of an asset is, or will be, worse than expected, are considered. Recoverable amount is calculated at the individual asset level. However, an asset seldom generates cash flows independently of other assets, and most assets are tested for impairment in groups of assets described as cashgenerating units (CGUs). A CGU is the smallest identifiable group of assets that generates inflows that are largely independent from the cash flows from other CGUs. The carrying value of an asset is compared to the recoverable amount, which is the higher of value in use or fair value less costs to sell. An asset or CGU is impaired when its carrying amount exceeds its recoverable amount. Any impairment is allocated to the asset or assets of the CGU, with the impairment loss recognized in profit or loss. Goodwill acquired in a business combination is allocated to the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination. However, the largest group of CGUs permitted for goodwill impairment testing is the lowest level of operating segment before aggregation.

Support for IAS 36 in Microsoft Dynamics AX Impairment can be recognized in the general ledger as an expense, and Microsoft Dynamics AX supports subsequent revaluations through the Fixed assets module. Reversal of an impairment loss can be recognized as income or revaluation increase as adjustments through fixed asset processing. Identifying the impairment and fair value of an asset, whether for an external or internal source, is a management decision and is performed outside Microsoft Dynamics AX.

IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” Overview A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A provision falls within the category of liabilities and is defined as ‘a liability of uncertain timing or amount’. Recognition and initial measurement A provision is recognized when: the entity has a present obligation to transfer economic benefits as a result of past events; it is probable (more likely than not), that such a transfer will be required to settle the obligation; and a reliable estimate of the amount of the obligation can be made. The amount recognized as a provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date, measured at the expected cash flows discounted for the time value of money. Provisions are not recognized for future operating losses. A present obligation arises from an obligating event and may take the form of either a legal obligation or a constructive obligation. An obligating event leaves the entity no realistic alternative to settling the obligation. If the entity can avoid the future expenditure by its future actions, it has no present obligation, and no provision is required. For example, an entity cannot recognize a provision based solely on the intent to incur expenditure at some future date or the expectation of future operating losses, unless these losses relate to an onerous contract. Restructuring provisions There are specific requirements for restructuring provisions. A provision is recognized when there is: (a) a detailed formal plan identifying the main features of the restructuring, and (b) a valid expectation in those affected that the entity will carry out the restructuring by starting to implement the plan or by announcing its main features to those affected. A restructuring plan does not create a present obligation at the balance sheet date if it is announced after that date, even if it is announced before the financial statements are approved. No obligation arises for the sale of an operation until the entity is committed to the sale (that is, there is a binding sale agreement). The provision includes only incremental costs resulting from the restructuring and not those associated with the entity’s ongoing activities. Any expected gains on the sale of assets are not considered in measuring a restructuring provision.

Reimbursements An obligation and any anticipated recovery are presented separately as a liability and an asset respectively. However, an asset can only be recognized if it is virtually certain that settlement of the obligation will result in a reimbursement, and the amount recognized for the reimbursement should not exceed the amount of the provision. The amount of any expected reimbursement is disclosed. Net presentation is permitted only in the income statement. Subsequent measurement Management performs an exercise at each balance sheet date to identify the best estimate of the discounted expenditure required to settle the present obligation at the balance sheet date. The increase in provision due to the passage of time, that is, as a consequence of the discount rate, is recognized as interest expense. Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or nonoccurrence of uncertain future events outside the entity’s control, or present obligations that are not recognized because: (a) it is not probable that an outflow of economic benefits will be required to settle the obligation, or (b) the amount cannot be measured reliably. Contingent liabilities are not recognized but are disclosed and described in the notes to the financial statements, including an estimate of their potential financial effect and uncertainties relating to the amount or timing of any outflow, unless the possibility of settlement is remote. Contingent assets Contingent assets are possible assets whose existence will be confirmed only on the occurrence or nonoccurrence of uncertain future events outside the entity’s control. Contingent assets are not recognized. When the realization of income is virtually certain, the related asset is not a contingent asset, it is recognized as an asset. Contingent assets are disclosed and described in the notes to the financial statements, including an estimate of their potential financial effect if the inflow of economic benefits is probable.

Support for IAS 37 in Microsoft Dynamics AX The determination of a contingent asset, a liability, or a provision is performed outside Microsoft Dynamics AX. Microsoft Dynamics AX provides indirect support for IAS 37 by providing the capability to record journal entries for any provision that must be recognized, or to classify a contingent liability or asset and revaluate it at fair value.

IAS 38, “Intangible Assets” Overview An intangible asset is an identifiable non-monetary asset without physical substance. The identifiable criterion is met when the intangible asset is separable, that is, when it can be sold, transferred or licensed, or where it arises from contractual or other legal rights.

Separately acquired intangible assets Separately acquired intangible assets are recognized initially at cost. Cost comprises the purchase price, including import duties and non-refundable purchase taxes, and any directly attributable costs of preparing the asset for its intended use. The purchase price of a separately acquired intangible asset incorporates assumptions about the probable economic future benefits that may be generated by the asset. Internally generated intangible assets The process of generating an intangible asset is divided into a research phase and a development phase. No intangible assets arising from the research phase may be recognized. Intangible assets arising from the development phase are recognized when the entity can demonstrate: 

Its technical feasibility

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Its intention to complete the developments

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Its ability to use or sell the intangible asset

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How the intangible asset will generate probable future economic benefits (for example, the existence of a market for the output of the intangible asset or for the intangible asset itself)

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The availability of resources to complete the development

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Its ability to measure the attributable expenditure reliably

Any expenditure written off during the research or development phase cannot be capitalized if the project meets the criteria for recognition at a later date. The costs relating to many internally generated intangible items cannot be capitalized and are expensed as incurred. This includes research, start-up and advertising costs. Expenditure on internally generated brands, mastheads, customer lists, publishing titles and goodwill are not recognized as intangible assets. Intangible assets acquired in a business combination If an intangible asset is acquired in a business combination, both the probability and measurement criterion are always considered to be met. An intangible asset will therefore always be recognized, regardless of whether it has been previously recognized in the acquiree’s financial statements. Subsequent measurement Intangible assets are amortized unless they have an indefinite useful life. Amortization is carried out on a systematic basis over the useful life of the intangible asset. An intangible asset has an indefinite useful life when, based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

Support for IAS 38 in Microsoft Dynamics AX The Fixed assets module supports recognition of intangible assets at cost in the financial statements. The identification of an intangible asset is a management decision and is performed outside Microsoft Dynamics AX.

Project accounting can be used to recognize internally generated intangible assets. The amortization of assets can be performed by using the depreciation routines.

IAS 40, “Investment Property” Overview Certain properties are classified as investment properties for financial reporting purposes in accordance with IAS 40 as the characteristics of these properties differ significantly from owner-occupied properties. It is the current value of such properties and changes to those values that are relevant to users of financial statements. Investment property is property, for example, land or a building, or part of a building or both, held by an entity to earn rentals and/or for capital appreciation. This category includes such property in the course of construction or development. Any other properties are accounted for as property, plant and equipment (PPE) in accordance with: 

IAS 16 if they are held for use in the production or supply of goods or services

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IAS 2 as inventory, if they are held for sale in the ordinary course of business. Owner-occupied property does not meet the definition of investment property

Initial measurement of an investment property is the fair value of its purchase consideration plus any directly attributable costs. Subsequent to initial measurement, management may choose as its accounting policy either to carry investment properties at fair value or at cost. The policy chosen is applied consistently to all the investment properties that the entity owns. If the fair value option is chosen, investment properties in the course of construction or development are measured at fair value if this can be reliably measured; otherwise, they are measured at cost. Under IAS 40, fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Under IFRS 13, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Changes in fair value are recognized in profit or loss in the period in which they arise. The cost model requires investment properties to be carried at cost less accumulated depreciation and any accumulated impairment losses consistent with the treatment of PPE; the fair values of these properties is disclosed in the notes.

Support for IAS 40 in Microsoft Dynamics AX An investment property can be recorded in Microsoft Dynamics AX as a fixed asset. The determination of a fixed asset by using the fair value or cost model is a management decision and is performed outside Microsoft Dynamics AX. The fixed asset journals can be used to adjust acquisition value based on changes in fair value, and also to recognize the change in the income statement. Investment properties can be classified by using specific asset groups and specific posting rules to ease disclosure of required information.

IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations” Overview IFRS 5 is relevant when any disposal occurs or is planned. The held-for-sale criteria in IFRS 5 apply to non-current assets (or disposal groups) whose value will be recovered principally through sale rather than through continuing use. The criteria do not apply to assets that are being scrapped, wound down or abandoned. IFRS 5 defines a disposal group as a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The non-current asset (or disposal group) is classified as ‘held for sale’ if it is available for its immediate sale in its present condition and its sale is highly probable. A sale is ‘highly probable’ where: there is evidence of management commitment; there is an active program to locate a buyer and complete the plan; the asset is actively marketed for sale at a reasonable price compared to its fair value; the sale is expected to be completed within 12 months of the date of classification; and actions required to complete the plan indicate that it is unlikely that there will be significant changes to the plan or that it will be withdrawn. Non-current assets (or disposal groups) classified as held for sale are: 

Carried at the lower of the carrying amount and fair value less costs to sell

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Not depreciated or amortized

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Presented separately in the balance sheet (assets and liabilities should not be offset)

A discontinued operation is a component of an entity that can be distinguished operationally and financially for financial reporting purposes from the rest of the entity and: 

Represents a separate major line of business or major geographical area of operation

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Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operation

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Is a subsidiary acquired exclusively with a view for resale

An operation is classified as discontinued only at the date on which the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation. Although balance sheet information is neither restated nor re-measured for discontinued operations, the statement of comprehensive income information does have to be restated for the comparative period. Discontinued operations are presented separately in the income statement and the cash flow statement. There are additional disclosure requirements in relation to discontinued operations. The date of disposal of a subsidiary or disposal group is the date on which control passes. The consolidated income statement includes the results of a subsidiary or disposal group up to the date of disposal; the gain or loss on disposal is the difference between (a) the carrying amount of the net assets plus any attributable goodwill and amounts accumulated in other comprehensive income (for example, foreign translation adjustments and available-for-sale reserves); and (b) the proceeds of sale.

Support for IFRS 5 in Microsoft Dynamics AX In Microsoft Dynamics AX, fixed assets that are classified as held for sale can be measured at the lower of the carrying amount and the fair value less costs to sale. For any assets that are held for sale, Microsoft Dynamics AX enables reclassification and transfer into new assets. Asset disposal groups can be managed by transferring multiple assets into a single asset. Assets can be set to not depreciate. General ledger accounts can be defined for the assets that are held for sale to provide for the correct presentation in the financial statements.

Foreign currency IAS 21, “The Effects of Changes in Foreign Exchange Rates” Overview Many entities do business with overseas suppliers or customers, or have overseas operations. This gives rise to two main accounting issues: Some transactions, for example, those with overseas suppliers or customers, may be denominated in foreign currencies. These transactions are expressed in the entity’s own currency (functional currency) for financial reporting purposes. An entity may have foreign operations, for example, overseas subsidiaries, branches or associates that maintain their accounting records in their local currency. Because it is not possible to combine transactions measured in different currencies, the foreign operation’s results and financial position are translated into a single currency, namely that in which the group’s consolidated financial statements are reported (presentation currency). The methods required for each of the above circumstances are summarized below. Expressing foreign currency transactions in the entity’s functional currency A foreign currency transaction is expressed in the functional currency using the exchange rate at the transaction date. Foreign currency balances representing cash or amounts to be received or paid in cash (monetary items) are reported at the end of the reporting period using the exchange rate on that date. Exchange differences on such monetary items are recognized as income or expense for the period. Non-monetary balances that are not re-measured at fair value and are denominated in a foreign currency are expressed in the functional currency using the exchange rate at the transaction date. Where a non-monetary item is re-measured at fair value in the financial statements, the exchange rate at the date when fair value was determined is used.

Translating functional currency financial statements into a presentation currency Assets and liabilities are translated from the functional currency to the presentation currency at the closing rate at the end of the reporting period. The income statement is translated at exchange rates at the dates of the transactions or at the average rate if that approximates the actual rates. All resulting exchange differences are recognized in other comprehensive income. The financial statements of a foreign operation that has the currency of a hyperinflationary economy as its functional currency are first restated in accordance with IAS 29. All components are then translated to the presentation currency at the closing rate at the end of the reporting period.

Support for IAS 21 in Microsoft Dynamics AX Microsoft Dynamics AX provides the capability to define a functional currency as the accounting currency for a ledger. The initial recognition of foreign currency transaction amounts are translated to the accounting currency by using the exchange rate at the transaction date. For foreign currency monetary items, a periodic currency revaluation process can be run in accounts receivable, accounts payable, and the general ledger for accounts that are set up for currency revaluation. Non-monetary items that are measured in terms of historical cost in a foreign currency can be excluded from currency revaluation and can be carried at the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency can be translated by using the exchange rate at the date of the transaction. Microsoft Dynamics AX automatically recognizes realized profit and loss postings related to the settlement of monetary items at rates that differ from the previous closing rate. Investments in foreign operations can be recognized in Microsoft Dynamics AX as separate financial statements of the reporting entity and also the individual financial statements of the foreign operation. Reporting currency translation is supported by the use of either a consolidation company or Management Reporter. For consolidation companies, the transaction rate, average exchange rate, or closing rate can be applied to accounts. The difference calculated to balance when you translate to the reporting currency will be identified as the currency translation adjustment amount and will be presented appropriately in the financial statements. Reports in Management Reporter can be viewed in any of the currencies with the appropriate rate applied. Reports can also be created to view balances in specific currencies side by side.

Revenue recognition IAS 11, â&#x20AC;&#x153;Construction Contractsâ&#x20AC;? Overview A construction contract is a contract specifically negotiated for the construction of an asset or combination of assets, including contracts for the rendering of services directly related to the construction of the asset (such as

project management and architectural design services). Such contracts are typically structured with the buyer as a fixed-price or cost-plus contract. Revenue and expenses on construction contracts are recognized using the percentage-of-completion method. This means that revenue, expenses and therefore profit are recognized gradually as contract activity occurs. When the outcome of the contract cannot be estimated reliably, revenue is recognized only to the extent of costs incurred that it is probable will be recovered; contract costs are recognized as an expense as incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. IFRIC 15, ‘Agreements for construction of real estate’, clarifies which standard (IAS 18, ‘Revenue’, or IAS 11, ‘Construction contracts’) should be applied to particular transactions.

Support for IAS 11 in Microsoft Dynamics AX Microsoft Dynamics AX supports the percentage-of-completion method of accounting as a basis for recognizing revenue and cost for fixed-price projects. Determining whether the contract can be estimated reliably is a management decision and is performed outside Microsoft Dynamics AX. The stage of completion of a contract can be determined based on the contract cost incurred to date versus estimated total contract cost and completion of contract milestones. In some scenarios, the outcome cannot be estimated reliably, contract costs need to be expensed as they occur, and no profit can be recognized. In these cases, recognized revenue can be manually adjusted. The entire expected losses for construction contracts can be recognized as adjusted revenue as part of percentage-of-completion recognition.

IAS 18, “Revenue” Overview Revenue arising from the sale of goods is recognized when an entity transfers the significant risks and rewards of ownership and gives up managerial involvement usually associated with ownership or control, if it is probable that economic benefits will flow to the entity and the amount of revenue and costs can be measured reliably. Revenue from the rendering of services is recognized when the outcome of the transaction can be estimated reliably. This is done by reference to the stage of completion of the transaction at the balance sheet date, using requirements similar to those for construction contracts. The outcome of a transaction can be estimated reliably when: the amount of revenue can be measured reliably; it is probable that economic benefits will flow to the entity; the stage of completion can be measured reliably; and the costs incurred and costs to complete can be reliably measured. Examples of transactions where the entity retains significant risks and rewards of ownership and revenue is not recognized are when:

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The entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions

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The buyer has the power to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return

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Then the goods are shipped subject to installation and that installation is a significant part of the contract

Interest income is recognized using the effective interest rate method. Royalties are recognized on an accruals basis in accordance with the substance of the relevant agreement. Dividends are recognized when the shareholder’s right to receive payment is established. IFRIC 13, ‘Customer loyalty programs’, clarifies the accounting for award credits granted to customers when they purchase goods or services, for example, under frequent-flyer or supermarket loyalty schemes. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale.

Support for IAS 18 in Microsoft Dynamics AX Measurement of revenue Microsoft Dynamics AX provides the capability to record the fair value of consideration that is received or is receivable. The determination of fair value and discounted revenue is a management decision and is performed outside Microsoft Dynamics AX. Recognition of revenue Microsoft Dynamics AX supports configuration to recognize revenue for order-based sales either at the point of delivery or at the point of invoicing. Configuration is user-defined to provide that the appropriate recognition policy can be applied to each good, service, and so on. Similar to construction contracts in IAS 11, services delivered over a period of time can use Microsoft Dynamics AX Project management and accounting to specify the appropriate revenue recognition policy. Revenue accounts are defaulted based on accounting rules, but they can be modified for each transaction. Revenue adjustments, including recognition for multiple elements and rights of return, are primarily made through accounting journals. Uncollected amounts or amounts for which recovery has ceased to be probable are expensed as part of the receivable collection process in Microsoft Dynamics AX.

IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance” Overview Government grants are recognized when there is reasonable assurance that the entity will comply with the conditions related to them and that the grants will be received.

Grants related to income are recognized in profit or loss over the periods necessary to match them with the related costs that they are intended to compensate. They are either offset against the related expense or presented as separate income. The timing of such recognition in profit or loss will depend on the fulfillment of any conditions or obligations attaching to the grant. Grants related to assets are either offset against the carrying amount of the relevant asset or presented as deferred income in the balance sheet. Profit or loss will be affected either by a reduced depreciation charge or by deferred income being recognized as income systematically over the useful life of the related asset.

Support for IAS 20 in Microsoft Dynamics AX Microsoft Dynamics AX supports the registration of grants and grants amounts. Grants can be classified as deferred credit. The Project management and accounting module can be used to recognize conditional grants as income and match them with the related costs that they are intended to compensate. Alternatively, the recognition and matching can be made by using journal entries. If a grant becomes repayable, it can be applied against unamortized deferred credit, and any excess can be recognized as expense. Grants related to assets can be registered as carrying amount adjustments in the Microsoft Dynamics AX Fixed assets module. Adjustments are tracked separately and can be reversed in the event of repayment. Adjustments to cumulative depreciation as a result of a repayment can be charged as an expense.

IAS 23, â&#x20AC;&#x153;Borrowing Costsâ&#x20AC;? Overview Under IAS 23, costs are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalized.

Support for IAS 23 in Microsoft Dynamics AX See IAS 11 and IAS 16 for more details.

General ledger concepts in Microsoft Dynamics AX Microsoft Dynamics AX provides the capability to define and share any number of charts of accounts, fiscal calendars, and currencies. The general ledger for a company or legal entity defines a combination of a specific chart of accounts, a fiscal calendar, and the functional and reporting currency. Furthermore, attributes for main accounts, fiscal calendar, and currencies can be defined per legal entity. Microsoft Dynamics AX provides comprehensive support for global businesses and intracompany and intercompany transactions. Microsoft Dynamics AX supports an unlimited number of financial dimensions. Accounting rules are defined, based on the chart of accounts and the organizational hierarchies, to provide that the appropriate dimensions and dimension values are captured for each accounting entry. These rules should be used to confirm that correct information is available for financial and management reporting.

Management Reporter for Microsoft Dynamics ERP supports the creation of statutory and operational reports based on general ledger data. Management Reporter is used for the creation, distribution, and analysis of financial statements and other financial reports, and is included in Microsoft Dynamics AX. Management Reporter provides out-of-box report templates that can be used to report on Microsoft Dynamics AX general ledger data. These templates can be modified to meet specific business needs.

U.S. GAAP Overview of U.S. GAAP, and identification of ERP differences between U.S. GAAP and IFRS U.S. companies became increasingly aware of IFRS over the past decade, as the FASB and the IASB (collectively, the Boards) worked jointly and focused their agendas on the convergence of U.S. GAAP and IFRS. But that era will soon be coming to a close, as the formal bilateral relationship between the Boards ends, and their joint priority projects on revenue recognition, leasing, financial instruments, and insurance are finalized. Although the Boardsâ&#x20AC;&#x2122; work both improved financial reporting and brought the accounting frameworks closer together, the future of further convergence remains uncertain as the Boards shift attention to their own independent agendas. IFRS is increasingly relevant to many U.S. companies, large and small, public and non-public. PwC has created a document titled IFRS and US GAAP: similarities and differences that can help the reader understand the implications and variations between U.S. GAAP and IFRS reporting requirements.

How Microsoft Dynamics AX supports the compliance initiative Overview of Sarbanes-Oxley The Sarbanes-Oxley (SOX) Act was signed into law on July 30, 2002. This act was designed to restore/enhance public confidence in the financial reporting and disclosure process and the accounting profession. In addition, it was designed to strengthen enforcement of federal securities laws, and improve executive responsibility and accountability. The Sarbanes-Oxley Act requires: 

Public companies to have an effective framework for internal controls and extensive documentation of controls.

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Quarterly certification by management of the nature and effectiveness of internal controls, and the quality of information contained.

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An annual report by management about internal controls and procedures for financial reporting, and, in certain instances, an attestation by the company’s external auditor as to the company’s internal controls over financial reporting.

General overview of Microsoft Dynamics AX and the compliance initiative Companies continue to find themselves in an environment of economic uncertainty and under pressure to become more efficient. At the same time, the number and complexity of regulatory requirements continues to increase. Performance expectations, increasing stakeholder demands, and changing market conditions are forcing business leaders to search for cost-effective ways to enforce compliance adoption without jeopardizing organizational agility and business growth. The compliance and audit features in Microsoft Dynamics AX let companies enforce compliance in a consistent, cost-effective way, while streamlining business processes and improving efficiency across the organization.

Compliance with corporate policies and procedures Microsoft Dynamics AX policies and workflows let you define business rules and automate processes, ensuring that users are following a specified set of processes that give companies greater and stronger internal automated controls. One example of enabling policy is the deployment of workflow. Workflow in Microsoft Dynamics AX enables the setup of an approval process for selected source documents, for example accounting journals. The approval process allows a user to define the conditions under which approvals are required and link this to the organizational hierarchy to provide appropriate levels of review and approval. The posting of the transaction is therefore placed in a pending status until the appropriate approvals are received providing internal control over workflow-enabled processes. Lastly in addition to capturing levels of approach, workflow capabilities in Microsoft Dynamics AX provide a mechanism to track the status of a document workflow (e.g., from initiation, pending

approval, approved, rejected) to provide a timely completion of open item. Other module specific policies can also be configured to secure an appropriate level of internal control for a specific business process. For example within account payables, configuration can be applied at an enterprisewide, vendor or product level to enable automated control areas such as a three-way or two-way match. Capabilities exist in configuration to define the matching policy for any level based on invoice totals and tolerances to provide control, yet flexibility per your organizationâ&#x20AC;&#x2122;s requirements. If a matching discrepancy exceeds the tolerance it will require to be resolved or accepted should the differences based on approval by an authorized user. Furthermore data integrity can be maintained in your environment through the successful deployment of automated controls to enable your data governance strategy. Internal controls relevant to mandatory data fields and validation of data input (e.g., within your customer or vendor master records) can lead to greater reliability of your core master data, and provide greater confidence and integrity of downstream business transactions. Automating auditing with audit rules, policies, and cases Internal controls relying on heavy manual control activities (e.g., reconciliations, reviews) can be time-consuming and expensive. Leading practice suggest companies leverage automation where possible to unlock the ROI and value with an ERP implementation. By enabling audit rules, and policies available in Microsoft Dynamics AX, the internal control framework can shift its mix of controls to greater automation driving to benefits in strong preventative internal controls and a potential reduction in the cost of compliance. Further, audits leveraging automation can bring about a standard, global control environment that is flexible and scalable to adapt to your organizationâ&#x20AC;&#x2122;s growth. For example, by configuring automated bank reconciliation functionality within the system, there is greater reliability in the matching and processing of bank transactions. It is possible to define common audit rules based on specific keywords and associate audit policies with these rules to evaluate for example expense reports, vendor invoices, and purchase orders for compliance with your companyâ&#x20AC;&#x2122;s policies. Audit rules can be applied to one or multiple legal entities in your organization. Each audit policy can be scheduled to run automatically and on recurring bases. Upon completion, audit policy violations are grouped into audit cases, allowing auditors to research and record all findings regarding non-compliant issues. Tracking and tracing changes Many compliance requirements focus on recording exactly what was done, when, and by whom. Microsoft Dynamics AX supports complete and robust audit trails to identify the origin of an entry, the user who created it, and the date and time when it was created. Database logging in Microsoft Dynamics AX makes it possible to track, trace and report changes to data fields and tables that are relevant to your compliance strategy. Alert rules can also easily be configured to deliver automatic notification about sensitive data. Access control and segregation of duties A key component of compliance is securing who has access to various features and data in the system. Setting up and managing security can be time-consuming; setting up permissions correctly can require multiple iterations. In addition, to enforce strong controls, companies need to create appropriate checks and balances, ensuring that

their systems are not only secured but are also maintain strong segregation of duties between conflicting functions in the organization that could lead to potential risk of unintended, malicious or fraudulent activity. Microsoft Dynamics AX supports role-based security, which helps manage growing complexities in organizations security by utilizing reusable permissions, default and sample security definitions. In a role-based security environment, users are assigned to roles based on their responsibilities in the organization and their participation in business processes. Microsoft Dynamics AX supports segregation of duties giving the ability to setup rules indicating when two duties must be performed by separate roles for better security or better compliance with policies and regulations. Microsoft Dynamics AX supports access to only authorized users through single sign-on capabilities. In Microsoft Dynamics AX, the extensible data security framework can be used to help secure the data. By using this framework, you can create data security policies that, for example, grant View access to one subset of sales orders and Edit access to another subset of sales orders. Microsoft Dynamics AX supports electronic signatures to help enable compliance and accountability as required by regulations, law or company policy for critical business processes. Documenting processes and controls Another key component in any compliance program is documenting business processes and controls, and also testing the validity and effectiveness of those controls. Microsoft Dynamics AX helps organizations enforce standard operating procedures by automating the process of creating and sharing business process documentation and standard operating procedures to its stakeholders in a shared collaborative workspace. Microsoft Dynamics AX provides a central location for users to view, manage, and control the internal controls, business process content, and reporting for the organization's compliance program. The Compliance site provides easy and convenient access to required documentation, internal controls and status tracking. From the Compliance site, users can view graphs representing the efficiency and effectiveness of the internal controls, examine key performance indicators, manage action items from alerts or workflow, and add links to important external compliance sites. The Business process modeler in Microsoft Dynamics Lifecycle Services is pre-populated with a standard process map based on the APQCâ&#x20AC;&#x2122;s (American Productivity & Quality Centerâ&#x20AC;&#x2122;s http://www.apqc.org/) cross industry framework. Task Recorder in Microsoft Dynamics AX delivers capabilities to automatically document business process, by recording tasks performed in Microsoft Dynamics AX as video recordings, process flow diagrams and step by step documentation.

Contacts page PricewaterhouseCoopers LLP (PwC) and Microsoft Corporation have formed a strategic alliance to help companies engaged in enterprise transformation projects that use Microsoft Business Solutions technology. With this alliance, PwC is the first major service partner recognized by Microsoft 's Dynamics Group as a Global Business Transformation Partner, which allows it to build business transformation services around the Microsoft Dynamics suite of applications. Under the agreement, PwC consultants will provide advice and implementation assistance to clients who select Microsoft Dynamics together with other Microsoft technologies, including Microsoft Dynamics AX enterprise resource planning (ERP), customer relationship management (CRM), and business intelligence (BI) solutions, as part of a business transformation project.

PwC contacts Jamie Draper

(415) 806-0576 james.draper@us.pwc.com

Rajesh Balaraman

(312) 298-6885 rajesh.balaraman@us.pwc.com

Matthew Korros

(206) 398-3324 matthew.d.korros@us.pwc.com

Microsoft contacts Microsoft Dynamics AX IFRS Discussion

daxifrs@microsoft.com

Appendix

IFRS external to Microsoft Dynamics AX ERP IAS 12, “Income Taxes” IAS 19, “Employee Benefits” IAS 24, “Related Party Disclosures” IAS 26, “Accounting and Reporting by Retirement Benefit Plans” IAS 28, “Investments in Associates and Joint Ventures” IAS 29, “Financial Reporting in Hyperinflationary Economies” IAS 39, “Financial Instruments: Recognition and Measurement” IAS 41, “Agriculture” IFRS 4, “Insurance Contracts” IFRS 6, “Exploration for and Evaluation of Mineral Assets” IFRS 7, “Financial Instruments: Disclosures” IFRS 9, “Financial Instruments” IFRS 12, “Disclosure of Interests in Other Entities” IFRS 13, “Fair Value Measurement”

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