Businesses in Germany must fulfill increasingly strict requirements regarding clear and transparent financial reporting. Differing business models, international activities, and growing documentation requirements are making the process increasingly complex. Businesses need to understand the difference between the German Commercial Code (HGB) and the International Financial Reporting Standards (IFRS) so they can correctly assess the reporting requirements and ensure their financial reporting is reliable.

In this article, you’ll learn what role the HGB and IFRS play in financial reporting in Germany and which standards to apply when. You’ll get an overview of the key differences regarding measurement, revenue recognition, accruals and deferrals, and provisions. You’ll also learn how businesses can use digital solutions to simplify financial reporting processes.

Key takeaways

• Most businesses in Germany conduct financial reporting in accordance with the HGB.
  
• The IFRS are predominantly aimed at businesses in the capital markets industries and are important for preparing financial reports that facilitate international comparisons.
  
• The key differences between the HGB and IFRS relate to the measurement of assets, revenue recognition, and provisions.
  
• In Germany, standalone financial statements typically fall under the HGB, while certain consolidated financial statements must adhere to the IFRS.
  

Why do most German businesses compile annual financial statements in accordance with the HGB?

For most businesses in Germany, the relevant legal framework for financial reporting is the German Commercial Code (HGB). The HGB governs which businesses are required to maintain financial accounts and how they must prepare annual financial statements. The HGB also sets out the principles for measuring and accounting for assets, liabilities, income, and expenses.

Regulations on balance sheets and annual financial statements

The provisions on financial accounting are set out in Book 3 of the HGB, which defines the sections that must be included in an annual financial statement and the requirements businesses must observe when preparing balance sheets. Depending on the size of the business and its legal formation, an annual financial statement must include, at minimum, a balance sheet and profit and loss (P&L) statement. Corporations are typically required to include an additional section containing notes to the annual financial statement. Medium-sized and large corporations must also prepare a management report.

Statutory obligation to prepare a balance sheet under the HGB

For the vast majority of German businesses—in particular sole proprietorships, partnerships, and most corporations—financial reporting is a legal obligation under the HGB. The purpose of an HGB annual financial statement is to present an accurate, standardized, and legally compliant picture of a business’s assets, revenue, and financial position. Annual statements provide shareholders, credit institutes, business partners, and other stakeholders with reliable information about a business.

When are the IFRS applicable in addition to the HGB, and why?

The purpose of the International Financial Reporting Standards (IFRS) is to enable businesses in different countries to prepare financial reports that allow for comparison. The standards are developed by the International Accounting Standards Board (IASB) and contain provisions for businesses on how to record, measure, and present their transactions in standalone and consolidated financial statements.

While the HGB is predominantly concerned with protecting creditors, the approach adopted in the IFRS focuses more on capital markets. The aim of the IFRS is to provide information on the financial position of a business that investors and other capital market actors can use to inform their decisions.

Scope of application of the IFRS

For most businesses in Germany, the HGB remains the primary regulation governing their standalone financial statements. The IFRS are mostly relevant for businesses in capital markets industries. Businesses whose securities are traded on a regulated market within the EU, for example, must prepare their consolidated financial statements according to the IFRS. However, most small and medium-sized enterprises (SMEs) in Germany are not required to apply the IFRS.

The primary purpose of the IFRS is to facilitate annual financial statements that can be compared across jurisdictions. Businesses that are active in different countries or that raise capital via international financial markets require unified accounting standards. IFRS statements make it easier for investors to judge the financial positions of different businesses regardless of domestic legal systems.

Businesses in Germany that are, in principle, not required to prepare financial statements according to the IFRS can voluntarily adopt these standards in their reporting. This option could make sense for businesses that must present financial information according to unified international standards or for those looking to improve the comparability of their reports with those of other businesses. IFRS reporting can also improve communication with international investors, business partners, and other stakeholder groups.

Applying the IFRS alongside the HGB

For many German businesses, the IFRS supplement the HGB rather than replacing it. Although commercial standalone financial statements can be prepared according to the HGB, certain groups of businesses might be required to prepare an additional consolidated financial statement according to the IFRS.

The HGB and IFRS therefore serve different functions: while the HGB is the legal standard for the majority of German businesses, the IFRS are mostly relevant for businesses in which international comparability and capital market requirements play a greater role.

What are the differences between the conservatism principle under the HGB and the performance principle under the IFRS?

A key difference between the HGB and IFRS lies in how they measure assets and profits. While the HGB follows the conservatism principle, the IFRS are more concerned with presenting as true and fair a picture of an entity’s financial position as possible. Consequently, financial statements might produce different results depending on whether they are prepared according to the HGB or IFRS.

Conservatism principle under the HGB

According to Section 252, Paragraph 1, Number 4 of the HGB, profits are to be taken into account only once they have been realized. Foreseeable risks and losses, on the other hand, must be taken into account once they become known. This approach is about protecting creditors and aims to prevent businesses from presenting their assets and revenue as more valuable than they actually are.

Performance approach under the IFRS

The IFRS approach focuses more on financial performance and providing information on the actual financial position of an entity, which stakeholders can use to make decisions. This means certain assets and liabilities are measured at their current market value more frequently under the IFRS than under the HGB. As a result, changes in a business’s financial position can be reflected in the balance sheet and P&L statement sooner.

What are the differences between the HGB and IFRS in regard to recognizing revenue?

One of the most noticeable differences between the HGB and IFRS is their definition of when businesses can recognize revenue on their balance sheet and P&L statement. Revenue recognition is particularly important for growing businesses because it influences when revenue—and therefore profit—can be reported.

Recognizing revenue under the HGB

The HGB typically follows the realization principle. Revenue can be recognized only once the performance has been rendered and the financial result realized. For a sale of goods, this is usually the time of supply.

Recognizing revenue under the IFRS

The IFRS approach to revenue recognition focuses more on performance. According to IFRS 15 Revenue from Contracts with Customers, revenue is recognized when an entity has satisfied its performance obligation to a customer and that customer has control of the promised good or service. Accordingly, what matters is not when payment is made, but when the performance is rendered by transferring a promised good or service to the customer.

Implications for businesses

The differences in the regulations might mean a business comes to different results and different revenue figures for the same transaction, depending on whether that business reports the transaction according to the HGB or IFRS. This is a particular concern for businesses with complex or long-term customer contracts in which performances are rendered over an extended time, such as businesses in the software industry, engineering sector, or other project-based industries.

What are the differences between the HGB and IFRS in regard to accruals, deferrals, and provisions?

The HGB and IFRS also differ regarding allocating income and expenses to the correct period and accounting for contingent liabilities. These differences become particularly apparent with accruals, deferrals, and provisions and might affect the amount of annual net profit and presentation of a business’s assets and financial position.

Accruals and deferrals under the HGB and IFRS

According to Section 250 of the HGB, the purpose of accruals and deferrals is to allocate expenditure to the financial year in which the corresponding income or expense occurs. For example, if rent or insurance is paid for on account, then these costs are to be shown as prepaid expenses, subject to certain requirements. Accordingly, payments received on account that relate to performances in future financial years are accounted for as deferred income.

The IFRS, on the other hand, do not recognize accruals and deferrals as separate line items. Instead, prepaid expenses and deferred income are captured via assets or liabilities and via the general principle of adopting the accrual basis of accounting. Therefore, although the two approaches differ in the presentation of these items in the financial statement, they essentially follow the same goal of allocating income and expenses to the correct period.

Provisions under the HGB and IFRS

The HGB and IFRS also take different approaches to provisions. According to Section 249 of the HGB, provisions are to be formed for contingent liabilities and anticipated losses on pending transactions. The conservatism principle ensures risks are taken into account when they become identifiable to avoid an overly optimistic presentation of a business’s assets and revenue.

According to the IFRS, provisions are recognized only if an entity has a current obligation from a previous event, if an outflow of cash or other financial resources is likely, and if the amount of the obligation can be rationally estimated. The criteria for recognizing a provision are somewhat stricter under the IFRS than under the HGB.

What financial reporting standard applies to standalone and consolidated financial statements in Germany?

Which financial reporting standard a business in Germany must apply depends on whether the business prepares standalone or consolidated financial statements and whether it is active in a capital market industry. Although most businesses fall under the regulations of the HGB, certain groups of businesses might be required to apply the IFRS in addition or exclusively.

Annual financial statements under the HGB

In principle, annual financial statements prepared by German businesses are subject to the provisions of the HGB. The annual financial statement forms the basis for a business’s obligations under commercial law and is used to calculate things such as dividends and taxable profits.

Businesses that voluntarily prepare a standalone financial statement according to the IFRS must usually still prepare an annual financial statement according to the HGB if they are subject to the corresponding statutory regulations.

Consolidated financial statements under the IFRS

Parent companies in capital market industries within the EU are subject to special regulations. According to the IAS Regulation (Regulation [EC] No 1606/2002), these companies must prepare their consolidated financial statements according to the IFRS if their securities are admitted to trading on a regulated market. Groups of companies that are not active in capital market industries can, in principle, still prepare their consolidated financial statements according to the HGB.

How Stripe Revenue Recognition can support your financial reporting

An increase in the number of transactions, the complexity of contracts, and the application of different financial reporting standards means increased requirements for compliant reporting. Recognizing revenue in the correct period according to the HGB or IFRS can be a particularly arduous task. Stripe Revenue Recognition helps businesses automate this process and streamline their financial reporting.

Revenue Recognition automatically recognizes revenue according to the underlying performance periods. It supports the requirements of IFRS 15 and the US ASC 606 standard. This helps you allocate revenue to the correct period clearly and consistently—which is particularly beneficial for businesses with subscriptions, advance payments, or other recurring revenue models.

Revenue Recognition also makes it easier to prepare monthly and annual financial statements by preparing revenue reports automatically and compiling all the relevant data in a central location. The Stripe Dashboard allows businesses to view their transactions and integrate data from other sources as necessary. Individual revenue recognition rules can be adapted to specific accounting processes to ensure reports fulfill internal company requirements.

FAQs about the differences between the HGB and IFRS