German and the United Kingdom Accounting Standards - Essay Example

The German and UK accounting standards have remained different for a long period of time, this can be attributed to the prevailing legal environmentin the two countries. In the united kingdom, accounting standards have generally been guided by the common law and case laws while in Germany the standards are guided by the codified laws with strict legal provisions that have been developed over time. In addition, the accounting standards may have also been influenced by the business ownership structures in the two countries; while in the united kingdom business was usually owned by individuals through shareholding, in Germany businesses were mainly owned by families whose capital had been providing by financial institutions. These differences in ownership structures have been led to the development of accounting standards that are geared towards shareholders in Britain and towards creditors in Germany. This paper will look at some why the accounting standards are different in Germany and in the United kingdom, in addition, it will also discuss the reasons why the the 4th directive had minimal effects on German’s accounting standards and why the 7th directive had more impact. One of the differences between German and UK accounting standards is the format of the financial statements. While in the two countries it is mandatory for companies to prepare a balance sheet and profit and loss account, in Germany, these are supposed to be accompanied by a note to the accounts, which explain the details in those accounts. In preparing a balance sheet, the UK accounting standards have allowed for two formats; one is the vertical format where current assets are deducted from current liabilities to show net current assets, the other format is the two sided format where liabilities and assets are placed on opposite sides with the easily liquefiable at the end. According to German standards, balance sheets can only be prepared using the two-sided format with assets being divided into current and fixed assets. In preparation for profit and loss accounts, United Kingdom allows for four formats two of which are vertical and two of which are horizontal. In the vertical formats, one formats puts expenditure as a cost of sales, distribution or administrative cost therefore, giving the gross profits while the other vertical formats gives a more detailed view of expenditure. On the side of the horizontal formats, expenses are put on one side and income on the other side with one of the format giving more details about the expenses. According to the German standards, only the vertical format is permitted which can detail expenditure in terms of the function to produce gross profit or the types of expenditure. According to both UK and German standards, additional information was required to be presented although its purpose was different. The UK standards require companies to present a statement of total recognised losses and gains which includes profit or loss before dividends, adjustments to the value of assets, differences in net investments in overseas companies as a result of fluctuations in exchange rates. In Germany, such requirements have never existed. In the United Kingdom, cash flow statement is required for all businesses except those businesses that can be taken as small companies, pension funds, building societies and life assurance companies. According to German standards, cash flow statements are not required to be included in the financial statements of businesses. German accounting standards have required companies to prepare a management report which describes the activities that the business is involved in and how it is fairing. In addition it should also describe the business factually including the branches that it has if any and important events that took part during the financial year. On the other hand, the UK accounting standards have required the preparation of director’s report, which includes the activities that the company has been involved in the previous financial year, future developments that the company is likely to undertake and the dividends that shareholder are likely to receive. Other differences in the accounting standards in the two countries are based on the accounting policies that the two countries have been using before 1980, the differences in these policies are discussed below. One of the differences in the policies is the definition of current assets; in the united kingdom standards, current assets are defined as those assets that a company does not intend to use for a long duration. However, the German standards have never defined what current assets are therefore, in preparing financial statements, individuals have to use the definition of fixed assets, the negation of which they take to be current assets. Calculation of the goodwill is another area that the accounting standards have differed; in United Kingdom, goodwill is calculated as the difference between the cost of the business premises acquired and the net value of the assets acquired during the period that the business was in operation. In Germany, goodwill is calculated as the difference between the value of the business at the time of acquisition and the value of individual assets that the company acquired less the value of liabilities at the time of acquisition. The united kingdom accounting standards have allowed internally generated assets that are intangible to be capitalised (made a capital good) where their market value can be determined, however, the German standards do not allow any intangible internally generated assets to be made capital goods. The united kingdom values stocks at the lowest value; either the purchase value or the production value and the net realisable value while in the German standards, stocks are valued at the lowest standards and either at the net realisable value, market value, replacement value or any other value that is allowed by tax regulations in the country. According to United Kingdom standards, capital instruments have always been classified as a debt as long as there is an obligation to transfer economic benefits to another party while on the other hand, the German accounting standards does not have a provision on how to treat capital instruments or any other complicated financial instruments. Read More