Differences between HGB (German GAAP) and IFRS

To understand the differences between German GAAP (HGB - Handelsgesetzbuch) and IFRS (International Financial Reporting Standards), it is necessary to look at the key features of both accounting systems. The two systems take different approaches and apply different rules to financial reporting. Here is a detailed comparison:

1. Objective and purpose

• German GAAP (HGB): Used to govern the financial reporting of companies in Germany; it prioritises creditor protection, limits on profit distribution and the link with the tax base.

• IFRS: International financial reporting standards that aim to create a single language for financial reporting worldwide. They provide decision-useful information and international comparability for investors, analysts and other stakeholders.

2. Scope of application

• HGB: The individual (statutory) financial statements of companies in Germany, whether listed or not, are prepared under HGB. The consolidated financial statements of unlisted groups are also generally prepared under HGB.

• IFRS: In the EU, parent companies whose securities are traded on a regulated market must prepare their consolidated financial statements under IFRS. Other companies may apply IFRS voluntarily in their consolidated statements, but the HGB requirement remains for individual statements.

3. Basic approach:

• HGB: The accounting approach is more conservative. The prudence principle comes first: unrealised profits are not recognised, whereas expected losses are recognised immediately (imparity principle).

• IFRS: Emphasises a faithful representation of the financial position. It gives less weight to prudence than HGB; as a result, some assets may be measured at fair value and revenue may be recognised earlier.

4. Measurement of assets and liabilities

• HGB: Assets are measured at historical cost, and cost is the upper limit. Impairments are reflected conservatively under strict rules.

• IFRS: In some cases assets may be revalued or measured at fair value (for example, property, plant and equipment, investment property and certain financial assets). Impairment is determined under IAS 36 through a recoverable amount test.

5. Revenue recognition

• HGB: Revenue is recognised under the realisation principle, generally on delivery of the goods and transfer of risks. For long-term construction contracts, revenue is as a rule recognised on completion.

• IFRS: IFRS 15 regulates revenue recognition in detail through a five-step model. Companies recognise revenue as they satisfy their performance obligations, so revenue on long-term contracts may be recognised over time.

6. Profit calculation and taxation

• HGB: The balance sheet prepared under HGB is the starting point for the tax balance sheet (authoritativeness principle). There is therefore a strong link between commercial profit and the tax base.

• IFRS: IFRS financial statements are not used to determine the tax base. Tax effects are reported under IAS 12 as current and deferred tax.

7. Consolidation

• HGB: Consolidation rules are set out in the HGB (sections 290 et seq.). Parent companies exceeding certain size thresholds must prepare consolidated financial statements.

• IFRS: Consolidation is based on detailed standards, chiefly IFRS 10, and rests on the concept of control.

8. Investor information and transparency

• HGB: Reporting is geared more to local needs and creditor protection; note disclosures are more limited than under IFRS.

• IFRS: Provides greater transparency and comparability for global investors and therefore offers more comprehensive and detailed information to international investors.

9. Presentation of financial statements

• HGB: Statutory formats are used for the balance sheet and the income statement (sections 266 and 275). A cash flow statement and a statement of changes in equity are mandatory only in consolidated statements and for capital-market-oriented companies.

• IFRS: Presentation is more flexible under IAS 1, but a cash flow statement, a statement of changes in equity and extensive notes are mandatory for all entities.

Conclusion

• HGB offers German companies a more conservative, tax-linked approach, while IFRS is a global accounting system that provides international comparability and transparency.

• Which system applies depends largely on legal requirements; where there is a choice, the company's objectives, investor base and the markets in which it operates are decisive.

Let us now explain the differences between HGB (German GAAP) and IFRS by comparing specific accounting items (inventories, property, plant and equipment, right-of-use assets, etc.). Such comparisons help us better understand how the two accounting systems take different approaches.

1. Inventories

• HGB (German GAAP):

  • Measurement: Inventories are measured at cost, which includes the purchase or production cost.

  • Price declines: The strict lower-of-cost-or-market principle applies to current assets; when the exchange or market price falls below cost, a write-down is mandatory.

  • FIFO and LIFO: HGB (section 256) permits the use of FIFO (first in, first out) and LIFO (last in, first out) for similar inventories.

• IFRS:

  • Measurement: Under IAS 2, inventories are measured at the lower of cost and net realisable value.

  • Price declines: A write-down to net realisable value is recognised in profit or loss in the period it occurs, and is reversed when the circumstances no longer exist.

  • FIFO and LIFO: IFRS permits the FIFO and weighted average cost formulas and prohibits LIFO.

Differences:

• LIFO may be used under HGB but is prohibited under IFRS.

• Under HGB, write-downs are generally based on the purchase (market) price, whereas IFRS uses net realisable value, which is based on the selling side.

2. Property, plant and equipment

• HGB (German GAAP):

  • Measurement: Property, plant and equipment is measured at historical cost, which includes the purchase or production cost of the assets.

  • Depreciation: Depreciation is charged over the asset's useful life; in practice, the tax depreciation tables (AfA) are often used.

  • Revaluation: Revaluation of property, plant and equipment is not permitted.

• IFRS:

  • Measurement: Property, plant and equipment may be measured using the cost model or the revaluation model. Under the revaluation model, assets are updated to their fair value.

  • Depreciation: Depreciation is based on the asset's useful life; methods reflecting the pattern of use (such as straight-line or the units-of-production method) may be applied. Significant components are depreciated separately.

  • Revaluation: IFRS permits revaluation by class of assets (for example, land and buildings).

Differences:

• IFRS permits the revaluation of property, plant and equipment, whereas HGB uses only the historical cost approach.

• In HGB practice, useful lives are mostly based on tax tables; under IFRS, the useful life is the entity's own estimate.

3. Right-of-use assets

• HGB (German GAAP):

  • Under HGB, leases are largely classified according to the lease rules in tax legislation; most leases remain off balance sheet and lease payments are expensed.

  • Right-of-use assets and lease liabilities are generally not recognised.

• IFRS (IFRS 16):

  • Leases: Under IFRS 16, the lessee recognises a right-of-use asset and a lease liability on the balance sheet, except for short-term and low-value leases.

  • Measurement: The lease liability is measured at the present value of the lease payments at the commencement date; the right-of-use asset is determined on the basis of this amount.

  • Depreciation and liability: Right-of-use assets are depreciated over the lease term. The lease liability decreases over time as interest is added and payments are deducted.

Differences:

• HGB treats most leases as rental expense, whereas IFRS recognises right-of-use assets and lease liabilities on the balance sheet.

4. Financial assets and investments

• HGB (German GAAP):

  • Measurement: Financial assets are measured at historical cost, with cost as the upper limit.

  • Carrying amount: Long-term investments are carried at cost. Market value is considered only in the event of impairment.

  • Write-downs: For financial investments held as fixed assets, impairments expected to be permanent must be recognised.

• IFRS:

  • Measurement: Under IFRS 9, financial assets are classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss, depending on the entity's business model and the characteristics of the contractual cash flows.

  • Allowances: For debt instruments measured at amortised cost or at fair value through other comprehensive income, an impairment allowance is recognised under the expected credit loss model.

Differences:

• Under IFRS, financial assets may be reported largely at fair value, and impairment is based on a forward-looking expected credit loss model. Under HGB, financial assets are measured more conservatively, on a cost basis.

5. Provisions and contingent liabilities

• HGB (German GAAP):

  • Provisions: Under HGB (section 249), provisions must be recognised for uncertain liabilities and for onerous contracts; owing to the prudence principle, provisions are generally recognised more broadly. Provisions may also be recognised for certain internal obligations (for example, deferred maintenance). Provisions are measured taking into account expected future price and cost increases.

  • Contingent liabilities: Unrecognised obligations such as sureties and guarantees are shown below the balance sheet or in the notes.

• IFRS:

  • Provisions: Under IAS 37, a provision is recognised only when there is a present obligation arising from a past event, an outflow of resources is probable (more than 50% likely) and the amount can be reliably estimated. Provisions cannot be recognised for internal obligations.

  • Contingent liabilities: Contingent liabilities are not recognised; they are disclosed in the notes unless the possibility of an outflow is remote.

Differences:

• Owing to the prudence principle, HGB takes a broader approach to recognising provisions; IFRS subjects the recognition of provisions to strict criteria and only discloses contingent liabilities in the notes.

Overall conclusion

• HGB generally takes a more conservative approach and measures certain accounting items at historical cost.

• IFRS provides a more transparent and detailed structure for financial reporting. It offers more flexibility and international comparability in areas such as revaluation, revenue recognition and asset measurement.

While both systems set out specific rules and requirements, IFRS generally aims for a more global approach and transparency, whereas HGB is based on local requirements, creditor protection and tax-linked accounting.