whitepaper‘Hype or Reality’... the risks associated with non-compliance, do you know the impact?

Draft V3.0 – 4 August 2004

International FinancialReporting Standards

(IFRS)

Table of Contents

1 Executive Summary 3

2 International Financial Reporting Standards (IFRS) 4

What it entails 4

How it came about 5

Who is affected 6

3 What changes on January 1, 2005 7

The challenges 8

The benefits 9

The steps to take 9

4 The important role of SSA Global 10

5 Conclusions 11

Physics tells us that objects appear larger as they get closer. What may seem insignificant when it’s off in the distance will over time take on new importance. That’s not necessarily a bad thingunless, of course, the impending change requires major preparation to forestall problems.

This principle applies to your business with as much force and consequence as it does to the phys-ical world in which you live. In the business world, there is a change coming that most assuredlywill have major consequences on public companies whose headquarters are in a European Unioncountry or who have a subsidiary with a headquarters in the EU.

This impending change is the January 1, 2005 enforcement date for the International FinancialReporting Standards (IFRS), a new law whose profile will soon be looming large for companiesthat have not taken steps to understand its impact on their operations.

IFRS is especially relevant to accounting functions at these companies. The fine print of the IFRSgets at the heart of what accountants do on a daily basis – balance sheets, income statements, cashflow management. It’s a safe bet that at some time this year virtually every CEO will turn to his or her CFO and ask about IFRS and its implications for their business. For some executives thiswill be an unpleasant conversation when they learn that non-compliance with IFRS can lead tode-listing of the company, can lead to reduced share price and can lead to overall reduced corpo-rate value. There is yet another potential adverse impact that will get executives’ attention – thedistinct possibility that their personal compensation will be reduced in the aftermath of IFRS-related business problems.

Given the far-reaching impact of IFRS, the SSA Global team has been hard at work understandingthe law, who it impacts and how, and putting together the plans and processes to help our cus-tomers navigate the advent of a European business climate where IFRS compliance is arequirement.

To date, we have had consultations with accounting boards and third-party experts and consult-ants. We’ve taken this knowledge and analyzed the impact IFRS will have on the long-term SSAGlobal product strategy to make sure our solutions today, and in the future, provide efficient andcomprehensive tools for helping customers meet IFRS requirements today and in the future.

This paper is one result of the SSA Global IFRS analysis. It is intended to help SSA Global customers gain insights into the IFRS legislation and also better understand how executives can take steps now to comply with the law’s many new requirements. IFRS is critically importantlegislation that will have a significant and lasting impact on companies doing business in theEuropean Union and other regions of the world. How each company fares after the enforcementdate will be determined in large part by how well they prepare in the months leading up toJanuary 1, 2005.

International Financial Reporting Standards (IFRS) 3

What the law entailsAs approved by the European Union, IFRS establishes 34 new accounting policies. In general,these changes affect how companies value their assets and report on their business performance.The law creates new, higher standards for transparency in business operations by requiring moredetailed presentation of balance sheets and cash flow. IFRS eliminates inconsistencies in financialreporting across the European Union by replacing the use of individual country GAAP (GenerallyAccepted Accounting Principles).

Based on analysis by SSA Global, we believe the impact of IFRS can be grouped into four high-level areas, each representing a major paint point for our customers.

Reporting and Disclosure. IFRS imposes new, more stringent requirements on preparation andmake up of a company’s balance sheet and cash flow statements. Individual balance sheet itemswill need to be shown as long-term or short-term assets or liabilities. A similar requirement forgranularity applies to cash flow statements where cash generated by finance activities, operationsactivities and investment activities will have to be presented separately.

Financial metrics will need to be broken down by product, service, and geographical lines. For some companies, this will require major change because their financial systems may be ill-equipped to produce this level of detail for such standard metrics as revenue, operating results,assets, liabilities, depreciation and cost of acquiring, property, plant and equipment.

Assets and Inventories. Under IFRS, companies will need to present assets and inventories in a way that reflects their actual value to the business as accurately as possible. Inventories willneed to be presented using first-in first out (FIFO) or average weighted cost methods, instead oflast-in, first out (LIFO). The result will be a more accurate and fair value picture of the company’sinventory management.

The value of property, plant and equipment must be based on historical costs with subsequentexpenses added to the carrying costs. Asset depreciation must be approached in a systematic way that accurately reflects how the asset is consumed and its residual value. An impairment cost must be recognized any time the carrying cost of an asset is greater than the recoverablecosts through sale or disposal.

Intangible assets are to be measured at initial cost and are expressed as non-monetary assets that have anticipated economic benefit.

Foreign Currency. IFRS requires more exacting treatment of how currency rates impact a transac-tion and how the transaction is recorded by the corporation. For example, the currency rate at the time of the transaction must be used in financial statements rather than the common practiceof applying the prevailing currency rate at the close of the period. For companies doing businessin a number of countries, there must be systems in place to capture the different rates of exchangebetween the local and the parent country currencies at month end for balance sheet and incomestatements.

International Financial Reporting Standards (IFRS)

�International Financial Reporting Standards (IFRS).

4

Revenue Recognition. Under IFRS, revenue must be recognized at fair value. In normal circum-stances, this is easily accomplished by measuring cash received for goods or services. But IFRSaddresses more complex circumstances in an effort to produce better transparency. For example,when an interest-free loan is part of the transaction, companies will need to accurately reflect the impact of this in their revenue recognition. IFRS requires that at each stage of a constructionproject, there must be recognition of the potential revenue and also consideration taken for thecosts to complete the project.

How it came about.The impetus for IFRS can be linked to the consolidation of the European economy. As theContinent moves to a single capital market under the European Union umbrella, there is agrowing need for an easy and accurate way to compare companies from country-to-country.

Recognition of the need for a cross-country approach to business measurement came as theInternational Accounting Standards Board (IASB) was developing a new generation of accountingstandards intended to raise the reliability and transparency of financial reports. These convergedin 2002 when the European Union voted to adopt the general IAS regulation. To appreciate thewisdom of enabling greater corporate transparency, European government and business leadersonly had to look to business scandals at North American companies such as Enron, Worldcom and the role played by accountants and accounting firms in those scandals.

IFRS Timeline

International Financial Reporting Standards (IFRS) 5

19 July 2002 General IAS regulation adopted by European Parliament

29 September 2003 European Commission adopts regulation endorsing IAS

01 January 2004 Beginning date for retroactive accounting period required for IFRS compliance

01 January 2005 IFRS compliance becomes legally binding, replacing local GAAP. Companies are required to produce an opening balance sheet that conforms to IFRS requirements.

01 January 2006 Financial statements for subject companies must be

fully compliant with IFRS as of 31 December 2005. Reporting requirements require one-year comparison to 01 January 2004.

01 January 2007 European Union businesses that have been operating under U.S. GAAP are required to transition to IFR

DATE MILESTONE

Who is affected.IFRS applies to all publicly traded companies headquartered in a European Union country. It also includes public companies with subsidiaries that have their headquarters in a EuropeanUnion country.

Beyond this core group, there are many other companies that also must comply with IFRS orsoon will have to sign up for IFRS compliance. There are many countries in other parts of theworld that are already on the IFRS-compliance timeline or soon will be. Over time IFRS is apt to evolve as the standard approach to business measurement throughout Europe and elsewhere in the world, so business leaders at non-public companies are likely to soon find themselves facingIFRS compliance.

With IFRS, the intended beneficiaries are obvious. These include the investors and investmentinstitutions for which IFRS will provide greater ability to accurately compare the health and performance of companies across the European Union.

In addition, there are positive unintended consequences. Companies subject to IFRS stand toderive business benefit from their compliance initiatives. The greater precision in financial meas-urement that results from IFRS will make it possible for executives to gain better insights intotheir own business operations, setting the stage for improved business performance. In addition,companies will be able to gain better insights into the operations of their competitors, customersand partners.

6 International Financial Reporting Standards (IFRS)

Beginning on January 1, 2005, most public companies operating in the European Union will needto address dozens of new regulations, some of which will require significant changes in their day-to-day operations.

As the deadline approaches there are a growing number of examples of companies that have takeninitiatives for IFRS compliance and begun to see an impact. Volkswagen, for example, raised itsnet equity from ¤10 billion to ¤20billion when it adopted International Accounting Standards(IAS) in 2000 1.

In another example, a Belgian company’s income statement done according to IFRS showed 18percent less income than when the statement was prepared using prevailing in-country GAAP.

These are examples of companies that have proactively engaged in IFRS compliance and preparedtheir key constituents for the changes in their financial measurements beginning January 1.

International Financial Reporting Standards (IFRS) 7

�what changes on January 1, 2005?

€000 €000Amortization of goodwill 187Development cost

Captilization & Amortization 2.350Depreciation of Software & tangible assets 1.491Inventory Valuation 1.002Trade Debtors — written off 192Investment grants 172Provisions 1.650Financial costs 21Deferred taxes 2.011

2.738 6.726Income according to Belgium Gaap 21.636Income according to IFRS 17.667% comparative 18% 3.969

CONSOLIDATED FINANCIAL STATEMENTS TO 2002: SSA GLOBAL CUSTOMERS

1 “World Watch,” October 2002. PricewaterhouseCoopers.

The challenges.Some of the IFRS-related changes will be fairly simple and straightforward, easily accommodatedby the business processes and financial systems a company has in place. But odds are at leastsome of the 34 new IFRS accounting standards will prove challenging, requiring major transfor-mation of internal business processes and, in some instances, redesign of supporting financialsystems. Knowing what is required before IFRS takes effect can help a company prepare for themore difficult changes that must be made.

SSA Global analysis indicates that at most companies the initial months after IFRS takes effectwill be characterized by volatility. As companies cope with new ways of doing business, there arelikely to be periods when changes in internal business measurements adversely impact businessperformance.

8 International Financial Reporting Standards (IFRS)

2007

2004

Initial implementation at January 2005 creates volatility issuesIFRS is a teething issue for Management

Moving to wider acceptance

TIME

IFRS IMPA

CT ON

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SINESS

Business as usual today — locally adopted policies

2005/6

The benefits.Despite initial volatility, companies can expect to reap benefits from IFRS over and above meetingthe legal requirement. For example, successfully addressing the requirements of IFRS will expandthe pool of potential investors in a company. Compliance with IFRS will give executives a financialreporting system that produces greater accuracy and granularity. This greater business insightcan lead to improved operations through business processes and systems that give managementfaster and more in-depth information pertaining to the financial implications of ongoing business activity.

The imposition of IFRS requirements also can lead to better competitive intelligence as executivestap into the enhanced public information of their competitors. And as IFRS produces greatertransparency, executives involved in mergers and acquisitions stand a better chance of more effec-tively completing their due diligence responsibilities before entering into a long-term relationshipwith another company.

The steps to take.Companies beginning to address IFRS compliance should approach the task in much the sameway they would approach any business transformation. This means adopting a disciplinedapproach that takes into consideration all people, budget and processes essential for success.

The initial step should be to gain a thorough understanding of the specific requirements thatIFRS imposes on your company. This should be followed by an analysis of your current processesand systems to identify the gaps in your current operations. This information will help you estab-lish the proper budget and multi-disciplinary team to put in place.

Your designated IFRS compliance team can then establish the processes that will lead to compli-ance. Throughout the transformation process, it is important to maintain a clear road map of thesteps to take and to communicate the road map and status to key executive decision-makers. Atsignificant milestones, it also will be useful to clearly communicate the status to a broader audi-ence including employees and, as appropriate, to outside audiences such as the investmentcommunity, outside directors, partners, vendors and key industry influencers.

SSA Global recommends that you view the IFRS compliance process in the broadest possibleterms so you identify not only all that must be done to meet requirements, but also related activities that can be easily incorporated into the process for achieving broader business benefit.

By taking a methodical, comprehensive approach to IFRS, your company stands to get thegreatest return on investment in IFRS.

International Financial Reporting Standards (IFRS) 9

As part of its commitment to help customers comply with IFRS, SSA Global conducted a company-wide internal assessment of the law and how it applies to the current SSA Global solution portfolio andthe company’s long-term product roadmap. Given that SSA Global has a diverse portfolio and equallydiverse customer set, it quickly became apparent that there will be many different complianceapproaches among SSA Global customers.

A high percentage of the company’s current portfolio already supports IFRS compliance. Futureproduct development will be geared to helping SSA Global customers achieve compliance. Below are the high-impact areas of IFRS and a summary of how SSA Global solutions can help companiesachieve compliance.

Reporting and Disclosure. SSA Global provides solutions that make possible the accurate and timely consolidation of data from multiple sources to produce financial reports with the specificity required to assist customer in achieving compliance with IFRS. The company offers flexible approaches to produce a consistent global view of financial information, leveraging complementary systems and,where possible, reducing or eliminating unnecessary internal accounting transactions.

Assets and Inventories. SSA Global has solutions that make possible the automatic capture, calculationand reporting of asset and inventory information required under the IFRS legislation. SSA Global solutions enable the use of FIFO or average weighted cost methods of inventory reporting. In addition,solutions identify situations of impairment and create a way to systematically apply depreciation meas-ures to impute impairment. SSA Global has solutions that support meeting the IFRS requirement to distinguish between tangible and intangible assets.

Foreign Currency. SSA Global solutions enable customers to produce monthly reports that incorporatethe implication of daily currency rates on transactions. These solutions handle multiple currencies andhelp companies overcome the challenges inherent in doing business in hyperinflationary economies.SSA Global has solutions that provide accurate forecasting and planning capabilities to help companiesmanage to their plan and take action based on the currency exposure in their business activities.

Revenue Recognition. SSA Global solutions track prices during the sales process so companies can easily report revenue at fair value. SSA Global solutions also assist customers’ initiatives to meet IFRS requirements for tracking and monitoring construction projects and government grants.

�the Important Role of SSA Global Solutions.

10 International Financial Reporting Standards (IFRS)

SSA Global is committed to working with customers on an individual basis to achieve the mosteffective and efficient approach to IFRS compliance. In doing this, SSA Global team will take intoconsideration the solutions currently at its customers and their long-term strategy.

As part of this customer collaboration, the company has prepared a Statement of Direction docu-ment specifically focused on IFRS compliance and the SSA Global portfolio. The statement ofdirection includes a detailed analysis of the major IFRS pain points for our customers – reportingand disclosure, assets and inventories, foreign currency and revenue recognition. This analysis canform the foundation on which SSA Global and its customers can collaborate to attain IFRS com-pliance in the most efficient way possible.

If you are not already in discussions with your SSA Global Account Manager about how best to comply with IFRS, we suggest you move quickly to begin the dialogue. In addition to youraccount team, there are SSA Global IFRS experts ready to begin working with you immediately to help you fully comply with the law.

We understand that no one cares about your business as much as you do. But we’re a close secondand the SSA Global team is ready to help you understand IFRS and all it means for your business.Just give us a call and we’ll get started.

International Financial Reporting Standards (IFRS) 11

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