German accounting rules are suitable for solely domestic companies but not for multinational enterprises. Discuss

Résumé du document

Following the Industrial Revolution in 1850's, the traditional German accounting pratices were influenced by banks. Indeed, for almost a century, banks had been the major financing sources for enterprises. After the WWII, the internationalization of the markets have bought in the system of equity financing among enterprises and this evolution has also affected the financial reporting rules. In the United States and other first world countries, the equity financing governed the financial reporting standards in such a way that the investors had access to right information about the financial situation of the company in which they had invested.

Extraits

[...] In 1794, the Common Prussian Law has provided the German accounting rules with a conservative interpretation of principles of realization and valuation of assets. Moreover, one should figure that Germany has been a federal country where there were many decentralizations. Consequently, the German “Corporatism” can be explained by the existence of uncodified laws, and the freedom to adapt rules by using the options suggested by the HGB & the GoB. This flexibility in the use of accounting rules is opposed to the French state-controlled governance where all the authoritative sources are codified in the texts. [...]

[...] At the same time, even the Commercial Law, codified in the HGB, allows to keep in reserves the benefits instead of distributing it to shareholders. The idea of creditor protection Because of the previous valuation principles, the German accounting rules are necessarily built over the idea of creditor protection. It is mainly due to the principle of prudence. This idea can be explained by the fact that in Germany, the importance of equity financing is not as wide that in the USA, for instance. [...]

[...] Tax law seriously guides the German accounting rules according to the “authoritative principle” or “principle of congruency”. It also has some interference with the international harmonization. The principle of congruency Tax law and Federal Fiscal Court decisions have a great impact on accounting practices, because tax accounts are calculated on the basis of the commercial balance sheet. So, this close link owes it to the determination of taxable income. Basically, the principle of congruency consists in the predominance of tax law over accounting rules. [...]

[...] It is important to understand that tax law contributes to suit the German accounting rules for solely domestic companies, because it appears that the main concern of these companies seem to be related to tax purposes. The conflict throughout harmonization The conflict throughout harmonization concerns in fact the 4th European Directive, notably, because the respect of the implementation in Germany of this Directive really diverges from the relief-objective” of German solely companies. That is to say that, the multinational enterprise, when obeying to the TFV principle, will aim the production of an open, clear, exact and complete information, meanwhile the German local solely domestic companies will be getting down to reduce the taxable income. [...]

[...] Therefore, the expanding vocation justifies a dynamic accounting approach favourable to multinational enterprises. The GoB and the various options In Germany, there are no compulsory accounting standards such as the French PCG. The concrete situation is that there is a fully-furnished set of rules which foresee too many options, and so they are to provide multinational enterprises with some leeway among the German accounting rules. In fact, theoretically, it seems that there is a separation between accounting rules developed by the HGB, which obey to the static accounting approach, and a set of uncodified rules allotted to dynamic side of accounting. [...]