Financial Standards and Reporting Process of Germany and Its Effects on Deutsche Bank

Financial Standards

Reporting standards for financial transactions have been varied with regard to countries and companies across the globe for many years. This fact has made it difficult for transactions to be reported with any great degree of accuracy. This was especially true in Germany where there was no true German GAAP. What the rest of the world has considered the German GAAP, the GoB, was actually comprised of here say and opinion gleaned from many different sources. With the advent of the IASB that the European Union adopted in 2007, Germany has finally decided on a single standard with which to govern financial reporting. Large companies within the country, such as Deutsche Bank, have had to make adjustments to the new standards, but this does not seem to have caused a problem. Since the country has loosely used international standards for many years, the new IASB is not new to German companies. Specifically Deutsche Bank has had to work with new disclosure requirements which especially impact the company because of its large global stance. This report specifically talks about how German standards have changed and how those changes have effected Deutsche Bank.

Financial Standards and Reporting Process of Germany and Its Effects on Deutsche Bank

The world has been trying to organize international financial accounting standards for many years. As with many other international agreements the United States always delays signing an agreement early because of the need to protect substantial interests. As with the Kyoto Accords that looked into international environmental regulations such as climate change, the United States has made sure that the country's best interests are taken into account with the agreement. A single set of financial reporting standards has been a topic that has engaged much of the financial community for almost a decade now because of the global nature of business. The International Accounting Standards Board (IASB) was set up in 2001 and modeled after the very successful Financial Accounting Standards Board (FASB) (Gornik-Tomaszewski & McCarthy, 2003). The standards that countries have followed to this time vary somewhat, but are basically the same. However, those differences can be substantial enough that they cause disputes when the different standards of nations are required in a single transaction. Therefore, it is necessary for accounting executives with different companies to understand how their country's accounting standards differ from those of countries with who they conduct business. This report will contain two different parts. First, since Germany was chosen as the research subject, the accounting standards of Germany will be examined. Secondly, one of the major players in the world banking community, Deutsche Bank, will be examined in relation to what the standards are now and how that company may have to change as the new international standards are developed.

German Accounting Standards

Germany, along with other European nations follows a set of standards that differ from those imposed in the United States. However, because the U.S. accounting model is the standard that is being adopted by the IASB, all countries who accept the standards will eventually have to change to that standard. Of course, many countries that do business with the U.S. have already changed to the standards of the states in order to successfully do business with them. Germany has been very successful financially, and has safeguarded transactions well with the standards that they adopted, but a change to an international standard will allow them to have an even better economy. Unfortunately, even though there has been agreement that all standards should be consolidated, the fact that the U.S. has been holding up the process has caused some ill will between that nation and other who are trying to work out an agreement (Shoaf & Zaldivar, 2005).

The difficulty in financial reporting standards can be summed up by a statement from a report by Robin Bonthrone (2000) about the financial reporting standards of Germany;

"http://www.onionsportsnetwork.com/articles/yankees-ensure-2003-pennant-by-signing-every-playe,32/http://www.onionsportsnetwork.com/articles/yankees-ensure-2003-pennant-by-signing-every-playe,32 / Financial reporting is a language, just like German or English. It is the language that companies use to talk to investors. It is the language that investors use to ascertain value. It is what people use everyday to decide where to invest their hard earned dollars for financial security and future opportunity. These decisions can be hard enough. But try it in a language you don't understand, and it becomes all but impossible. Even worse, misleading."

He goes on to say that there are even more issues when those standards have been translated poorly from original language to report language (Bonthrone, 2000). Another complication is with the amount of transactions that come under the auspices of the reporting standard. In Germany, as with most economically advanced nations, there are different reports, prospectuses, M&A (Merger and Acquisition) transactions, and the reports from subsidiaries (Bonthrone, 2000). All of these communications made between companies from different countries have to be properly translated and then they have to take into account the different accounting standards of the two (or more) countries involved. It is a very complex process and one that is fraught with avenues along which multiple mistakes can be made.

In Germany there are three different sets of accounting standards that are in operation with any one transaction. HGB/GoB standards are translated from the German language as the German Commercial Code and the German Principles of Proper Accounting. These standard are complex just in themselves because there is little standardization between the two. The main reason for that, according to Bonthorne (2000), is that the GoB standards "are not actually defined anywhere!" (exclamation point his.) The GoB bounds are defined by several disparate documents (opinions from the German Industrial Trade Association, and undefined relevant professional literature (Bonthrone, 2000)) among them. This non-standardization of a professional standard makes it difficult for other nations to conduct business with German companies. Besides these German entities the German business community also makes use of the International Accounting Standards (IAS) and the United States Generally Accepted Accounting Principles (USGAAP). This makes for a very tangled group of professional standards that must be waded through if any business is to be conducted between a German firm and one from another nation. Especially the fact that they have very loose personal standards with regard to professional accounting.

The problem with the German standard is that they do not know which standard is the most important (Feige, 1997). Since the GoB is considered the German GAAP, there should be a definite standard that is adhered to and which foreign investors can look to as a measuring stick for the German financial situation. However, Germany has not moved significantly toward a single international standard, or one that has been securely in place such as the United States GAAP. Instead, the German system has taken an opposite tack from establishing its own single standard. Now, the GoB also significantly includes the IAS and the USGAAP as a part of its own accounting standards. This is difficult because the international and American standards differ on many points with the German standards.

According to Bonthrone (2000) there are five specific areas in which the IASB standards and those in Germany differ. The IASB stated objective is to provide "investor information" whereas the German standard is used for "creditor protection." The IASB principle is to use "prudence…for estimating uncertain outcomes" which is not the case with the GoB. There are also significant differences in how the two sets of standards look at revenue recognition, taxation of corporations, and how assets and liabilities are defined (in the case of the GoB, they are not). Also, "there are also significant differences in other areas, such as goodwill accounting, recognition of development costs, currency translation/recognition, accounting for long-term construction contracts and accounting for pensions" (Bonthrone, 2000). German accountants have also been known to be fairly loose with their interpretation of the IASB accouinting standards. This process has become known as "IAS lite financial statements, where the preparers adopt a "pick 'n mix" approach to which IASs they adopt" (Bonthrone, 2000). This practice is still sometimes implemented even though most preparers have agreed to either use the standards or not. This type of approach has been one of the reasons that companies have had a difficult time working with some German firms.

Like many other countries, when German preparers attempt to use the U.S. GAAP there are problems. The main reason is that the U.S. standards are complex and numerous (McArthur, 2006). One of the issues here is the difference in the two cultures. Since German workers (especially engineers) have long been noted as very detail oriented, there accounting system is also formulated in this way. Even though the standard is picked from many different standards, the German accounting practices have still compared favorably to those in the U.S. where, as with many other standards practices, the code is too large and unwieldy. It is difficult for other nation's companies to understand the U.S. GAAP because of the large cultural gap (McArthur, 2006). The problem is that other countries must deal with U.S. companies, so the preparers have to have some understanding of the U.S. GAAP, and make decisions based on it also. Therefore, German companies try to conform, as best they can, with the large U.S. GAAP as well as their own and the IASB standards. There is no wonder that it seems piecemeal to the rest of the world.

Impact on Deutsche Bank

Companies in Germany have gotten used to a piecemeal way of doing financial accounting. Though the accountants are exacting, there still has been no single accepted national standard that they have had to follow. With all countries likely to adopt the IASB standards by 2014, it is imperative that they learn to follow the single standard instead of using the formula that they have in the past. As stated previously, there have been many differences between the international and German standards historically, so German accountants have to understand the new IASB and conform to it.

This means that large companies, such as Deutsche Bank, have to understand how these reporting standards are going to impact their businesses specifically. Deutsche Bank is one of the leading investment banks in the world with significant investment in Europe and growing interests in North America and Asia (Deutsche Bank, 2011). Because the company does a majority of its business with companies outside of Germany, incorporating international standards is an important piece of the company's business.

From their 2010 financial statement Deutsche Bank lists its accounting standards as;

"Except where we have indicated otherwise, we have prepared all of the consolidated financial information in this document in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and as endorsed by the European Union ("EU"). Until December 31, 2006, we prepared our consolidated financial information in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). All 2006 data included in this report, however, have been prepared in accordance with IFRS as issued by the IASB. Our group division and segment data come from our management reporting systems and are not in all cases prepared in accordance with IFRS" (Deutsche Bank, 2011).

This means that since the country has agreed to the IASB standards, that Deutsche Bank is trying to comply with that as well. Since the company has done a significant business in the United States for many years they have also complied with the U.S. GAAP standards exclusively at times. Because of this some of the reporting data (that before 2006) conforms to the U.S. GAAP standards. However, some subsidiaries are still not completely compliant with the IASB or U.S. GAAP standards, so that information cannot be relied upon under either of those umbrellas. Also, the reason that Deutsche Bank is complying with the IASB is that the European Union as a whole decided to adopt the standards. Unfortunately from this information, it sounds like German companies are still applying different accounting rules because there are different standards still mentioned. Even thought they no longer adhere to the U.S. GAAP, the company is still not completely under the IASP banner.

Deutsche bank has complied with the international standards almost exclusively since 2007 (Deutsche Bank, 2011), so there is little impact that will occur after the rest of the world adopts the standards. The only issue that may arise is making sure that all parts of the business are in line with the IASB standards. Some researchers have suggested that large companies like Deutsche Bank could put pressure on noncompliant partners to adopt the standards (Schipper, 2010). But the problem for Deutsche Bank seems to be that not all of its components are reporting using the IASB standards. The pressure in that instance is going to have to come from the member countries to get businesses to use the reporting standards.