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In Germany, the basis for determination of dividends payable to shareholders, and calculation of taxes can only be made provided the statements are prepared in line with the national standards. German subsidiaries outside Germany prepare their standalone financial statements in line with the IFRS or other local national standards. However, for consolidation purpose, such German parent companies are required to prepare their financial statements according to the German standards (HGB) and hence the local subsidiaries also need to convert local numbers into HB II numbers at the year-end.
The financial statements of the Indian entity are prepared as per the local GAAP (Generally Accepted Accounting Principles) which in the German context is called Handelsbilanz- I (HB I). The Handelsbilanz- II (HB II) statements are the single entity financial statements adjusted to restated to comply with the uniform group accounting policies and translated into the group reporting currency. HB II reporting is the preparatory measure for the consolidation of the financial statements at the group level.
In HB II reporting, the financial year of the parent company is decisive. Generally, Indian companies follow the accounting period from April to March as against January to December in Germany. To overcome this inconsistency in the statutory closing dates, a detailed scheduled is prepared for reconciling the figures as per German accounting period. Also, the local books of accounts of the Indian entities are closed based on annual closings as on the year-end as required by the parent company. Depending on the requirements of the group auditor and the materiality of the annual numbers of the Indian entity, the parent company may also request a HB II audit of the HB II financials which is certified by an independent auditor. Others may not require the HB II audits and the submission of the unaudited complete HB II package would suffice.
It is pertinent to note that the Indian entity should strictly adhere to the intimated deadlines for the HB II packages as the group consolidation is further dependent on the same. The HB II books closing starts with the review of the group accounting policy as provided by the German Management. The Group policy is studied so as to understand which specific income, expense, asset and liability would need adjustments to local numbers as per the group policy.
The Indian subsidiary should identify the changes arising due to change in reporting GAAP and accordingly make adjustments to the local numbers. Usually, German subsidiaries maintains a reconciliation of these differences so that the local numbers are not changed in the local accounting software so as to avoid any non-compliance on the local level. The reconciliation of the intercompany transactions and the elimination of the intercompany profits also plays an important role during finalization of the HB II reporting. The separately maintained HB II data are then carried forward for future reporting.
The most common differences in the accounting policies for HB I and HB II reporting are usually observed in the following areas:
As per the Indian GAAP all the expenditure that qualifies the definition of assets as per the statutory accounting standards should be capitalized. Under the group accounting policy, the capitalization requirements are specifically mentioned for each class of assets. Expenditure less than say EUR 500 are sometimes required to be written off to the P&L in the first year itself.
As per the Indian Companies Act and the Indian Income Tax Act, the methods of depreciation, useful life of the assets and the percentage rates of depreciation are specified respectively unlike the group accounting policy which provides the useful life of assets depending on the individual business nature.
The group accounting policy usually requires based on the ageing of the inventories and the accounts receivable, certain percentage of these amounts to be written off every year. Such requirement of mandatory write-offs under statutory laws is not applicable to HB I reporting. The same is done as the management estimates if required.
The restatement of forex transactions as per the HB II books are to be undertaken as per the group specified exchange rate as mentioned in the group policy unlike the HB I where the source of the exchange rate is not specified, and the requirements is that such exchange rate source should be consistently followed.
The taxes as computed under HB II depends on the income tax rate and the deferred tax requirements as specified in the policy of the individual company. In HB I reporting, taxes are to be calculated in accordance of the Indian Income Tax Act.
The Indian subsidiary should accordingly be prepared and be well-equipped with this important information in order to prepare and submit a timely and error-free HB II package to the parent company. We firmly believe such preparedness certainly affects the overall quality of the HB II reporting and the consequent consolidation of the financial statements at the group level.
Newsletter India
Martin Wörlein
Partner, Head of India practice
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Rödl & Partner in India
