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            A Brief History, Cultural Heritage and Financial Reporting
        in the Federal Republic of Germany (Bundesrepublik Deutschland)


                                    Michael Foss
                                    Mark Lamb
                                Jenna Lynn Moscovic
                                   Amanda Taylor

For International Accounting Class (Acct 445-501), Fall 2002
Instructor: Dr. Murphy Smith, Professor of Accounting, 979-845-3108,
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               A Brief History, Cultural Heritage and Financial Reporting
           in the Federal Republic of Germany (Bundesrepublik Deutschland)

          The Federal Republic of Germany was formally founded in 1949 when Great
Britain, France, and the United States relinquished control of the former Western
Germany. Germany was finally re-unified on October 03, 1990 after the fall of the Berlin
wall in 1989.
          Germany experienced a period of incredible economic growth during the offices
of Konrad Adenauer and Ludwig Erhard from 1950 to 1966. This inordinate growth in
the business sector naturally propelled Germany into its own standard of accounting.
One major difference between United States and German accounting is that the United
States uses a common law system, whereas Germany has a code law system. Another
major difference is that financial statements are directed towards the need of the creditors
rather than the shareholders.

    Brief History overview:
800—1806: Germany was a nation under the Holy Roman Empire.
1806—1863: Inter-dispersed with different conflicts and governments.
1864—1871: Otto von Bismark creates a single German nation through three wars.
        1864: Prussian victory over Denmark.
        1866: Prussian-Austrian war.
        1870: Franco-German war.
1871: Bismark appointed Chancellor of the Reich, and Wilhelm is proclaimed Emperor.
1914—1918: First World War.
1919—1932: Weimar Republic, established under the terms of the Treaty of Versailles.
1933—1945: Hitler’s Third Reich, Nazi regime defeated in World War II.
1946—1948: Ally occupation of Germany.
1949: Federal Republic of Germany (Bundesrepublik Deutschland) established.
1950—ca.1966: Konrad Adenauer and Ludwig Erhard’s Economic Miracle.
1989: Fall of the Berlin Wall.
1990: October 03 marks Germany’s national holiday for the re-unification.
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1992: Treaty of Maastricht establishes the European Union.
1999: € is introduced in non-cash transactions.
2002: € is in full circulation.

Brief Culture overview:
         Even though Germany is a fairly young nation, the German culture has been
molded over the centuries. Many of the fairy tales that we know today are of Germanic
origin; also, many of our Christmas traditions are of German heritage. Germany is also
the birthplace of Martin Luther’s reformation of the Holy Roman Catholic Church and
the German people (1517).
             As Germany became more and more sophisticated the world began to realize the
great scientific achievements of its citizens; for example, Albert Einstein’s theory of
relativity, Klaus Fuch’s nuclear physics, and Walter Dornberger’s rocketry were all
ground breaking developments in the scientific community. Germany has also been an
economic and political powerhouse both as ally and foe. Even the Holy Roman Empire
recognized Germany’s political power.
         As any other unique culture, Germany has its own stereotypes. Generally
speaking Germans are said to be serious, punctual, up tight, efficient, aloof, etc… The
German stereotype goes even further to placing the entire country within one specific
region’s stereotype. When many people hear Lederhosen, ―Wiener Schnitzel, Pretzels
and Beer‖, they think of Germany, but this is actually a Bavarian stereotype and would
more generally describe Austria than Germany, generally speaking.

    Natural Resources:
Germany does not have an incredible amount of any one resource, but there is a supply of
the following: iron ore, coal, potash, timber, lignite, uranium, copper, natural gas, salt,
nickel and arable land.

    Government type:
         Germany is a Federal Republic with its capital in Berlin. The 16 states are:
Baden-Wuerttemberg, Bayern, Berlin, Brandenburg, Bremen, Hamburg, Hessen,
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Mecklenburg-Vorpommern, Niedersachsen, Nordrhein-Westfalen, Rheinland-Pfalz,
Saarland, Sachsen, Sachsen-Anhalt, and Schleswig-Holstein, Thueringen.

National holiday: is Unity Day, 03 October 1990.

Legal system: is civil law system with indigenous concepts; judicial review of legislative
acts in the Federal Constitutional Court; has not accepted compulsory ICJ jurisdiction.

Executive branch: has a president elected for a five-year term by a Federal Convention
including all members of the Federal Assembly and an equal number of delegates elected
by the state parliaments; elected by an absolute majority of the Federal Assembly for a
four-year term.

Legislative branch: contains a bicameral Parliament that consists of the Bundestag
(usually 656 seats; however, the number can vary; the representatives are elected by
popular vote under a system combining direct and proportional representation. A party
must win 5% of the national vote or three direct mandates to gain representation;
members serve four-year terms) and the Bundesrat (69 votes; state governments are
directly represented by votes; each has 3 to 6 votes depending on population and are
required to vote as a block).

Judicial branch: is comprised of a Federal Constitutional Court
(Bundesverfassungsgericht), from which half the judges are elected by the Bundestag and
half by the Bundesrat.

Political parties: that are most prevalent are the Alliance '90/Greens, Christian
Democratic Union, Christian Social Union, Free Democratic Party, Party of Democratic
Socialism, and the Social Democratic Party [current chancellor Gerhard Schroeder’s
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    Major Industries:
         Directly in line with Germany’s stereotypes of being serious and efficient as well
as having the great scientific cultural background, Germany’s dominating industries are
all within the field of engineering. Germany is the third largest automobile manufacturer
in the world, exporting approximately 65% of production. In fact, the largest numbers of
production facilities are devoted to mechanical engineering and plant construction.
         The chemical industry is a primary supplier for intermediate and finished goods in
a variety of sectors. Germany’s electrical engineering and the electronic industry
comprise a considerable share of their industries. German companies have even
developed their own niche in the field of environmental protection technologies. Besides
the engineering sector, the food industry, textile and clothing, metal
producing/processing, mining industry, precision engineering and optics industries are an
important part of the German economy.

Exports and Imports
         Germany is the second largest exporter in the world but has a large services
deficit. Exports were US$571bn in 2001 and imports US$488bn, resulting in a trade
surplus of US$83bn. United States has had a 28 and 29 billion dollar trade deficit with
Germany for the last two years.

Major exports (2001) % of total Major imports (2001) % of total
Motor vehicles           18.2        Chemicals                10.1
Machines                 14.2        Motor vehicles           9.3
Chemicals                12.4        Machines                 6.9
Telecoms technology      5.2         Telecoms technology      6.3
Items for electricity    4.9         Mineral oil and gas      6.1

Automobiles are Germany’s biggest export. With 770,000 employees (2001) and an
annual turnover of Euro 202 billion, the automobile industry is one of the most important
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branches of the German economy. Germany is the world's third largest producer of
automobiles (after the United States and Japan).

German Mechanics
         The largest number of production facilities is engaged in mechanical engineering
and plant construction. Small and medium-sized firms are predominant, and because of
their flexibility and technological efficiency, Germany is among the world’s leaders in
this field. Roughly 83 percent of the companies engaged in mechanical engineering are
highly specialized small or medium-sized firms with fewer than 200 employees. As
suppliers of high-quality plant and production equipment for industry they play an
important role in the economy as a whole.

German Chemicals
         The chemical industry is an important supplier of primary, intermediate and
finished products for sectors such as health care, the automobile industry and the
construction industry as well as for private consumption in Germany. In addition to the
large firms in this branch of German industry, there are also successful small and
medium-sized firms. With a total workforce of about 467,000, the chemical industry
generated a turnover of approximately Euro 134 billion in 2001. Roughly 60 per cent of
its output was exported.

    German Electrical Engineering
         The electrical engineering and electronics industry, with a turnover of Euro 127
billion in 2001 and roughly 880,000 employees, is likewise one of the main branches of
industry in Germany. This industry includes such sub-divisions as the food industry, the
textile and clothing industry, the metal producing and metal-processing mining precision
engineering and optical industry, together with the fields of process control technology,
electromedical equipment and timepieces, and the aerospace industry.

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          The HGB is the American version of the GAAP (Generally Accepted Accounting
Principles) in Germany. It has been regulating the accounting system since 1897. HGB
was amended in 1985 in order to follow the European Harmonization process in financial
accounting. It not often amended because, unlike the US, Germany is under code law.
Because code law is not based on interpretation, accounting standards are very detailed.
However, German accounting leans toward the professional end of the scale rather than
the statutory. (Roberts 310) Professionalism give the company some flexibility in
accounting. Accounting standards are broken down into eight sections:
      1) General rules concerning legal forms
      2) Additional rules for corporations
      3) Additional rules for group accounts
      4) Rules concerning auditing
      5) Rules concerning disclosures
      6) Additional rules for registered cooperative associations
      7) Additional rules for banks
      8) Additional rules for insurance companies

          The federal corporate tax rate in Germany is 25%, but because of local taxes, the
tax rate is closer to 38%. The top marginal personal income tax rate was 48.5% but will
fall to 42% by 2005. Social Security is contributed 50% by employers and employees
and amounts to about 42% of gross wages. Germany has a 16% value added tax that
applies to most sales and services.
          ―In Germany, there is a close link between the annual accounts and the tax
accounts. Small businesses in particular prefer to produce one set of accounts which
satisfy the tax law as well as the accounting rules‖(Roberts 298). Individual companies
are taxed rather that groups of companies in Germany. In 2003, capital gains taxes will
not be levied against major shareholders. Taxable income is based on the net assets at the
beginning of the year against net assets at the end of the year. Profits distributed by
corporations are not as heavily taxed. There is also a trade tax that is based on business
profit and business capital. (Roberts 298-299)
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U.S. German Relations
          At the outset of the 21st century, the basic framework of German foreign policy
has changed fundamentally and continues to change. Germany’s foreign policy is
oriented towards the aims of maintaining freedom, peace and prosperity, promoting
democracy, developing respect for human rights all over the world, fostering sustainable
development in all countries of the southern hemisphere and safeguarding the future of
the global community.
              NATO is one of the organizations that helps to tie the US and Germany together.
―NATO serves as an indispensable bridge to the United States and functionally helps to
counter that country's neo-isolationism by maintaining a visible United States presence in
Europe; and NATO remains the only viable instrument for German and European
defense, given that the EU, WEU, and OSCE are all still untested in the coordination and
implementation of defense policies‖ (bigchalk.com 1995).

    History of Financial Reporting
          In the past, Germany’s industry was dominated by the Mittelstand- private
companies, many of which are effectively family businesses whose capital has been
provided by the banking sector. Consequently, the major developments in German
accounting have been driven by the needs of the creditors, rather than those of the
shareholders. Although it is possible to argue that profitability is most important to the
general user of US financial statements, financial security (balance sheet) has
traditionally been more important to the German user. There is a clear trend in Germany
towards wider share ownership and the attractiveness of a public company.
          Financial accounting and reporting in Germany is now undergoing rapid change.
New legislation and stock market regulations allow German corporations to publish
financial statements complying with International Accounting Standards (IASs) and US
GAAP. The recently established German Accounting Standards Board has also started
issuing new accounting standards that fill a number of gaps. However, a good grounding
in the principles underlying German accounting and reporting is also a prerequisite for
translating German IAS and US GAAP financial statements.
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Standard Setting in Germany
       It is important to distinguish between the Handelsgesetzbuch (HGB—the German
Commercial Code), and the Grundsätze ordnungsmäßiger Buchführung (GoB—German
principles of proper accounting). It is rather misleading to refer to the GoB as "German
GAAP" certainly in formal contexts such as financial statements, because although they
are the nearest thing Germany has to GAAP, they are neither defined as such, nor do they
fulfill the same purpose. Accountants, however, frequently refer to the GoB as "German
       Financial statements of all business entities in Germany are required to be drawn
up in accordance with GAAP (GoB or HGB). Traditionally, German accounting practice
is a result of detailed codification. The main accounting rules are governed by the
Commercial Code (HGB). Special regulations applicable to specific legal forms are
included in the Stock Corporation Law dealing with public companies and the law on
Limited Liability Companies. All other large entities must comply with the regulations
under the Publicity Law.
   In 1998, the German Accounting Standards Committee was set up by the government.
This body was a non-governmental organization and it was given the following tasks:
   1- development of accounting standards for listed companies’ consolidated financial
   2- advising the German Ministry of Justice on changes in accounting standards
   3- liaison with international standard setters and representation at international
       accounting committees.

Since then, they have formed 17 standards.

Differences in standards
       The emphasis of US GAAP is to provide all relevant information to investors in
order to facilitate future investment decisions. A US entity must adhere to certain
requirements set by the SEC. German GAAP and US GAAP are based on different
concepts. German GAAP is oriented towards the protection of creditors and the emphasis
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on the prudence concept. Financial statements are presented on a pro forma basis and
only include those entities directly or indirectly controlled by the reporting entity.

         Under US GAAP, pension obligations are recognized based on the project benefit
obligation using the projected unit credit method. This is also permitted under HGB.
         US GAAP states that when establishing and funding a trust independent of the
company results in corresponding reductions in pension obligations from the balance
sheet. Under German GAAP, pension assets and obligations are recorded gross on the
balance sheet until such obligations are legally settled.

         Inventory is based on manufacturing costs in both German GAAP and US GAAP.
Manufacturing costs under US GAAP are defined as production costs on a full absorption
basis, whereby manufacturing overhead is included together with material and other
direct manufacturing costs. Under German GAAP, certain overhead costs can be
excluded from the valuation of inventory.

         Goodwill is calculated as the difference between the cost of acquisition and the
value of the individual assets of the company less the liabilities at the time of acquisition.
Goodwill can be netted against revenue or capital reserves. Assets and liabilities
acquired – irrespective of their previous balance sheet values and the agreed upon price-
         are valued at the date of takeover taking into account the intended use,
profitability aspects or liquidation values. The valuation should be conservative.
Goodwill can be written off immediately or by at least 25% a year following the year of
acquisition. Alternatively, it can be systematically amortized over its estimated useful
life (15 years). When justified, a longer life can be used for amortization, however it is
hardly ever longer than 40 years. A straight-line method is applied. In August of 2000, a
standard was passed saying that the longest estimated life for goodwill would be 20
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         Under U.S. GAAP, assets and liabilities are recorded at their fair values and any
remaining excess purchase price is recorded as goodwill. Under German GAAP,
goodwill is no longer amortized, but tested for impairment after each year.

Research and Development
         In Germany, in-process research and development is included in goodwill
whereas in the United States it is expensed as it is incurred. Related to normal research
and development expenses, Germany and the US both expense it as it is incurred.

Foreign Exchange Transactions
         Foreign Exchange Transactions are conducted differently depending on whether
the transactions occur in an individual company’s financial statements or in consolidated
financial statements. All German financial statements as of 2001 must be reported in
             In an individual company’s financial statements, foreign exchange transactions
are ―recorded at the rate ruling at the date on which each transaction occurs‖ (88). At the
balance sheet date different transactions occur to properly follow the German principle of
―Imparitätsprinzip.‖ First the translation of foreign cash and bank balances may be done
using the year-end rate, unless a different fixed rate is agreed upon in a contract. Also the
foreign currency monetary assets and liabilities may be retranslated if it will result in a
         In consolidated financial statements there is no method specified on the proper
reporting of foreign exchange transactions. In practice, the financial statements are
translated according to either the ―closing rate/net investment method‖, the ―modified
closing rate method‖, or the ―temporal method‖ (89). German GAAP on foreign
currency translation is based on standards found in US GAAP and IASC GAAP.
Translation depends on the way a foreign operation is financed and the reporting
enterprise. The temporal method is applied if the company is just an extension of the
reporting company’s operation. The net investment method should be applied if the
company has most of its cash, income, expenses, and borrowings in its local currency.
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             German GAAP differs slightly from US GAAP. In German GAAP ―foreign
currency denominated assets and liabilities are recorded at spot rate on the transaction
date, with only unrealized losses reflected in income at the balance sheet date‖ (3). US
GAAP also records at spot rate on the transaction date, but both unrealized gains and
losses are reflected in income.

        If a German company is a parent company, it is required to prepare consolidated
financial statements. The definition of a parent company is a company that has in excess
20% of share capital and exerts control over entity. Even if the company does not have a
participating interest and meets two out of three of either of these conditions it has to
prepare financial statements.
         Gross figures before consolidated adjustments:
                Balance sheet total exceeds 16.5 million Euros
                Sales exceed 33 million Euros
                An average workforce exceeding 250
        Net figures after consolidated adjustments
                Balance sheet total exceeds 13.75 million Euros
                Sales exceed 27.5 million Euros
                An average workforce exceeding 250
        German GAAP consolidated financial statements only include those entities
directly or indirectly controlled by the reporting entity. Most German companies simply
follow US GAAP or IASC GAAP in the preparation of consolidated financial statements.

Segmental disclosure
        Segmental disclosure requires one to break down an enterprise into segments and
report certain information for each of the segments. Two ways that a business can be
segmented are by industry (Line of Business) and by geographic area. Germany follows
IAS 14 for segmental disclosure. IAS defines segments as two types: primary or
secondary. Primary segments are identified using internal operating and management
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                    The following should be disclosed for each primary segment:
                  --revenue (external and inter-segment shown separately);
                  --operating result (before interest and taxes);
                  --carrying amount of segment assets;
                  --carrying amount of segment liabilities;
                  --cost to acquire property, plant, equipment, and intangibles;
                  --depreciation and amortization;
                  --non-cash expenses other than depreciation;
                  --share of profit or loss of equity and joint venture investments;
                  --the basis of inter-segment pricing.
                  The following should be disclosed for each secondary segment:
                  --revenue (external and inter-segment shown separately);
                  --carrying amount of segment assets;
                  --cost to acquire property, plant, equipment, and intangibles;
                  --the basis of inter-segment pricing. (IAS 14)

           The United States follow a much stricter standard on segmental disclosure. More
information is required for all operating segments. The US standards do not differentiate
between primary and secondary segments on the amount of disclosure.
           As can be seen in the following chart taken from Global Accounting and Control
page 159, the amount of disclosure required by Germany is significantly less than the
United States:
     Table 8.5    Segmental Disclosure Requirements
                                  Line of Business                     Geographical
                          Sales       Profits        Assets    Sales       Profits        Assets
Germany                    Yes          No            No        Yes         No             No
European Union             Yes          No            No        Yes         No             No
United States              Yes          Yes           Yes       Yes         Yes            Yes

     Germany’s attitude on disclosure
           Germany does not place as much of an importance on disclosure as the United
States. Unlike the US, Germany focuses on disclosure of information for the benefit of
creditors instead of shareholders. Any company that has listed shares must minimally
―disclose its figures for turnover and profit, before or after tax, for the present and
previous year‖ (10). Other disclosures may be necessary if needed to properly evaluate
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An examination of 15SAP and 16DaimlerChrylser
         Examining the 2001 annual reports of SAP and DaimlerChrylser shows that
Germany requires certain social, employment and environmental disclosures. Both
reports include a section on Human Resources. This section includes benefits workers
receive and how the companies recruit employees. The reports also detail how the
company is working to improve the environment. SAP focuses more on the human
aspect of the volunteer organizations it belongs to, while DaimlerChrylser focuses on
how it is improving its product to be more environmentally friendly.
Both companys’ reports are audited by an outside accounting firm. Arthur Andersen
audited SAP’s 2001 annual report. DaimlerChrylser’s 2001 annual report was audited by
KPMG. The financial reports for both companies are reported in US GAAP.

     Auditors in Germany
         There are two different routes one might take in European countries in order to
meet the educational requirements to perform audits. In one route the person must attain
a college degree, ―complete a course of theoretical instructions,‖ have three years
experience, and pass an examination to test their education (13). The second route
focuses on experience and does not require a college degree or the completion of the
theoretical instruction course. If one has fifteen years experience and passes the
examination, he/she is certified to perform audits. Similar to the US, after passing the
exam an auditor is required to take continuing education classes.

 Status in the IASC
         Hans-Georg Bruns represents Germany as a member of the International
Accounting Standards Board. He was appointed in January 2001 to the position. Before
becoming a member, Hans-Georg Bruns was the former Chief Accounting Officer of
DaimlerChrysler. Germany is also represented in the Standards Advisory Council by
Jochen Pape from PricewaterhouseCoopers. The Trustees appoint all members of the
IASB, the International Financial Reporting Interpretations Committee and the Standards
Advisory Council. Hilmar Kopper represents Germany as a member of the Trustees.
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       Germany has the strongest economy of the European Union. During the 1990s,
the re-combining of East and West Germany into one nation was a difficult process but
the German people rose to the challenge. The nation plays a leadership role in the
European Union. With regard to financial reporting, Germany does not require as much
disclosure as the United States, mainly because creditors rather than shareholders are the
main audience.
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                                    Works Cited

Germany Info. [On-line].
Available http://www.germany-info.org/relaunch/index.html
German Scientists. [On-line].
Available http://www.spartacus.schoolnet.co.uk/GERscientists.htm
CIA–The World Factbook 2002–Germany. [On-line].
Available http://www.odci.gov/cia/publications/factbook/geos/gm.html#Govt
Germany Info. [On-line].
Available http://www.germany-info.org/relaunch/index.html

5 German Foreign Direct Investment [On-line].
Available http://www.foreign-direct-investment.de/index.html?w=gges
 Clare Roberts, Pauline Weetman and Paul Gordan. International Financial Accounting.
2002. Pearson Educated Limited.
Bigchalk [On-line]
Available http://www.bigchalk.com
 German Financial Accounting [On-line]
Available http://www.accurapid.com/journal/13finan.htm ―German Financial Accounting
and Reporting‖
Deloitte and Touche [On-line]
Available http://www.deloitte.com ―European Comparison: UK & Germany‖
  KPMG [On-line]
Available http://www.kpmg.com ―Additional Information to the U.S. GAAP consolidated
financial statements pursuant to HGB Section 292a‖
 Christopher Nobes and Robert Parker. Comparative International Accounting. 2002.
Pearson Educated Limited.
 IASB – International Accounting Standards Board [On-line]
Available http://www.iasc.org.uk
 Gray, Salter, and Radebaugh. Global Accounting and Control, A Managerial Emphasis.
2001. John Wiley and Sons, Inc.
     German Accounting [On-line]
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Available http://gcconline.georgian.edu/business_review/germany.htm ―Business
 SAP Annual Report 2001 [On-line]
Available http://www.sap.com/company/investor/reports/ar_onlin/2001/cover.htm ―SAP
Annual Report 2001‖
 DaimlerChrysler Internet – English [On-line]
Available http://www.daimlerchrysler.com/index_e.htm ―DaimlerChrysler Annual
Report 2001‖