Presenting financial results that comply with generally accepted accounting principles, International Financial Reporting Standards and possibly even a third or fourth set of standards can be challenging for companies. SAP's ERP products' parallel accounting capabilities could potentially help organizations achieve this.
SAP users can pursue different strategies, including taking a multi-ledger approach, to comply with financial reporting standards.
Here's a look at generally accepted accounting principles (GAAP) vs. International Financial Reporting Standards (IFRS) as well as how SAP products can potentially help users comply with international financial reporting rules.
What are GAAP and IFRS?
For decades, GAAP was the U.S. financial reporting standard. Other countries followed their own specific variants, leading to a lack of global accounting practices standardization.
International Accounting Standards emerged as the world economy grew more and more interdependent. Efforts to globally standardize accounting practices eventually led to the creation of the IFRS. Today, IFRS has been adopted by much of the world, with additional countries planning to make the transition.
Some key differences exist between GAAP and IFRS. GAAP is more conservative, while IFRS encourages reporting financial results that align with current realities. For example, GAAP requires recording fixed assets at their historical cost, then regularly depreciating the fixed assets. IFRS allows for assets to be revalued on a periodic basis to reflect their fair value. Companies may need to maintain one set of books for GAAP and another for IFRS.
Why companies must report in multiple standards
Companies with offices or partners in more than one country likely often encounter situations that require parallel accounting.
For example, a parent company that's based in the U.S. may own subsidiaries in China, Germany and Australia. Each country's authorities require companies within their jurisdiction to report based on the local standard, which may include China GAAP, German Handelsgesetzbuch (HGB) and Australian Accounting Standards. Meanwhile, the U.S.-based parent company must also present consolidated statements that conform to U.S. GAAP and IFRS standards.
The group company's statements must roll up numbers from each subsidiary based on the accounting standards for the consolidated report. For example, the organization must first render the financial statements for each of the four companies in U.S. GAAP for a U.S. GAAP report that encompasses the entire organization. These demands require parallel accounting systems.
Two SAP parallel accounting approaches
The first approach to solving this problem using SAP ERP products is simply to create additional general ledger accounts that only appear on one version of the financials. A company running U.S. GAAP as its primary standard might create two additional accounts to handle IFRS adjustments for the revaluation of assets. If an asset has appreciated in value, a debit to an IFRS-specific asset account and a credit to a corresponding IFRS-specific income account would occur. The company can produce reports that conform to both standards by designing two different versions of the financial statements, with one including the IFRS accounts and another excluding them.
Another SAP option is a multi-ledger approach. In this case, a company runs two or more parallel versions of its general ledger, and users can designate each transaction as belonging to a particular ledger. If neither ledger is designated, transactions are recorded in both places. Recording transactions in both places will be correct most of the time, but when differences between GAAP and IFRS crop up, a transaction might only post to one ledger or appear differently across the two sets of accounts.
For the asset revaluation example, the GAAP ledger would not require any entry, as GAAP does not recognize increases in the market value of fixed assets. However, the IFRS ledger would include a debit to the asset account and a credit to income.
A company using the multi-ledger approach may choose to use the same financial statement format for GAAP and IFRS statements and would merely need to designate which ledger to use for the report.