Accounting Issues - IFRS Compliance, etc

The Financial Integration (FI) aspect of Compiere means Accounting Consequence, and stuff that makes Accountants rule. Well, IANA.

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Accounting Issues - IFRS Compliance, etc

Postby jaztek » Tue Sep 19, 2006 5:43 am

It been a long standing bone of contention between myself and Jorg and quite frankly he isn't qualified enough to even understand the problem - Jorgs skill lie elsewhere.

However, there is a problem with the way the accounting engine deals with currency exchange for reporting (versus transacting) and this is not compliant with IFRS standards (International Financial Reporting Standards). Originally, when I borugh this up (2003), the US were happily making up their own standards still so there was no real issues for Compiere to worry about - they don't provide a warranty anyway - do they.

However, then came Enron and others and eventually even the US had to fall in to line and adopt IFRS.

We however, have dealt with economies accross Europe, Japan and Australia and these have been substantially compliant or compliant with IFRS for some time. Therefore, we addressed the issue and solved the problem. One of our clients has been audited by PWC and in explaining the methodoloy to the partner, he was "pretty impressed" with the way we dealth with this and the upline problem of currency translation adjustments, translation of multi curreny results for foreign controlled entities and integrated foreign operations.

I intend to patch the repository version but I don't want to fuel Compiere's dispute at this present time.

If anyone has any objections - when the time is right - I'll patch the engine. Before then - feel free to speak to me directly.

The issue relates to if you have operations in more than one currency and those operations need to be consolidated.
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Postby croo » Thu Sep 28, 2006 6:54 pm

Hi Mike I would be interested in hearing more about this!
In the days before the split I was working on a problem I found in how bank statements were reconcilled. Initially it seemed like a simply matter of when the actual currency exchange rate on the bank statememt differed from that on the payment it resulted in an imbalance in the bank intransit account. Then adaxa in Oz, pointed out that there was also a problem when the Bank Statement initiated the payment which resulted in amounts which must be posted as over and under payment in the allocation in order to balance. Also when I investigated closer it looked to me like the currency gain/loss functionality only occured if the currencies of the allocation & invoice were different... were in reality the gain/loss could be possible even if the two documents had the same currency... so long as that currency differed from the GL accounting currency!?
Are these some of the issues you have addessed or did you find problems that run deeper still?

colin
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Postby jaztek » Fri Sep 29, 2006 6:00 pm

There ar ea number of issues with currency exchange but they can be classified as such:

1. What currency are your books accounted for in - this may be the currency associated with your country (such as GBP in the UK) but more correctly, this is specificed in your incorporation documents - usually the Memorandum of Association specifies share capital in a specific currency and hence the books are kept in that currency. Some countries allow dual currency books (these are called hyper inflationary economies) and there is a separate accounting standard about that.

2. Once the book currency is determined, the next issue is how are transactions recorded when they are not denominated in the same currency as the book currency. This is referred to as transacting currency - the issues here are a debt/obligation/right denominated in a currency that will be subject to gains and losses over time (relative to your book currency). Basically, the books are impacted for the unrelealised gain and losses over time until such time as the transaction is crystallised and then the gain/loss is crystallised.

3. We need to be mindedful of where the transaction referred to in 2 is not a transaction in the ordinary course of trade, but part of the financing arrangment of the business. This may be treated differently depending on your country of operation, your reporting country(ies) and how you interpret the reporting standards.

4. The final issue is reporting/comnsolidation currency, and this gives rise to unrealised gains and losses on the business combination (which has a different set of rules again). This problem is one dealt with very poorly by almost all companies. The issues are again different accounting standards and the fact that to get a good consolidation, you need to have kept not only the correct acquisition information (and someone who understands it needs to have worked out the correct consoidation entries in the right currencies), but also tracking of the balance sheet and earnings over time.

Each of these are an essay in themselves so I won't go in to depth here. I take it that your issue is about transacting exchange gain/loss realisation.

If you would like to talk a specific issue, let me know what you have, what jurisdiction you are in for transacting and reporting and we can take it from there.
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Postby croo » Fri Sep 29, 2006 10:25 pm

Hi again Michael
thank you for the info ...
I think you points are more general and deeper.
My problems are more specific to compiere transactions. I had problems with some sceanrios causing imbalances in the Bank Intransit acount(s), and also an issue of unbalanced allocation when a non-book currency payment was created from the Bank Statement. And when I looked I the code to cehck these problem I saw other potential problems too... but until I have a adempiere to test it I'll leave further testing on hold!

colin
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