Reporting financial results in accordance with Generally Accepted Accounting Principles, International Financial Reporting Standards, and perhaps even a third or fourth set of standards can be challenging for businesses. The shadow accounting capabilities of SAP’s ERP products could potentially help organizations achieve this goal.
SAP users can pursue different strategies, including adopting a multi-ledger approach, to comply with financial reporting standards.
Here’s an overview of Generally Accepted Accounting Principles (GAAP) versus 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 has been the financial reporting standard in the United States. Other countries have followed their own specific variations, which has led to a lack of standardization in global accounting practices.
International Accounting Standards emerged as the global economy became increasingly interdependent. Efforts to standardize accounting practices globally eventually led to the creation of IFRS. Today, IFRS has been adopted by much of the world, and other countries are considering making the transition.
Some key differences exist between GAAP and IFRS. GAAP is more conservative, while IFRS encourages the presentation of financial results that reflect current realities. For example, GAAP requires recording capital assets at their historical cost and then depreciating the capital assets regularly. IFRS allows for the periodic revaluation of assets to reflect their fair value. Companies may need to maintain one set of books for GAAP and another for IFRS.
Why companies must declare in several standards
Companies with offices or partners in more than one country often encounter situations that require parallel accounting.
For example, a US-based parent company may have subsidiaries in China, Germany, and Australia. Authorities in each country require companies within their jurisdiction to report in accordance with the local standard, which may include Chinese GAAP, German Handelsgesetzbuch (HGB), and Australian Accounting Standards. At the same time, the US-based parent company must also present consolidated statements in accordance with US GAAP and IFRS.
The statements of the group company must aggregate the figures of each subsidiary on the basis of the accounting standards for the consolidated report. For example, the organization must first report the financial statements of each of the four companies in US GAAP for a US GAAP report that encompasses the entire organization. These requirements require parallel accounting systems.
Two parallel accounting approaches SAP
The first approach to solving this problem using SAP ERP products is to simply create additional general ledger accounts that only appear on one version of the financial statements. A company using US GAAP as the primary standard may create two additional accounts to manage IFRS adjustments for asset revaluation. If an asset has appreciated in value, a debit to an IFRS-specific asset account and a credit to a corresponding IFRS-specific income statement would occur. The company can produce reports that comply with both standards by designing two different versions of the financial statements, one including the IFRS accounts and the other excluding them.
Another SAP option is a multi-book approach. In this case, a business runs two or more parallel versions of its general ledger, and users can designate each transaction as belonging to a particular ledger. If no 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 appear, a transaction may only be recorded in one ledger or appear differently in the two sets of accounts.
For the asset revaluation example, the GAAP ledger would require no entries, 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 the income.
A company using the multi-ledger approach can choose to use the same financial statement format for both GAAP and IFRS financial statements and would only need to designate which ledger to use for the report.