Doing Business In Germany Part III

The German Accounting Standards Committee (GASC) is the body charged with bringing German GAAP in line with international accounting standards. Germany began modernizing its accounting processes in 2005, but German GAAP has some key differences from IFRS. Today, we ‘ll look at two differences.

Step #5: If you operate in other countries that require IFRS, you still need a system flexible enough to handle GAS and U.S. GAAP. With the “modernisation law” (Bilanzrechtsmodernisierungsgesetz in German, often abbreviated as BilMoG), local GAAP comes closer to IFRS, but there are still differences. Please be aware that international companies operating in Germany need to close their local books under local GAAP for external reporting purposes as well as for tax purposes. Either way, you need to prepare a tax book, which is the basis of tax audits and tax laws that usually are based on GAS and describe only the differences between GAS and tax laws. (Please see Step #5 regarding tax books.) Tax laws have not been renewed to come closer to IFRS. Meanwhile, your system in Germany must also interoperate with your U.S. solution, to ensure automated results. Also, according to the GASC, “enterprises applying international accounting principles shall continue to apply German Accounting Standards (GAS) to the extent international accounting principles do not include any requirements. This holds especially for the German Accounting Standards concerning risk reporting and management reporting.”

Step #6: Realize GOB also known as German GAAP or GAS has at least five key differences from IFRS. GAS gives more flexibility in terms of options within the accounting rules, while the requirements for the German tax books are stricter. Local GAAP is focused on risk, seeking to protect local creditors more than IFRS seems to do. Your accounting system should be able to handle key differences that include:

• Capitalization of R&D: Under GAS, you can capitalize R&D costs, as in the U.S., but not in your tax book.
• Goodwill: Under GAS, you can capitalize Goodwill, but not in your tax book.
• Fixed assets: These are handled differently in the U.S. from the way they ‘re handled in Germany. There ‘s an additional complication when it comes to German tax books, with defined depreciation rules and periods from U.S. GAAP. Your system should maintain two separate calculations levels for U.S. GAAP and local GAAP. You need a system that can report depreciation of fixed assets according to U.S. GAAP as well as GOB. Ideally, the system should be automated because errors can creep in when conducted manually.
• Pensions: Pensions need separate actuarial calculations from the way they are accounted for in Germany. That means you need a solution that can handle the German process and the U.S. process.
• Valuation of inventory: There are different valuation rules for different counties. Again, you need a solution that can handle both sets of rules for any inventory.
• Chart of accounts: (see Step #3).

For a good comparison of IFRS vs. GAS, check out this PwC presentation: “IFRS versus German GAAP (revised): Summary of similarities and differences.”

Tomorrow, we ‘ll look at some additional ways German accounting practices require localized solutions.