Managing Parallel Accounting Standards

On January 1, 2005, publicly traded German companies must balance their books according to both local regulations and International Financial Reporting Standards (IFRS) or International Accounting Standards (IAS). The requirements of commercial law in Germany are primarily aimed at protecting creditors and address creditors (those who provide credit capital). IFRS, however, is oriented toward investors.

The conversion also affects companies in other countries of the European Union (EU). In 2002, the EU issued a directive that requires IFRS as the normative accounting standard for companies considering an initial public offering. But in these countries, as in Germany, local accounting standards still apply. The guidelines do not affect the companies in the United States, because they must balance their books according to U.S. Generally Accepted Accounting Principles (U.S. GAAP) requirements. Two factors lead to this difference. First, the IFRS guidelines are quite similar to U.S. GAAP – the same logic, but with a different approach to valuation. Second, U.S. law requires the use of U.S. GAAP.
The advantages for international companies that balance books according to IFRS are obvious. Their reports are comparable internationally and within their industry, transparent throughout the corporate group, and last, but not least, sustainable. Midsize companies that balance their books according to IFRS can negotiate with banks more easily and work in the international arena. Such companies can also support management with an IFRS report. Companies that plan to replace their existing IT systems with SAP solutions can also benefit from changing from HGB to IFRS.

Detailed Valuation of Key Figures According to IFRS

When books are balanced, assets (fixed and floating asses) are listed opposite the corresponding liabilities (proprietary and borrowed capital). If a company considers the new IFRS guidelines, it must balance assets and liabilities differently than it does according to HGB. For example, depreciation for the acquisition of a minority interest in another firm can now run to € 40,000 (instead of € 33,000) a year, because the intangible goodwill of the acquired firm is included in the calculation – in numbers. Depending upon the method used to balance books, profit according to IFRS tends to be higher in the first year and numbers on the balance sheet look better than they do when using HGB. The reason for the difference is that IFRS generally values assets higher and liabilities lower than HGB.
The changes required by IFRS are most noticeable with fixed and financial assets. Intangible assets or the value of stock acquisitions or minority interests in other firms flow into assets. Depreciation that is allowed by the tax code but is higher than the depreciation allowed by commercial law disappears and is no longer counted as a liability. In some circumstances, IFRS uses different depreciation and useful-life periods than HGB.
For financial assets, balancing according to IFRS considers the market value of a company’s products along with all financial assets and liabilities. Costs for a long-term order are calculated according to the degree of production that has been completed. IFRS breaks down leased goods, pensions, financial assets, and latent tax (all of which are tax receivables or liabilities) exactly and assigns them to individual departments.

SAP’s New General Ledger or Account Solution

Up to SAP R/3 4.7 and SAP R/3 Enterprise, SAP offered three different solutions for parallel accounting standards: an account, a ledger, and a company code solution. The account solution was best for most companies because it could be used along with standard SAP reporting.

The Ledger Solution in SAP R/3
The Ledger Solution in SAP R/3

The Ledger Solution: For customers with a large number of accounts with different valuations, the ledger solution is the best. Companies can set up a second, special ledger in the Financials (FI) component of SAP R/3. The special ledger is used to make offsetting postings when parallel accounting standards are in use. SAP R/3 Enterprise includes accounting criteria. Its presence also simplifies use of the ledger solution in SAP systems because it can define criteria for posting. Here, too, standard reporting is available.
The Company Code Solution: Users can map an additional valuation area using a separate company code in asset accounting with the company code solution. However, this solution cannot be integrated with the Controlling (CO) component of SAP R/3, and SAP no longer develops it.
In addition to these three options, users have a fourth option with the new general ledger in mySAP ERP. The solution can map several ledgers, provide them with content with a uniform posting transaction, or evaluate them with uniform reporting for balance sheet and profit-and-loss accounting.
All four methods enable companies to start postings as parallel accounting standards from the Financials component. The preparation phase of a project determines which of the methods provides a company with the greatest benefits whether the company uses SAP R/3 Enterprise or mySAP ERP. The new general ledger can also be used only with the previous functionality.

Account Assignment with the Mickey Mouse Solution

Three-Phase Model
Three-Phase Model

Contrary to frequent fears, companies running parallel balances according to HGB and IFRS do not necessarily lose an overview of matters or face unexpected costs. The consulting experience of BTC, an SAP partner and consulting firm, has produced a proven project procedure with three phases.
To implement the account solution, BTC offers its customers a “Mickey Mouse solution” developed by SAP for account assignment. The solution derives its name from a graphical depiction of the procedure, which looks like a cross-section of Mickey Mouse’s face.

The Ledger Solution in SAP R/3
The Ledger Solution in SAP R/3

For line items to be posted differently from HGB according to IFRS, similar ID numbers that begin with a prefix of I or H and a common account without a prefix are defined. For example, the holiday bonus item uses HGB account H552, IFRS account I552, and common account 552. Items unchanged by valuation according to IFRS receive only identical numbers.
Line items calculated and valuated differently by IFRS and HGB appear in two balance sheets: in an HGB balance sheet (consisting of the HGB and the common accounts) and in an IFRS balance sheet (containing the IFRS and the common accounts). The common accounts appear in both balance sheets. HGB accounts appear only in the HGB balance sheet, and IFRS accounts occur only in the IFRS balance sheet.

Group Subsidiaries Run in Parallel with the Mickey Mouse Solution

When a parent company converts to IFRS, its subsidiaries are also affected – even if they balance their books only according to HGB – because the numbers they report become part of the parent company’s balance sheet. They must create common accounts for all company codes valuated differently (H and I) and for line items valuated identically. They must also publish two balance sheets: the IFRS balance (balance from IFRS and common accounts) flows into the group’s consolidated closing report; the HGB balance (balance from the HGB and common accounts) has to be published separately. For each account, users can define if it may be posted only according to IFRS, only according to HGB, or according to both. This control over posting allows automatic, quick, and error-free creation of parallel accounts. As long as only a limited number of valuation differences are involved, the implementation can run rather quickly and problem free.
Valuation according to HGB will remain a requirement in Germany for the foreseeable future because annual tax reports must be created according to its provisions. Companies in other European countries face similar challenges. This is especially true when local accounting standards serve as the basis for determining tax payments.

Jörg Amtenbrink
Jörg Amtenbrink