IFRS and Parallel Accounting

The idea of uniform, globally comparable accounting standards is an idea which is and could be used as the basis of progress. The International Financial Reporting Standards (IFRS) has already come quite close to the realization of this idea. After a transition period, IFRS became mandatory for the consolidated financial statements of enterprises listed on the German stock exchange in Europe in 2005. This requirement affected not only the publication of these statements but also strategic and operational control processes.

Assessments and valuations of business transactions according to IFRS are therefore implemented at the operational level at which the business transactions are originally posted: the individual financial statement. This major effect on the transaction system presented a great challenge for the introduction of parallel accounting: especially because European enterprises that were listed on the U.S. Stock Exchange had to provide a statement according to U.S.-GAAP—in addition to statements according to the local standard and according to IFRS. At this point, the exchange supervisory authority did not approve IFRS.

Today, the U.S. is more open to IFRS. The story of IFRS in Europe seemsto be repeating itself in the U.S. In 2009, the U.S. exchange supervisoryauthority concluded a binding schedule for the introduction of IFRS inthe U.S. For enterprises with market capitalization of more than $700million, IFRS will be mandatory as of 2014. Enterprises with market capitalization between $75 million and $700 million have until 2015to implement IFRS. All other listed enterprises must introduce IFRS by2016.

Consequently, IFRS de facto has become the future financial statementstandard in the U.S. Fifty other countries plan to introduce IFRS until2011. These include Japan, Brazil, Chile, India, Canada, Malaysia, Mexico,Pakistan, and South Korea: countries whose accounting systemssometimes significantly differ from IFRS. The greater the differencesbetween the individual accounting systems, the more important the subjectof parallel accounting.

Based on fiscal law, many U.S. enterprises use inventory valuationsaccording to the LIFO (Last In First Out) method. When purchase pricesincrease, this method valuates the material that is already in stock toolow, and hidden reserves are accumulated. However, you can comparethe financial statements of two enterprises only if hidden reserves areeliminated to a large extent and if the figures provide transparent netassets, financial positions, and results of operations.

Therefore, a valuation of inventory assets using the LIFO method is notpermitted by IFRS. For enterprises in the U.S., a general IFRS implementationwould have considerable taxation consequences, which probablywould lead to a parallel balancing of valuations. To enable the SAP systemto determine and store these valuation approaches, two main options are available:

  • Parallel Accounts
  • Ledger Solution with New General Ledger