Prof. Dr. Holger Pooten from the University of Muenster concluded from that the three main functions. the HGB is build on:
1) Ascertainment of profits, distribution measurement, capacity accrual
2) Information for creditors
3) Documentation of transactions
The basic idea the HGB was built on, was to provide a view that mirrors the real financial situation. The Principle of Prudence, German Principles of Proper Accounting and Creditor Protection are the typical characteristics and basic guide lines.
Often the HGB refers to the principals of adequate and orderly accounting; however they are nowhere defined properly.
In praxis it leads to huge problems since laws are not concrete fixed and can be interpreted and used in the most favourable way. A fact that leads almost automatically to manipulation in balancing. Annual balances are the basis for fiscal law and taxation.
Entrepreneurs are often interested in decreasing value and turnover in order to minimize taxation assessment basis. Balances are often set up in view of saving taxes; what mostly lead to a complete deformation of the real business situation.
Summing up, the HGB can be described as conservative and creditor oriented, but at the same time pretty much incomplete and imprecise.
That characteristic does not match with the needs of shareholder value. Therefore ever more companies prefer the international accounting systems.
Some examples of companies that switched to international standards voluntary are RWE, Siemens and Hanover Rück.
2.2 The International Accounting Standard (IAS)
The IAS fulfils the international guidelines of the International Accounting Standards Committee (IASC), set up in 1973, pretty much.
The IASC was founded by industrial unions from Australia, Germany, Great Britain, Ireland, Japan, Canada, Mexico, the Netherlands and the US.
The conception was made in intention to be accepted and hold worldwide and to provide the shareholders with the following information about the company’s actions:
- financial position
- changes in financial position
- performance
The reader shall get a true and fair view about the real situation of earning cash and cash equivalents within the company. Moreover, these figures should be a criterion for shareholders to evaluate the performance of management and to change management if needed, or to sell the companies shares at all.
The greatest historical and/or organisational differences lay within the legislation.
While in the German HGB there are strict paragraphs for each item in accounting, in IAS (and US-GAAP) there are only case laws, which regulates the rule for all items depending from a concrete situation (e.g. transportation ship ran aground because of civil wars on the coast of Colombia ).
3. Differences in Formal Prescriptions and Content
Since historical background and basic intention of the two standards differ, formal prescriptions and content differ too.
The following paragraph is going to name the specific differences in formal appearance and style of balancing.
3.1 Active Side
3.1.1. Assets
HGB:
The balance consists out of the Activa (Assets) and Passiva (Liabilities) side. All structural prescriptions are listed in HGB §266 (2) and (3) in detail, therefore here we will give the basic overall structure only briefly.
The assets side gives information about the allocation of resources. The right hand liability side gives us information about the sources of funds.
In the German HGB assets are divided into being fixed (Anlagekapital) or current (Umlaufkapital), depending from the time range the asset is going to stay in the company.
1) Active accruals are set up for future payments that are going to be calculated for the former balancing period in order to hold the principle of allocation of expenses unrelated to accounting period.
However, they are no assets, since they cannot be divested individually.
The principle of prudence says that bill receivables can only be count as asset, after (own) performance is yield.
Therefore in a multi-year order (e.g. building a bridge), cost are high (passive side increases). However turnover in the profit and loss account is not going to increase, even if the client paid already a part of the amount as a commission.
IAS:
1) In IAS (and US-GAAP) all earnings are going to be calculated in the same period they are earned. Bills receivables can be activated as soon, as the building process started (Principle of realisation and percentage-of-completion-method).
However, the following criterions need to be covered:
- Clearing of the whole amount is likely.
- A clear identification of costs linked to the order is possible.
- A reliable detection of total cost and process status is given.
For balancing using the IAS there is no prescribed pattern, but a prescription that says which positions need to be covered. Therefore the following diagram is a proposition of disposition only.
Assets that are going to stay longer than 1 year within the company are called non-current assets. All others are only current within the company. Most accruals are current (on the active, as well as on the passive side).
In IAS also former costs that count as investments can be calculated on the asset side. However it needs to be likely that investments are going to cover at least the generated costs. And the generated cost needs to be definite (more about that, see 3.1.3. intangible assets).
3.1.2. Property, Plant and Equipment – Tangible Assets
HGB:
Tangible assets which are used within the company are items to be shown on the assets side of the balance sheet (§ 247 II HGB).
For evaluation an asset, either historical or production costs must be calculated.
Depreciation is fixed and listed in diagrams of depreciation (Afa-Listen).
IAS:
Using the 16th IAS guideline, tangible assets can be evaluated using historical or production costs.
Further it is allowed to evaluate an asset new, using either the actual market value or the costs of replacement. Re-evaluation must then be made every accounting period in order to ensure actuality.
Using the re-evaluation method is used to detect the “real actual” value of a company, in order to attract shareholder for financing.
→ That significant difference in evaluation of assets mirrors the intention of both standards pretty well. While German commercial law asks for security in evaluation and prefers an under-evaluation, instead of over-evaluation, the IAS is more value oriented.
The IAS is also more short term oriented in terms of actuality.
An imaginable reason might be the financial short time investment (speculation), shareholders keep themselves busy with.
3.1.3. Intangible Assets
HGB:
1) It is allowed to list intangible assets that are acquired against payment (mirrors real market value).
But it is forbidden to list items that are acquired gratuitously or generated by ones own (§ 248 II HGB).
A suffrage exists by listing goodwill (however, then higher taxes need to be paid).
2) Costs for developing and research can not be activated.
IAS:
1) In IAS is every item an asset, as long as it is going to serve for an increase in business activity and turnover; tangible, as well as intangible.
All items that can be identified as assets must be listed on he left hand side (but the Goodwill).
2) Costs for research and development can be activated as period costs, if some prescriptions are covered (if the investment matches the need of the company and brings returns on investment).
3.1.4. Investments in Associates
HGB:
Shareholdings are shares from other companies.
They can be listed as assets, if they are serving for increasing own business efficiency (§ 271 I HGB).
1) The costs are listed, using the historical costs or the lowest price on due date (rather under-evaluation, than over-evaluation).
IAS:
1) Investments in shares from other companies are going to be evaluated using the Equity-method. The Equity-method mirrors not the worth of shares using the historical cost, but the value of own equity within the other company. Therefore the shares value depends pretty much on the performance, the other company makes.
3.1.5. Financial Assets
HGB:
1) Financial assets must be listed using the historical costs. A re-evaluation is possible when the actual market value lays above the historical costs, even if the decrease in value is not likely to hold on (§ 279 I S.2 HGB).
The other way around (over - evaluation) is prohibited (principle of prudence).
IAS:
1) Financial means must be calculated using historical costs.
However, there is a distinction between financial assets and financial liabilities.
The continuation evaluation creates the significant difference to the HGB.
Financial means are going to be re-evaluated using the fair value (actual market situation), even if that means an over-evaluation.
3.1.6. Accounting for Leases
HGB:
1) Leasing business is not regulated in the HGB.
Therefore all leasing items are going to be calculated from the legal owner of the item.
Hereby it often must be access to writs from financial administration.
IAS:
Using the 17th IAS guideline, it needs to be distinguished between finance lease and rent lease.
Rent lease means paying money for using an item (asset).
Financial lease means using an item (asset) with the intention to keep it (comparable with holdback payment).
1) Financial leasings are countable for the lessee. Rent leasings are countable for the lessor.
In general the rules for balancing leasing items in IAS are very complex and effort an own case study.
3.2. Passive Side
3.2.1. Liabilities
HGB:
Liabilities are defined as likely proprietary charges which are underlie legal claims and are clear to relatetable.
1) In German commercial law debts are not only liabilities, but also accruals.
IAS:
The IAS defines liabilities as actual duties towards third persons, which are based on past activities and result in a decrease of assets (IAS 13).
Also accruals are countable as being debts.
1) In opposite to the German commercial law, the recognition-of-loss principle does not become valid. Therefore the same rules are valid for the passivation as for the activation of assets. (See 3.2.2.)
3.2.2. Provisions (Accruals)
HGB:
Provisions or accruals are defined in HGB very explicit (§ 249).
Provisions are liabilities, resulting from losses from not finished deals or contracts that are founded in the period 0, where the costs are going to arise in the next period only (period 1). However, the costs were generated in business period 1 and can be listed at the same.
1) They can be listed, as soon as the likelihood of a contract loss provision arises (Imparitätsprinzip).
Here the German commercial law gives space for choosing an option.
A very controversial and often citizen formulation can be found in § 249 HGB, which says that the listed provision amount (even if the point of time and the amount are not known yet) must be evaluated using the Principle of Prudence and commercial judgement.
However, covering fiscal demand, the company’s interests may be lead by over-evaluation of provisions, what may deform the real actual situation.
2) In German HGB also internal accruals can be listed.
IAS:
IAS regulation guidelines (also US-GAAP) are much fixer than in the German commercial law.
1) Provisions can only be listed, when the likelihood to occur is high and the amount well to estimate.
For listing, it must be used the amount that is most likely. In case the amount is difficult the estimate, the smallest amount should be taken.
2) Internal accruals are improper.
4. Conclusion / Epilogue:
As seen, both standards differ in intention, and therefore in appearance.
In order to judge about, which concept is better, the global situation need to be taken into account.
Since globalisation is developing forward, without seeming to stop that soon, also financial markets should contribute and hold the global direction.
The EU commission published in the year 2000 the following statement, in order to attract a uniform accounting standard (the IAS):
“The Commission believes that the adoption of International Accounting Standards (IAS) are the way forward. The Communication announces that the Commission will come forward with proposals before the end of 2000 which would require all EU companies listed on a regulated market to prepare consolidated accounts in accordance with International Accounting Standards. This requirement would enter into force at the latest from 2005 onwards. Member States would be allowed to extend this requirement to unlisted companies and for preparing individual accounts. Since transparency and comparability are of particular importance for financial institutions, this policy will also cover listed banks and insurance companies.”
However, it is not that easy to get through the theoretical ideas of uniformity.
Today, seven years later, in 2007 there is still no uniformity reached, but at least the direction is fixed more or less. In about more 5-7 years the standard may be established everywhere around European members.
An interesting question to clear: Why has the IAS and not the US-GAAP been chosen for becoming European standard?
“Allowing the use of US-GAAP would run against the fundamental objective of the strategy to move in the direction of one single set of global standards. US standards are certainly equivalent to IAS. However, they are developed without any input from outside the US.
US-GAAP is also very detailed, reflecting the litigious environment in the US which calls for more and more detailed regulation. US-GAAP cannot be detached from the regulatory intervention by the SEC. EU companies applying US-GAAP are automatically supervised by the SEC. Allowing the application of US-GAAP within the European environment as an alternative to IAS would give an unwarranted advantage to US interests. US-GAAP is also difficult to manage because it is a moving target.”
From that one more interesting thing can be concluded.
While the world goes international, the European Union is still trying to stay more or less independent from the US (in terms of uniformity).
Uniformity is an indicator for close relationship, since it makes transactions and business operations easier and more efficient. If the EU does not think about choosing the direction of becoming uniform to the USA, really close relationships in the future (and total globalisation) does not seem to be planed yet.
References:
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German Financial Accounting and Reporting
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International Accounting Standards
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"Rechnungslegung international" von Karl Born.
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Von internationalen Rechnungslegungsnormen zu den IAS
Kapitalaufnahmegesetz (KapAEG) valid from 1998
The abbreviated diagram can also be supplemented:
On the active side with:
- liabilities of shareholders (bills payable)
- expenditure for establishing / running the business
- deferred taxes
On the passiv side:
- special reserve with an equity portion
Germ.: Eigenkapitalanteilsmethode:
A method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net profit or loss of the associate (investee).
Use of the equity method should cease from the date that significant influence ceases, or if severe long-term restrictions are imposed that significantly impair the ability of the associate to transfer funds to the investor. The carrying amount of the investment at that date should be regarded as cost thereafter.
(IAS 28.11)
Financial assets are:
Liquid means, the legal claim to get financial means, the claim to change financial means (cheques) into other financial means (cash), and the claim of owners equity from another company.
Financial liabilities are duties to pay liquid means or other financial assets, or the duty to change financial means in other financial means even if a disadvantage results (e.g. transaction costs).
(Guiding information can be found under: and )
In accountancy, Provisions are similar to Accruals, however the amount or probability of occurrence is not known. Typical examples are provisions for warranty costs or for the results of court ruling.
(Germ.: Imparitätsprinzip)
Is a principle, derived from the Principle of Prudence and is the opponent of the principle of allocation of expenses unrelated to accounting period.
While listing earning not until performance is finished, here, liabilities must be listed, as soon are they are likely.
(Germ.: Aufwandsrückstellungen) Internal accruals are liabilities not towards third persons, but towards the company itself.
E.g. Machines are going to be maintained every year in December. This year there is a great deal and the machines capacity is utilized to its maximum. Since there is no time for maintaining the machine this year, it will be maintained next year. However accruals will be set up this year.
http://www.europa.eu.int/comm/internal_market/en/company/account/news/strategy.htm
Robin Bonthrone (2000), German Financial Accounting and Reporting.