U.S. GAAP and German HGB - A comparative Approach

Table of Contents

II.a Table of Figures

II.b Table of Abbreviations

1. Introduction

2. A comparison: HGB and USGAAP
2.1. Accounting in Germany
2.1.2 Accounting and Taxation: The ‘Maßgeblichkeitsprinzip’
2.2 Accounting in the United States of America

3. The level of conservatism
3.1 § 252,1 HGB
3.2 SFAC No. 2 Par. 92
3.3 Measuring conservatism

4. The concept of True and Fair View
4.1 “A picture according to the facts”
4.2 The ‘overriding’ principle

5. Conclusion

III. Table of Literature
III.a References
III.b Bibliography
III.c Websites

II.a Table of Figures

Figure 1: Selected balance sheet data of the Siemens AG

Figure 2: Factors for Changes in Accounting (source Roberts et al., 1998)

Figure 3: Equity & Liabilities from the HGB report of the Siemens AG 2000

Figure 4: Liabilities from the F-20 report of the Siemens AG 2000

Figure 5: Details on provisions under HGB in 2000

Figure 6: Intangible assets under HGB

Figure 7: Securities trading in the U.S. GAAP report

II.b Table of Abbreviations

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1. Introduction

This essay will compare and contrast the accounting systems of Germany and the United States of Amerika. First the single systems, their core concepts and purposes will be introduced. Second, the two core concepts of conservatism and true and vair value will be presented. Both systems will be examined in order to show how they incorporate these concepts and how this might affect the calculation of profits. Where data is available, selected examples from published company accounts will be shown. Finally some short comments on how the systems come closer to each other since several german companies aim for crosslistings in both countries. A conclusion will summarize the main facts.

2. A comparison: HGB and USGAAP

Different accounting systems might come to different results in their calculations of profits. This can be shown by drawing an example from the Siemens AG’s annual report 2000. In their report based on German GAAP (General Accepted Accounting Principles) the net income in 2000 was 7,901 million €. The same calculation based on U.S. GAAP amounts in the F-20 report for the Securities and Exchange Commission (SEC) to 8,860 million € (see figure 1). Now the Question is how come this difference of nearly 14%? Is one system more exact?

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Figure 1: Selected balance sheet data of the Siemens AG

As we have seen in assignment 1, accounting is not a science. It has been developed to serve a purpose. Accounting systems are influenced by several social and economic factors (Radebaugh and Gray, 1997).

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Figure 2: Factors for Changes in Accounting (source Roberts et al., 1998)

It seems that German GAAP and US GAAP have different objectives. Therefore we will analyze the two systems in their national contexts now.

2.1. Accounting in Germany

German accounting is dominated by the objective of carefully calculated profits. The protection of creditors is one of the main purposes of German GAAP. In order to classify the German accounting system, Nobes (1980) describes the system as macro-uniform, government-driven and tax dominated. We will find further proof for this in the following parts, in particular fort he close link to taxation, since the „Maßgeblichkeitsprinzip“(§ 5,1 EstG) provides a important principle for German accounting.

Nobes (1998) also describes the system as based on fairly weak equity. This is because the sources of financing are very much bank related and credit based (Hill, 1999 and Mueller et al., 1991). The financial system in Germany is categorized as bank based as there is little access to the capital market for small and medium sized companies (Glaum and Mandler, 1993, pp. 215-216). These companies represent about 80% of the companies in Germany and are called “Deutscher Mittelstand”. The German accounting is based on statutes, defined in the commercial code, the “Handelsgesetzbuch” (HGB). The HGB comprises 5 books. Book 3 contains the main accounting principles, called principles of properly bookkeeping (GoB).

All limited companies are required to publish an annual report, containing the balance sheet, the profit & loss account as well as some notes at the end. (§ 264,1 HGB). All principles must accord to the 4th and 7th EU directive (Fritz et al., 2003). There are loosened requirements for non-listed companies.

The GoB include statements on transparency and clarity, completeness and valuation as well as principles against offsetting and assets that may not be capitalized. We will see them in more details in the ongoing of this comparison. Also the concept of true and fair value is incorporated in the HGB to a certain extend which we will see in section 4.

2.1.2 Accounting and Taxation: The ‘Maßgeblichkeitsprinzip’

According to Achleitner (2000), providing the basis for taxation is another purpose of German accounting. Since the tax balance sheets correspond to the GoB, the tax balance sheets are derived from the published balance of the company (§5,1,1 EstG). This concept of German accounting is called “Maßgeblichkeitsprinzip”. There is also a reverse effect since the taxation principles set limits for accounting, e.g. for depreciation methods.

2.2 Accounting in the United States of America

According to Crouzet and Véron (2002), the accounting principles, U.S. General Accepted Accounting Principles (U.S. GAAP) are not codified like in Germany, but published by the SEC and the Financial Accounting Board (FASB). The development of these standards is largely influenced by the professional audit body and business practices in the anglo-saxonian area (Nobes, 1980). From Nobes classification scemes we find that the U.S. System is quiet opposite to the German system, as it is based on strong equity and characterized as based on commom law and flexibility.

In addition to six basic principles as a regulatory framework (CON 1-6), the U.S. system is based on the Statements of Financial Accounting Concepts (SFAC). The major objective of the U.S. GAAP is to provide the range of stakeholders of a company (SFAC 1), such as customers, suppliers, shareholders or employees with all necessary information they need in order to make their decisions (Mueller et al., 1991).

From this we can recognize that the U.S. system is much more oriented to the capital market and investors, since this is the main source of finance in this market-based financial system (Tarca, 2002).

The central point in the U.S.GAAP conceptual framework is the aim for a ‘fair presentation’, refered to as the ‘overriding principle’. It requires the company to publish accounts that give a true and fair view of its real economic situation (CON 2).

Similar to the German system there are general principles for valuation and going concern (CON 5/6). They suggest the valuation at historic or market values (Maron, 2001). In order to compare the two systems, we shall now explore how they incorporate the core concepts of conservatism and true and fair value.

3. The level of conservatism

From Theory we find a whole range of definitions of conservatism. Feltham and Ohlson (1995) describe conservative accounting as based on the expectation that net assets will be worth less than market value in the long run. That justifies the accounting with historical costs. Beaver and Ryan (2000) come to a similar conclusion.

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