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German Financial Accounting and ReportingFAQs and Fallaciesby Robin Bonthrone | ||||||||||||||||||||||||||||||||||
 he objective of this article is to summarize some of the topics presented and discussed at both the 1999 ATA Conference in St. Louis ("Mind the GAAP—Translating German Financial Statements") and the DTT Seminar "Mehrsprachige Terminologie der Rechnungslegung im Vergleich," held in Cologne in January 2000, supplemented by a set of FAQs (frequently asked questions) on issues of translating German financial and accounting that have regularly come my way. It rounds off with a discussion of future developments in this field.
"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." To which I would add: the situation is further compounded if the financial statements have been poorly translated from a foreign language, turning potentially useful information into dangerously inaccurate or misleading information. Investors and other decision-makers deserve the best possible translations of financial information, including financial statements, and it is the responsibility of the translators to make sure that their knowledge of the subject areas and specialist terminology involved is comprehensive and up-to-date. There is simply no excuse for a poor translation. Fighting words, or so I'm told, and far, far easier said than done. That's certainly true, because if it were not the case, all the time and effort I have invested in researching the issues involved, and turning myself into something of an expert in comparative and contrastive accounting and reporting concepts and terminology, would have been wasted. Nor would there be such great demand from my colleagues for me to share, at least in part, the information and findings I have gathered. Firstly, how large is the market for German-to-English financial reporting standards? Broken down into the components I can identify, there are full-blown annual and interim reports, mostly (but not exclusively) of listed companies. Then there are securities offering prospectuses (which may contain six or even more separate sets of financial statements), for example for IPOs on the Neuer Markt—Frankfurt's tech market, where publication in English is mandatory—the SMAX small-cap market, as well as fixed income issues (bonds etc.). The merger between the Frankfurt and London stock exchanges is unlikely to change this situation—in fact, it may even increase the volume of translation requirements, albeit with a much higher proportion of English-to-German. The growing volume of M&A transactions (mergers and acquisitions) involving German companies, coupled with the financial due diligence required for these and other transactions, is another factor driving up the number of translations. Finally, there are German subsidiaries of foreign groups; these often do not prepare a separate annual report, but do have to report their financial statements to group headquarters, mostly in English. If you then add in the requirements from the Austrian and Swiss markets (although the GAAP used here is, of course, different), I estimate that the total volume of individual financial statements and notes (single-entity, consolidated, pro forma, interim) requiring translation from German is probably in excess of 5,000 a year. Despite this strong demand, however, translators—and interpreters too, of course, but for the sake of convenience I'll use the terms translators and translation here to cover both professions (no offense intended)—faced with translating German financial reporting into English, or English financial reporting into German, can certainly be forgiven for being confused, frustrated and unsure of how they should approach this task. Why should this be the case, given that the market for this translation work is actually quite substantial? The first response is that accounting and reporting are by their very nature difficult and complex subjects. Accountants study for several years, and then need a further few years of supervised work before they can (or at least should) be let loose onto the clients on their own. Where we as translators are concerned, this situation is further compounded by the fact that (for Germany at least) three quite different sets of accounting standards are involved: HGB/GoB, IASs (International Accounting Standard) and US GAAP (United States Generally Accepted Accounting Principles). This triples at a stroke the in-depth knowledge of accounting that the translator needs, and it's worth pointing out from the outset that there are very few professional accountants who have this sort of knowledge. This hardly makes the translator's job any easier and means that a translator wanting to achieve expert-level status in this field is, in quite a number of ways, going to have to know more about German and international accounting standards than most accounting practitioners. Let's now take a quick look at these various accounting standards, and how they fit—or don't fit—together. HGB/GoB It is important to distinguish between the Handelsgesetzbuch (HGB—the German Commercial Code), and the Grundsätze ordnungsmäßiger Buchführung (GoB—German principles of proper accounting). It is rather misleading to refer to the GoB as "German GAAP," certainly in formal contexts such as financial statements/notes, because although they are the nearest thing Germany has to GAAP, they are neither defined as such, nor do they fulfill the same purpose. Accountants, however, frequently refer to "German GAAP," in the same way that they refer to "French GAAP," "Thai GAAP" or "Kazakh GAAP": it's simply a shorthand for them to categorize national accounting standards. Section 243 (1) of the HGB sets out that financial statements must be prepared in accordance with the GoB ("Der Jahresabschluß ist nach den Grundsätzen ordnungsmäßiger Buchführung aufzustellen"). The problem is that these GoB are not actually defined anywhere! Born (Rechnungslegung International—Konzernabschlüsse nach IAS, US-GAAP, HGB und EG-Richtlinien, 2. Auflage; Schäffer-Poeschel 1999) refers to them as ein unbestimmter Rechtsbegriff. According to the Wirtschaftsprüfer-Handbuch 1996, the following may be considered part of the GoB:
I think that even outsiders will see that this is a potentially crazy, almost schizophrenic situation, where "German GAAP" may actually include IASs and US GAAP, although these two sets of accounting standards have no relation whatsoever to German GAAP. To give an analogy: it's akin to suggesting that the German DIN standards automatically include all SAE standards, even though the latter are published only in English (the elements of US GAAP haven't yet been translated into German, except for internal convenience purposes) and often have no relevance to German manufacturers. My experience is that this is confusing enough for preparers and auditors of financial statements—for translators, it's a potential nightmare. Section 292a of the HGB The Kapitalaufnahmeerleichterungsgesetz (KapAEG = Capital Raising Facilitation Act), which came into force in April 1998, inserted a new section 292a into the HGB. Section 292a allows listed group parents to prepare befreiende Konzernabschlüsse (exempting consolidated financial statements). Befreiende Konzernabschlüsse are consolidated financial statements which are prepared in accordance with international accounting standards which comply with the EC 7th Directive (and indirectly with the 4th Directive). Because the EC 7th Directive is loosely worded and contains many options, it is largely compatible with both the IASs and US GAAP. This means that listed German corporations can now use IASs or US GAAP for consolidated financial statements (but not for single-entity financial statements). The new section 292a HGB expires on December 31, 2004, as it was assumed at the time that new European accounting legislation would have been implemented by that date. In addition to those companies required (under the terms of private contracts) by stock exchange rules and regulations to report their consolidated financial statements using either IASs or US GAAP, large numbers of other listed German companies have now gone over to adopting IASs or US GAAP for their group reporting. This is on top of those German companies that have prepared US GAAP financial statements or reconciliations to US GAAP for some time now because their securities (e.g. ADRs, equities or fixed-income securities) are listed on US stock exchanges. There is also an increasing number of foreign companies (not just from western Europe, but also e.g. Israel) that are now listed on German stock exchanges. Most of these companies prepare their consolidated financial statements (translated into German) in accordance with US GAAP. IASs and Germany The International Accounting Standards Committee (IASC), headquartered in London, was formed in 1973. At present, there are just over 150 member bodies in the IASC (including associates and affiliates) in 112 countries. The IASC also works closely with national standards setters (e.g. FASB), securities regulatory agencies (e.g. SEC), the European Commission, the OECD, the UN and the World Bank. The IASC has published 40 standards to date, of which around 35 are currently in force—standards are regularly revised, and some earlier standards have been superseded by more recent standards. The International Accounting Standards (IASs) are prepared in accordance with due process. A Steering Committee for each standard makes recommendations to the IASC's Board. This Committee normally publishes a "Draft Statement of Principles" or similar discussion document that contains the potential requirements for the standard and a discussion of these requirements. The Board then publishes an "Exposure Draft" for public comment and assesses the pro and contra arguments received before finally adopting the standard. An Exposure Draft can only be issued if they are backed by two-thirds of the Board members, and approval of a final standard requires a three-quarter majority on the Board. Why is there a need for IASs? "A single set of high quality, uniform, globally applied and enforced accounting standards is essential for both domestic and cross-border investment and financing decisions." (IASC) The objectives of the IASC as stated in its constitution are:
IASs and the HGB differ in a number of key areas, for example:
Although this "message" is being gradually understood by German preparers, the number of "IAS lite" financial statements encountered for translation is still surprising. Another area of confusion is the presentation format and terminology used by German preparers. In almost all instances, they stick rigidly to the HGB classifications and terminology—in some cases, so rigidly that it is almost impossible to tell at a glance whether the financial statements concerned are HGB or IAS. Neither is the terminology of the official IAS German translation applied to any great extent, and even then only inconsistently. This gives rise to the following picture, using the example of some of the line items in an IAS balance sheet: official IAS German terminology is shown in the left column, actual IAS German terminology in the center, and the English equivalents to the right: US GAAP and Germany I don't propose to go into any detail here about the sources and hierarchy of US GAAP. Those readers who attended my St. Louis presentation or the seminar in Cologne have an outline of this information in any case, and it will no doubt be repeated in some form or other at future presentations or workshops. The problems involved in the application of US GAAP in Germany are broadly similar to those concerning the IASs, as are many of the differences as against the HGB/GoB (despite frequent comments to the contrary, in the accounting profession US GAAP and IASs are actually much closer than might be apparent at first sight). There is, however, one feature peculiar to US GAAP that consistently causes problems for translators: unlike the IASs, which are pretty compact (everything in a single volume), the sheer volume of US GAAP is staggering, and there is still little in the way of material in German relating to US GAAP. There are certainly a number of German commentaries and implementation guides on US GAAP, most of which are excellent, but there no official German translations of promulgated GAAP. In fact, the only translations of elements of US GAAP of which I am aware have been prepared by (mostly Big Five) accounting firms for internal use by their own preparers and auditors, as well as a few commissioned translations by companies such as F&B. One consequence of this is that there is no generally accepted, standardized terminology for US GAAP in German (although of course the original English US GAAP does not seek to impose any sort of prescriptive solution). The number of German companies reporting under US GAAP is rising very fast, and as with the IASs, the quality of this reporting varies widely. However, these German companies face the same problem as any foreign (non-US) company reporting under US GAAP: US GAAP is no more (and no less) than the national GAAP of the United States. As such, it is tailored wholly to the needs of the financial reporting, business and legal environment in the US, and takes no account whatsoever of the fact that this environment differs (often substantially) from country to country. This means that foreign preparers normally have to go through convoluted hoops to ensure that their financial statements comply with the relevant US GAAP, and that they may well have to make assumptions and create pro forma scenarios to squeeze their financial data into the constraints imposed by US GAAP. The concluding section of this article ("Future developments") will examine whether this situation is likely to continue in the future. FAQs Why all the fuss? Translating financial statements is surely much easier than you make out—after all, so many translators claim in their resumes that they can do it! Many translators also state that they can handle marketing texts, or legal documents, although their skills here are actually close to non-existent. The fact is that accounting and reporting is as much a complex technical discipline as, say, nuclear engineering, pharmacodynamics or food chemistry. For German and English translations, this situation is multiplied by the different GAAPs in use—even the number of professional accountants who have the body of knowledge needed to handle these differing accounting standards confidently and competently is relatively small, so translators—unless they have an accounting background, or are willing to invest considerable time (and money!) in learning the ropes—are seriously disadvantaged. And remember what I said at the beginning: there is simply no excuse for a poor translation. So you think that only a (self-chosen) few should be allowed to handle these translations? Far from it—over the past two years or so, I have spent a lot of time training and coaching other translators in this complex area, including my public presentations and workshops (and this article too!). My objective is to lift the general standard of German-to-English financial reporting translation to the point where we as a profession are regarded as competent experts by the preparers, auditors and users of financial reporting documents. I would also like to see a situation where translators are more involved in the preparation of foreign-language standards—up to now, for example, translations of IASs have been prepared largely by accounting professionals, rather than translators. I have been told that the major reason for this is the lack of accounting and reporting knowledge on the part of the translators. Most translators simply can't afford the time and money needed to gain the necessary knowledge. Why bother? It's certainly true that you need to invest a lot of time to learn and research comparative and contrastive GAAP. Neither does it come cheap—in terms of reference works, I estimate an initial investment of three to five thousand euros/US dollars, plus annual updates costing a further five hundred. You'll also need to attend basic (if you have no accounting knowledge) and continuing professional education courses (primarily aimed at the financial community). On the other hand, I think that this level of investment is reasonable, given the potential monetary rewards. And the notion that translators shouldn't really have to invest in their professional education is as nonsensical as it is dangerous, irrespective of what subject areas you translate. But why is that the case? Aren't there sufficient dictionaries and glossaries that cover the subject? Unfortunately not. One of the most serious problems for the translator is that many of the concepts and terms involved are not intuitive—you literally have to learn the "language of accounting" referred to by Arthur Levitt, and in this case, three accounting "languages" and two natural languages. Here are a couple of examples: The stand-alone equivalent of Werthaltigkeit is "recoverability," a measure of the carrying value (recoverable amount) of an asset. IAS 36.15 defines recoverable amount as "the higher of an asset's net selling price and value in use." Überprüfung auf Werthaltigkeit should therefore be something like "review for recoverability." However, the "language" of accounting uses the term "impairment review." At first sight, this might appear to be the exact opposite of what the German is saying, but in fact it is the proper direct equivalent: although it looks at the issue from a different standpoint (whether an asset has been impaired), the net result is the same. You often see beizulegender Wert translated as something like "value to be applied." In fact, it is the "fair value." Note here that the Marktwert of a marketable security is also its "fair value." In financial reporting, the verbs realisieren and berücksichtigen are translated far too often as "realize" and "include" respectively. In most cases however, they both mean "recognize." The Bilanzgewinn is not the "balance sheet profit"! It can be rendered variously as "net retained profits," "unappropriated retained earnings," "unappropriated surplus" (more UK GAAP) or "accumulated profits" (suggested IAS). As for the dictionaries, there is unfortunately no reliable German and English accounting dictionary on the market that is suitable for beginners or intermediate users. There are two dictionaries that may be of use to advanced users (i.e. users who are thoroughly familiar with the accounting and reporting concepts and scenarios involved), both of which must be used with extreme caution. However, as I want to avoid misleading my colleagues into thinking that such dictionaries should necessarily form part of their Handbibliothek, I would prefer if anybody who is interested in these works would contact me by e-mail. Why can't we standardize on a single set of English terms for all the GAAPs? This would make the translator's life much easier and enhance the potential use of language technology tools. It would certainly make the translator's life easier, but not the user's. Far from it: it would actually reduce the usefulness of the financial disclosures and information. I think that the decision to make a clear distinction in translations between the three accounting standards involved—HGB, IASs and US GAAP—should be guided by the purpose of the financial statements themselves, as defined very similarly by both US GAAP and the IASs: the decision-usefulness for the users, and the information needs of these users; transparency; understandability; and comparability. A distinction between the terminology used in translations of HGB, IAS and US GAAP financial statements is, I believe, substantiated on all of these counts. Just because many German preparers still use highly similar formats and terminology for all three accounting standards does not, I believe, mean that translators should fall into the same trap (as far as the terminology is concerned), as they would then be actively defeating the objective of their own work: transparent, lucid communication. HGB or IAS financial statements are not the same as US GAAP financial statements, and translators can help make this abundantly clear. Two other points are worth making: firstly, the terminology of the IASs and of US GAAP frequently differs substantially, although the two sets of standards are normally describing the same procedures and accounting and reporting activities. Secondly, German preparers are (albeit gradually) themselves going over to using non-HGB terms in their IAS or US GAAP financial statements in an effort to distinguish these from the HGB. Future developments On June 13, 2000, shortly before this article was published, the European Commission finally published its proposals for the reform of corporate financial reporting standards. As I had predicted at both St. Louis and Cologne, the Commission has come down decisively in favor of the International Accounting Standards. A Communication entitled "EU Financial Reporting Strategy: the way forward," presented by Commissioner Frits Bolkestein, member of the Commission in charge of the Internal Market and Taxation, outlines the broad thrust of the Commission's plans and objectives, which are summarized as follows in the accompanying press release: http://www.europa.eu.int/comm/internal_market/en/company/account/news/strategy.htm and a PDF of the full Communication can be downloaded from the same page in all the official EU languages. It is quite clear that this development will have a dramatic effect not just on preparers and reporting entities (and indeed on the European accounting profession as a whole), but also on translators. The full extent of the Commission's proposals is evident in sections 16 and 17 of the Communication: 17. The requirement to use IAS relates to the consolidated accounts of listed companies. As far as the national statutory individual accounts are concerned, regulatory and tax requirements could make the use of IAS inappropriate or even invalid. Nevertheless, whenever possible, the Member States should encourage even to the point of requiring the use of IAS for individual accounts as well. This would facilitate the preparation of consolidated accounts in the future. Why not allow US GAAP as an alternative? Allowing the use of US GAAP would run against the fundamental objective of the strategy to move in the direction of one single set of global standards. US standards are certainly equivalent to IAS. However, they are developed without any input from outside the US. US GAAP is also very detailed, reflecting the litigious environment in the US which calls for more and more detailed regulation. US GAAP cannot be detached from the regulatory intervention by the SEC. EU companies applying US GAAP are automatically supervised by the SEC. Allowing the application of US GAAP within the European environment as an alternative to IAS would give an unwarranted advantage to US interests. US GAAP is also difficult to manage because it is a moving target. This response ends with the curious statement: It is impossible to translate. I have already written to Commissioner Bolkestein pointing out that while the general direction of the Commission's proposals is certainly to be welcomed, a statement such as (US GAAP) is impossible to translate is not just inaccurate, but an unacceptable argument against the use of US GAAP. While it is certainly true that US GAAP is difficult to translate—and as the Communication states is "voluminous"—this does not mean that translation is an impossibility (and I wonder who whispered this little fallacy in the Commission's ear?). My feeling is that the Commission's proposals are going to produce howls of anguish—from some national accounting associations determined to preserve the peculiarities of their national GAAP, from multinational companies already listed in the US, and in particular from smaller and mid-sized companies that have already invested substantial amounts of money in their US GAAP reporting. At first sight, this development might appear to favor translators, by eliminating at least one GAAP from the picture (there's a strong chance that the HGB/GoB will continue, possibly in modified form, as the required GAAP for single-entity financial statements—because of the Maßgeblichkeitsprinzip—and for unlisted companies). But I fear that there will be much confusion and argument along the way, and there is a risk that translators will again be left stranded with little guidance and help for their work. Future activities I have made a proposal to the ATA to run two pre-conference workshops at the 2000 Conference in Orlando. The first (morning) session "aims to provide a more detailed insight into the complex, and often confusing, state of financial accounting and reporting in Germany today. In addition to an in-depth contrastive analysis of HGB/GoB, US GAAP and IAS using examples from published financial statements, there will be a special focus on changes in accounting and reporting resulting from the KonTraG and other recent legislation, including the new-style German auditor's report." Of course, I will also keep participants abreast with the latest developments at European level, and I hope very much that this will give us an opportunity to discuss a common strategy. The proposal for the second (afternoon) session envisages a hands-on, "let's do it" workshop where we will actually translate selected passages from German financial reporting texts, and cover in greater detail some of the more complex issues, including: accounting for deferred taxes; accounting for long-term construction contracts; and pensions accounting. Check out the ATA's website at http://www.atanet.org/ for details of the conference and workshop program as soon as it's when available. Provided we get the green light, I look forward to welcoming as many of you as possible. |
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