What is the German GAAP?
The Generally Accepted Accounting Principles within the country of Germany, referred to simply as the German GAAP are accounting standards that make financial reports common for German companies. This is good for both local and international business because the transitions of internal and external reports are conducted fluidly under a single system. Here is a quick look at what the German GAAP is and how it is beneficial to businesses worldwide.
When a business has to submit reports outside of the company, they can follow the standards of the GAAP. This is for one main reason: So that the body looking into these reports can easily read them following the same pattern and can compare them with reports from other German companies because they all follow the same style, rules, and reporting pattern. There is no additional calculation required, and there is no additional translation or additional accounting required. Because all of the companies follow the same standards in their external reports, it is easy to just pick up any document and comprehend what is listed.
It is best to understand how the German GAAP works by comparing it with the other set of policies and standards commonly used by international countries other than the United States. Most foreign countries use the International Financial Reporting Standards (IFRS). If you want to ensure good business relations within the financial sector in the US, then the principles listed in the GAAP are the ones to follow.
A Closer Look at the GAAP in Germany
So what do the standards preset? To better understand how these make for quality accounting and improved businesses look into this short view of some of the comparisons between the IFRS and the newly revised Generally Accepted Accounting Principles.
In the IFRS, there is no restriction whatsoever in the presentation of flexibility in regards to their specific income statement items. In the German GAAP, however, they are limited to two definite formats. This allows the outside surveying team to have a strong and comparable format to study. There is no need to convert one format to another with the German GAAP because companies are given a steady and reasonable guideline to follow. Also, in the new German GAAP there is the rule that all foreign currency will be translated into the standard currency. There is no required translation in the IFRS and this can create unstable liquidation reports.
When it comes to presenting balance sheet items, there is no mandatory format in the IFRS. The German GAAP gives a specific format for the presentation of balance sheet items and this is based upon the order of liquidity. Another thing to take note of is that in the German GAAP there is the inclusion of the minority interests and these are to be presented as part of the equity. This is not so in the IFRS financial reporting standards. In many areas within the policies of the IFRS there are no given formats, guidelines or rules. When it comes to presenting a company's financial report to a bank or an investor, this lack of formal organization may constitute a significant disadvantage.
There are so many other areas where the differences can make and break a business. Concerns over consolidation reports, business combinations, and statements of cash flow and the German basis of accounting are all approached differently in both the IFRS and the aforementioned GAAP system. The main difference that any accountant can see is that the latter choice is much more organized and carries specific formats for business reports to follow. The prior does not have all these formats and this can make report comparisons very difficult over time.
What Does All This Mean for a Company?
When it is easier to understand financial reports, a company has better chances of getting approved by both local and international creditors, banks, and loaners. They have better chances of forming international relationships because the outside party has no need to do extra calculations and conversions since everything follows a specific format. This is vital in forming relations with business partners because a potential partner would like to review a company's assets and financial reports before they can decide whether the partnership would be beneficial and profitable.
This is especially true for the United States which uses the US GAAP system, even though there can be slight differences. An American company that once conducted business in Germany or plans to conduct business in Germany would have no problem understanding one another's financial status and accounting reports if they follow basically the same format all across the board. This helps make the transition and decision making much faster.
As mentioned above it also helps a company receive loans and investments. An investor, broker, bank or creditor would no longer have to resort to hiring a tedious financial team just to dissect a financial report given by a company. Since everything is presented in a known format they just need one specialist in that type of financial reporting to be able to understand what was given and to interpret whether it shows profit or not.
Lastly it is also a good format and set of principles when it comes to taxes and legal proceedings. This is because the standards are the same all across the board across all organizations, so the reviewing board will not have to resort to numerous calculations and translations. A report following the given standards and format of the GAAP in Germany will be accurate in all regards and can easily be compared with the reports of other companies to double check for accuracy. Some nations are currently trying to move from their local GAAP standards and want to create an international committee aimed at a more common use of IFRS, but so far in Germany, the GAAP certainly will remain for years.
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