The accounting requirements for companies have significantly increased in recent years.
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Our accounting firm offers services throughout Germany. Clients located in Munich or the Munich area can visit us in our office at the Isartor.
In order to establish different levels of requirements for the preparation, audit, and publication of single entity and consolidated financial statements, certain size criteria were incorporated in the German Commercial Code and the Publicity Law, in addition to the differentiation according to the legal form of an entity.
Further, single-entity financial statements of corporations which are subsidiary companies of a parent company that is required to prepare consolidated financial statements do not require a statutory audit and publication if certain criteria are met. The most important ones are the inclusion in consolidated financial statements prepared according to the provisions of the German Commercial Code or IFRS and the legal or contractual obligation of the parent company to absorb annual losses of the subsidiary company, if any.
In addition to the general principles, which require a clear, understandable, and complete presentation and disallow the netting of items, the following presentation and disclosure rules are incorporated in Section 265 of the German Commercial code and are important for our accounting services:
Other important rules which need to be considered for our accounting services are the options to present
In order to avoid overloading the balance sheet and to improve the clarity of presentation, there is a strong tendency to put as many disclosures as possible into the notes, where optional, and also to use the legal options to combine headings in the balance sheet with supplementary analyses in the notes.
The main differences compared to a balance sheet prepared in accordance with international accounting principles such IFRS and US GAAP are:
The basic formats of the income statement are incorporated in Section 275 of the German Commercial Code. They apply to the single-entity as well as to the consolidated financial statements. The income statement must be presented in a vertical form following either the “type-of-expenditure” (“Gesamtkostenverfahren”) or the “functional” format (“Umsatzkostenverfahren”).
The traditional format for the income statement in Germany, the type-of-expenditure format, is a production-oriented presentation. According to the underlying philosophy, the measurement of the performance of a company is not only sales but also inventories produced or taken from stock, as well as the value of internal resources used to create or improve fixed assets. Accordingly, the change in work-in-progress and finished goods as well as own work capitalized are disclosed separately. Together with sales, they make up the “gross performance” for the year. As a further typical characteristic, income and expense items are disclosed according to their type, irrespective of where they were incurred, and include the complete period expenses instead of cost of sales.
As the type-of-expenditure format is unusual compared to Anglo-American standards it requires some additional explanations:
The alternative format for the income statement in accordance with the German Commercial Code is the “functional” format which was implemented into German accounting law by the transformation of the 4th and 7th EU directives back in 1985. Since then this format gained increasing importance in Germany, especially as the traditional German “type-of-expenditure” format does not fit into international accounting principles such as US GAAP. Under IFRS, however, the “type-of-expenditure” format is an allowed option.
According to the philosophy behind the “functional” format, the measurement of the performance of a company is primarily sales. Consequently, the change in inventories and own work capitalized are not disclosed separately. Instead, expenses are mainly structured according to the “cost centers” or functions where they are incurred.
The notes form an integral part of financial statements. As with international practice, notes provide additional information for the interpretation of the balance sheet and income statement. Furthermore, they fulfill a replacement function, since they contain information that otherwise would need to be incorporated in the balance sheet or income statement.
While small corporations are allowed to present and disclose their balance sheet in the above condensed format, all other companies must break down the subheadings into various prescribed items.
The basic format of the balance sheet for single-entity and consolidated financial statements is presented in Section 266 of the German Commercial Code ("HGB - Handelsgesetzbuch").
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