We offer complete accounting services in Munich and all over Germany. The advantage for clients based in or close to Munich is that they can easily access and visit our office, which is located close to the Isartor in the city of Munich.
We offer the following services for our clients in Munich:
If you plan to set up a business in the Munich area please also take into consideration that the different levy rates of the municipalities around Munich for the trade tax can have a significant impact of the total tax burden of your business.
In the following please find some important rules in preparing German GAAP financial statements:
Corporations must disclose separately the following headings regarding intangible fixed assets on the face of the balance sheet:
Intangible fixed assets are only to be capitalized if purchased. There is also an option to capitalise assets created by the use of internal resources -
this option, however, can not be applied to tax records.
Goodwill included in single-entity financial statements must be differentiated from that incurred through consolidation. It arises, for example, if a business is acquired through an asset deal and at a price exceeding the fair market value of the acquired assets. It can also occur when a partnership is merged at a net asset value that is below the book value of the participation. It cannot occur in single-entity financial statements when shares are acquired, since all costs incurred in this connection are to be reflected as acquisition cost of the investment.
As a part of fixed assets, property, plant and equipment (PPE) include only items that are supposed to service the business for a long period of time. Corporations must disclose separately the following headings on the face of the balance sheet:
As a general rule, PPE should be valued at acquisition or manufacturing cost, less regular depreciation.
Acquisition cost include the purchase price (after price reductions) plus incidental cost and expenses incurred to render the asset ready for use.
No specific methods are prescribed by law how to determine regular depreciation. The most common methods are the straight-line and the declining-balance methods. Estimated useful lives are taken mostly from the tax tables available for various industries. The assumptions used in these tables are generally conservative resulting in relative short useful lives and relative high depreciation expenses when compared to international standards.
A write-down to recoverable amount of PPE is required if a permanent impairment is anticipated.
Valuation of PPE is highly influenced by tax regulations. This applies not only to the use of tax tables as described earlier but also to of the use of the declining balance method of depreciation and special tax depreciation, which is both accepted as a tax-deductible item only if accounted for in the commercial financial statements as well. The effect of special tax depreciation on the current and future years’ results (but not the cumulative effect from previous years) needs to be disclosed in the notes. The limit for capitalization (EUR 410) commonly used for low-value items, are also taken from the German Income Tax Law.
As for many other issues, accounting for leases in Germany is in practice dominated by tax regulations, which are incorporated in various
statements of the fiscal authorities.
Corporations must disclose separately the following headings on the face of the balance sheet:
Participations are defined as shares in other enterprises that are designed to serve the business through a long-term relationship with the other business (Sec. 271 German Commercial Code). Shares in affiliated companies have to be separated from participations and include participations in companies which should in principle be included in the consolidated statements of the ultimate parent according to the provisions for full consolidation regardless whether such a consolidation is actually prepared or not. Accordingly, participations usually qualify as investments of 20 - 50% of the other entity’s nominal share capital. They normally qualify as shares in affiliated companies if the interest exceeds 50%.
It should be noted that there is a second definition of affiliated companies included in the Stock Corporation Law, which is not applicable to accounting but to other issues like the duty of AGs to prepare a dependency report. Such a dependency report is supposed to include all transactions between the dominated subsidiary, its parent, and the parent’s affiliates, as well as measures imposed on the subsidiary and how disadvantages to it, if any, are compensated. It is only required in the case of a dominating influence of a parent without a domination agreement. If such an agreement exists, the subsidiaries and their minority shareholders are protected by the parent's legal obligation to carry all of its losses incurred.
Like other financial assets, participations are carried at cost, unless an impairment write-off is required.
The equity method of accounting is not allowed for valuation of participations in single-entity financial statements. Provisions for impairment write-off must be made in cases of a permanent impairment of capitalized value. In case of a temporary impairment such a write-off is optional. Unlike for property, plant, and equipment, this option is applicable to corporations as well.
German GAAP do not classify financial assets as “held for trading”, “held to maturity” and “available for sale” as required under IFRS. German GAAP do not allow for fair market valuation of financial assets in case that fair value exceeds cost.
Corporations, CorpCo’s and large non-corporations must provide a fixed asset movement analysis, either on the balance sheet or in the notes, which must include tangible, intangible, and financial assets. Small non-corporations usually provide such an analysis on a voluntary basis.
Corporations and CorpCo’s must disclose separately the following inventory items on the face of the balance sheet:
Advance payments received on orders may be openly deducted from inventories or, alternatively, shown as liabilities.
Inventories must be stated at the lower of historical cost or market value. Historical cost includes acquisition cost of raw material, supplies and merchandise as well as manufacturing cost of work-in – process and finished goods. Market value comprises net realizable value as well as replacement cost.
Manufacturing cost, which is the basic measure for work-in-progress and finished goods, comprises expenditures that are incurred through the consumption of goods and services in order to manufacture, enlarge, or improve an asset significantly beyond its original state. German GAAP allow for a wide range of options regarding the inclusion of cost in manufacturing cost.
Idle capacity costs must be excluded from manufacturing costs which is in line with IFRS.
Net realizable value in Germany is often determined by deducting an average profit margin from the sales price, since this is allowed for tax purposes. For work-in-progress and merchandise, either market may apply. In any case, the lowest amount reasonably applicable must be used. This also means, for instance, that unlike the rule in some other countries (including US GAAP), replacement cost is to be used if lower than historical cost, even if the net realizable value less average profit margin exceeds replacement cost.
Further, German GAAP allow to anticipate expected future price reductions (“future” often being defined as up to 2 years) via inventory reserves, and the option for non-corporations to set up reserves within the framework of “sound business judgment.” Both provisions of German law are not in line with IFRS.
The above described options regarding the valuation of inventories especially related to the definition of manufacturing cost and the set up allowances for future price reductions may create significant differences to an inventory valuation in accordance with IFRS. In addition, there remain judgmental areas with respect to the definition and valuation of obsolete and excess items even though restricted by tax laws.
As a general rule regarding revenue recognition, revenues may be recognized only if the agreed-upon product or service has been completely rendered. Accordingly, the completed-contract-method is prescribed for long-term production type contracts under German GAAP. Only under specific and restrictive circumstances, the stage-of-completion method can be applied optionally. In either case, the revenue recognition method must be described in the notes if material amounts are concerned.
The minimum subscribed capital is EUR 50,000 for AGs and EUR 25,000 for GmbHs. The subscribed capital usually represents the maximum liability of the shareholders for liabilities of the company and is divided into individual shares. Nevertheless, in certain situations, shareholder loans can be considered as an equity-substitute, putting severe restrictions on pay-backs by the company.
Sole proprietorships and partnerships cannot have subscribed capital by nature. Nevertheless, their fixed capital accounts are sometimes described as subscribed capital, since such accounts have a similar function.
Regulations concerning reserves exist only for corporations. Reserves are split into capital and revenue reserves under German GAAP. Capital reserves need not be broken down on the face of the balance sheet and include funds provided by shareholders. Revenue reserves must be split up on the face of the balance sheet by type and are created by transfers from retained earnings. The main difference to retained earnings is that such reserves bear certain restrictions regarding their distribution to shareholders.
Capital reserves consist of:
1. The premiums paid in connection with the issuance of new shares
2. Amounts received on the issuance of debentures with convertible rights and share options
3. Contributions from shareholders as consideration for preferential rights of their shares
4. Other shareholders’ contributions to capital
Revenue reserves are composed of:
5. Legal reserve (for AG an KGaA only)
6. Statutory reserves (only in case they are prescribed by the statutes of the company)
7. Reserves for own shares (see above)
8. Other revenue reserves
Provisions for reserves 1–7 are prescribed by law. Provisions for “other revenue reserves” out of retained earnings are usually subject to the management board’s decision. The reserve for own shares must be set up in an amount corresponding to the value of own shares capitalized, see above. A legal reserve is compulsory for AGs and KGaAs only. According to Sec. 150 AktG, the annual provision is 5% of the annual net income until the reserves 1–3 and 5 reach 10% (or a higher amount if required by the bylaws) of the corporation’s subscribed capital. No such regulations exist for GmbHs.
While the reversal of reserves for GmbHs is only restricted to types 6 and 7, AGs and KGaAs are also restricted regarding types 1–3 and 5. These reserves may be reversed only in order to compensate accumulated losses or to serve as funds for the increase of the subscribed capital. Special reference is made to Sec. 150 AktG.
Liabilities are obligations that are certain in terms of existence, value, and maturity.
Accruals are provisions for uncertain obligations, anticipated losses, and certain expenses incurred before the balance sheet date.
German accounting legislation requires pension, tax, and other accruals to be separately disclosed on the face of the balance sheet. While pension and tax accruals represent provisions for uncertain liabilities, other accruals also may include amounts to reflect loss contingencies and expense equalization accruals.
Other accruals include provisions for uncertain liabilities, for anticipated losses from pending transactions (loss contingencies) and for expense equalizations.
The legal requirements and common practice for the first two categories mostly comply with international standards but there is still a tendency in Germany towards a very conservative approach regarding the valuation of accruals when compared to international standards, which is a result of the general prudence principle and the trend to reduce income taxes based on the linkage between commercial and tax accounts.