What are the financial reporting options for German-owned entities looking to establish a subsidiary in the United States (U.S.)?
Unlike many other countries, the U.S. does not have a statutory reporting requirement for privately owned organizations. While U.S. Generally Accepted Accounting Principles (GAAP) is the most common accounting methodology for commercial entities in the country, it is not required. Similarly, the Internal Revenue Service (IRS), the Federal taxing authority in the U.S., does not mandate a book accounting methodology. Regardless of which book accounting methodology is elected, entities are converted from their book accounting methodology to the income tax basis of accounting as part of the tax provision and return process.
This provides flexibility for foreign-owned companies to choose the accounting methodology that best meets their needs. Many German-owned subsidiaries in the U.S. will make the choice between U.S. GAAP or German GAAP.
U.S. GAAP and German GAAP both provide a high level of reporting with financial and regulatory transparency. The two have similarities, but also significant differences. Both standards reflect their cultural, financial, and regulatory environments. The high quality of both standards is tailored to the needs of their large economies, which together account for 30% of the global Gross Domestic Product, according to the World Bank.
Accounting Standards Compared: U.S. GAAP vs German GAAP
German GAAP is grounded in the Handelsgesetzbuch (HGB) commercial code framework regulated by the German Federal Ministry of Justice. The German Accounting Standards Board (GASB) then develops standards for non-listed entities within this framework and incorporates select global best practices. The framework has more focus on the needs of creditors and regulatory authorities with an emphasis on conservatism and the prudence principle.
U.S. GAAP is a rules-based approach, shaped by the nature of the American economy. The framework is driven by the Financial Accounting Standards Board (FASB), an independent, private-sector, non-profit organization that establishes financial accounting and reporting standards for public, private, and not-for-profit organizations. U.S. GAAP is generally more investor-focused on transparency and comparability of the financial statements between reporting entities.
The differences are further complicated as U.S. GAAP has undergone substantial convergence projects with International Financial Reporting Standards (IFRS) in the past decade, including Revenue Recognition, Leases, Current Expected Credit Losses and Inventory Measurement. These areas, along with the measurement of long-term assets, contingent liabilities, hedge accounting, and pension accounting, may have a major impact on your organization, depending on the accounting methodology selected.
U.S. GAAP and German GAAP: Which Is Right for Your Business?
When making an accounting methodology election, Organizations should consider the ultimate financial reporting needs when making an accounting methodology election, including those of management, investors and third parties. The U.S. does not require a particular chart of accounts. Given this flexibility, many organizations will choose a chart of accounts that corresponds to the parent entity, regardless of the methodology selected.
Foreign entities that follow IFRS at their parent organization would generally elect to follow IFRS at each subsidiary. The IFRS elections made at the parent level should be followed by each subsidiary, as permitted by their local jurisdictions. IFRS provides more flexibility with accounting elections than German GAAP but can often be more complex. Our Resource Page contains a number of articles on IFRS accounting and current matters.
How Can Schneider Downs Help?
Schneider Downs provides a full range of services to organizations following U.S. and German GAAP including assurance, tax, and advisory services. For more information concerning international business matters and their impact to your organization, please contact us or learn more at www.schneiderdowns.com/international-services.
About Schneider Downs International Services
The Schneider Downs International Services industry group is a dedicated team of professionals specializing in serving international companies. Schneider Downs helps clients take full advantage of all their international opportunities and can reach you and your business, no matter where you’re located around the globe.
To learn more, visit our International Services Industry Group page.
