Considering the global convergence on the International Financing Reporting Standards (IFRS), there has been a constant influence on the improvement of the German Handelsgestestzbuch (HGB). The HGB is also recognized as the German statutory accounting and reporting requirement (GAAP). However, both IFRS and HGB are used in providing better understanding financial systems highlighted in each case. IFRS application is essential towards the consolidation of financial statement in public corporations within the member states of the European Union, though other privatized firms can also apply the same. Besides, the use of the IFRS is a considered a separate entity since is it done voluntarily for the purpose of presentations.
On the other hand, the German commercial laws necessitate the use of HGB in the distribution of profits as well as tax and statutory disclosure and presentation reasons (Chen, 2013). Although, the current reforms on the German HGB has marked several modifications that are comprehensive for the legal principles of accounts. Such a move has been facilitated to promote the establishment of a less complex new accounting principle that would be a reliable and suitable alternative to the IFRS. Further, the new German HDG was created to help in improving the content of the information in the financing reports through the implementation of same elements used in the IFRS. Therefore, the revision of the HGB enabled the substantial changes to be implemented in the measurement and recognition criteria, and disclosure requirements in the management's report. Thus, several factors can be used in comparing and contrasting IFRS and the German HGB.
The historical cost of IFRS constitutes the basis of the accounting, with possible re-valuations on intangible assets, property, equipment, and investments value, and while for German HGB, it becomes the major convention in accounts with no revaluation allowed. However, for HGB exceptions are applied to the financial institutions that are capable of trading at fair value. As well, the exemption can apply to assets that are deprived of the accessibility and exclusion from other creditors about the pension obligation's coverage or type of the liability, which is valuated fairly. However, the IFRS necessitates that the various groups of finances and living assets are measured at fair value. Further, the IFRS entities can be very rare, especially when the management concludes that complying would mislead the company's financial systems, which implies on the disclosure (Smith, 2012). Whereas, in German HGB false financial statements, further disclosures will be conducted, though they are limited to the presentations. More so, the IFRS entire retrospective application in reporting financial statements requires some exceptions and exemptions since a similar report is prepared in its basis with certain adjustments incorporated against the goodwill of the firm. Meanwhile, German HGB needs no detailed guideline in the first-time adoption of the account's framework (Koppeschaar, 2015).
Based on the components of financial statements, a complete set of IFRS constitutes the financial position, comprehensive income, equity change, cash flow and notes on the accounting policies, which is similar to the German HGB used in public trade companies. However, in German HGB, the cash flows and equity changes are not required for financial statements with single entities. As well, for the preparation of the consolidated financial statements, segment reporting is optional but can be added as a report on the individual finances in publicly traded companies with the inclusion of the management's report. However, for IFRS, additional requirements are needed in the retrospective application of the accounting policies. More so, in the formulation of the balance sheet, IFRS do not require a particular format for the current and fixed assets, and liabilities to be used, while the German HGB prescribes for an increasing liquidity order in the presentation since the entities are supposed to be subjected to a specific legal form and formatting. The current assets/liabilities comprise of particulars to be realized in the next 12 months, and the deferred taxes are considered non-current on the IFRS balance sheet. However, a different presentation of the fixed and current assets is essential in the German HGB because the current items are not meant for a long-term purpose in the company (Koppeschaar, 2015). Besides, IFRS allows for assets and liabilities offset under given circumstances, whereas in the German HGB offsetting is not permitted unless there is a legal enforcement to facilitate the process. Meanwhile, the interests of the minorities are demonstrated as part of the equity changes for both IFRS and HGB.
Similarly, the statement of income can be presented by an entity in both IFRS and German HGB. However, IFRS there can be either a single-entity general income statement or a display of profit and loss components. However, the German HGB has no comprehensive income statement, and the statements can be presented using the nature or function of the expenses in providing a minimal structure. As well, the IFRS lacks a standardized format for the income statements in the presentation of the expenditures through their function or nature. The German HGB accounts for the difference in the exchange rates in equity that is subject to the consolidated process in currency translations and does not hinder the position of the net income. Besides, for particular legal forms in German HGB, a detailed structure of income statement may be required in the income statement. Whereas, in IFRS, changes in equity is elaborated in the comprehensive income statement, which includes evaluation of surpluses, defined benefits plans from actuarial gains and losses, effects of foreign operation translation, measurements of financial assets and accrued loss and profit margins from the cash-flow hedge (Koppeschaar, 2015).
In the statement of changes in equity, IFRS represents every adjustment in the owner as a statement in the shareholder's equity, while in German HGB, it is only necessary for the consolidated finances and public trade companies with no obligation for preparing the consolidated financial statements. The IFRS statement of change entails total comprehensive income with distinct owner attributions, effects and application of retrospective restatements, complete owner's transactions in their full capacity and a basis for reconciliation for each component is often included in the statement. As well, the German accounting standards require a collection of change statements that includes different components, like first enterprise subscribed capital, capital reservations, contributions, earned group equity, redemption shares and accumulated losses and profits, and minority equity attributions (Chen, 2013).
Much more, the cash flow statements in IFRS have standardized headings with minimal content flexibility and are required to give a report on the classified operation period, investments, and financial activities. However, German HGB only requires a consolidated financial statement for public traded organizations that are not obliged to prepare consolidated statements. In the IFRS, the statements of cash flow are made through a direct and indirect method, whereas German HGB uses either direct or indirect method of reporting cash flows. Therefore, special regulations are established for cash flow application in financial and insurance institutions (Smith, 2012).
Chen, Ted. (2013). "IFRS accounting measures to take effect for all listed companies in Taiwan in 2013", The China Post, January 1, 2013
Koppeschaar, ZR (2015). Introduction to IFRS. Durban: LexisNexis. pp. 290311. ISBN 9780409118445.
Smith, N.J. (2012) CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS, Ch. 1.22.2 Three Concepts of Capital Maintenance
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