Comparing Accounting Principles in Germany and the UK

1. Case Study
GERMANY
By:
Myriem Atlassi MSc BA &
Richard Ondimu MSc, CPAK
© 2017
Germany
Vs
United Kingdom

2. Background Information/differences
• Even before the introduction of IFRs in 2001 there existed
accounting differences in the accounting systems of Germany and
UK.
• This was due to:
 Legal systems – (Code law- (German’s separate body of private of
private company law and UK- Common law systems)
 Financing system –(Germany) Credit based; governmental while
(UK) was capital market based; prices are set by the competitive
market.
 Investor preferences- (Germany)-More interested in long-run
control of the management.
• Historically, UK was governed by UK GAAP and the Companies
Act while German- was German GAAP and subscribed to the
commercial code (HGB) –With strong degree of conservatism

3. Financial Reporting Systems
United Kingdom Germany
• Class A as alluded by Nobes
(1998) corresponding to Anglo-
Saxon Accounting.
• Class B. corresponding to
Continental European Accounting
• Company Law is a major direct
influence on corporate financial
reporting together with
accounting standards (Where accounting
practice differs from tax rules
• The major influence of the
German accounting is the
commercial code and Tax
legislation (where accounting practice follows tax
rules)
• It is mandatory for all listed
companies to use IFRS to report
and GAAPS for all companies not
using IFRS.
• IFRS is not allowed for reporting
by individual companies, unless
they also provide a report under
the commercial code.

4. Accounting Principles/Practices
1. The General Accounting Framework
 United Kingdom
• Historical cost is the primary basis of accounting, however it
permits the intangible assets, PPE and Biological assets to be
reported at their fair value.
Germany
• Historical cost in the main Accounting convention.
• Does not permit revaluation
• There is an exception to banks where assets held for trading are
valued at fair value

5. 2. Substance over Form (SoF)
United Kingdom
• Transactions and other events that may arise from leased assets should
be accounted for and presented according to their economic and
financial reality and not merely on legal form.
• Additionally, Special Purpose Entity (SPE)’s control is considered to be
SoF where the parent assumes the majority of risks and rewards
associated the entity
Germany
• The application of Substance over form is primarily based on general
statutory anti-tax avoidance clause which provide that tax ‘must not be
circumvented’ by abusive behaviour thus prohibiting its use.
• Similar to UK, SPE’s control is considered as SoF with parent assuming
the risks and rewards associated with the entity.

6. 3. Legal Reserves
 United Kingdom
• Its not a requirement, therefore not applicable
Germany
• Required by law to create legal reserves
• It should be 5% of net undistributed income per year which should
be allocated until legal + capital reserves are 10% of nominal capital
or higher
• This is designed to protect creditors

7. 3. True and Fair View (T&FV )
 United Kingdom
• The concept of true and fair view applied to both UK GAAP and
IFRS reporting. Meaning financial statements be free from
misstatement and faithfully represent the financial performance of
an entity.
Germany
• The concept of True and fair view is not regarded as a basis of
income measurement. The overriding requirement in German
accounting is to be in conformity with regulations and GoB /HGB
(German codes)
• General accounting law indicates that ‘T&FV’ does not influence the
computation of income but rather the information given in the notes
to the F/S should comply with the principle of ‘true and fair view’

8. 4. Income statement Presentation
 United Kingdom
• In the profit and loss statement, expenses are recorded by function
(e.g. Cost of sales, Administration, Sales and Distribution
Germany
• In the profit and loss statement, expenses are recorded by nature
(e.g. total wages etc.)
5. Others
• In the UK, Cashflow statements and Earning per Share (EPS)
Disclosure are required while in German accounting, Cashflow
statements and EPS disclosure are not required but found only
sporadically.