On 23 July the German act on transformation of the EU directive 2013/34/EU („Bilanzrichtlinie-Umsetzungsgesetz – BilRUG“) has become effective. BilRUG will have a significant impact on German GAAP (HGB) statutory financial statements.
Amongst the individual regulations of BilRUG, which include an increase in thresholds for company sizes according to sections 267, 293 HGB, amendments of valuation net of own capitalized intangible assets and goodwill, the omission of extraordinary results in the profit and loss statement and accompanying amendments of the notes to the (consolidated) financial statements, the change of the definition of sales revenues is one of the amendments with the biggest factual effect.
The new definition of sales revenues most significantly impacts automotive suppliers, and will most likely significantly change the presentation of gross profit and other profit and loss ratios.
The new definition of sales revenues includes:
- the sale of products,
- income from rent and leasing of products, and
- income from services.
The former reference to the ordinary course of business is no longer prevalent in the new definition of sales revenues. If you follow a business model approach of the new legal term “product” for the shipment of products, the effect on sales revenues will most likely be not significant compared to the old definition in German GAAP, at least for revenues from product shipments.
More important – and highly relevant to the automotive sector – will be the omission of the reference to the ordinary course of business for service revenues and for example for revenues from licenses.
Specifically subsidies to development costs, as well as license revenues from external production under license are significant to the automotive supply industry. In this case the relevant factor is the characteristics of the consideration for the services or licenses.
Development activities of an automotive supplier for a new supply product are a typical example. In this case an automotive supplier typically follows the OEM’s specifications and in many cases enters an exclusive contract. If the OEM subsidizes the development costs of the supplier, the subsidy can be seen as a direct consideration. Even more evident is the classification of license revenues from an external producer.
In both cases revenues from the above activities will be sales revenues following the new German accounting act, whereas the transactions would have been presented as other income under the former legislation.
This change in presentation leads to a significant shift in the structure of the profit and loss statement. Besides, the application of the total cost method versus the cost of sales method will again have different effects on the gross margin. Overall, we are facing effects on external and internal reporting, processes and controls in accounting, contracts with customers who buy services (which previously have not been identified as such) providers, as well as possible effects on contracts with employees.
As the new definition of sales revenues can have a significant impact depending on the individual companies’ structure, the earlier you analyze and identify possible effects, the better. Generally, BilRUG is effective in Germany for all financial years beginning after 31 December 2015. In fact this will be 31 December 2016 for most companies, having the calendar year as financial year. Also, early adoption of the new revenue definition is possible now, under certain conditions.
Action is required, now. We support you implementing BilRUG!
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Checklist for BilRUG:
- Processes and controls over revenue recognition
- Accounting guidelines and policies
- Account mapping
- Subledgers (open-item lists)
- Reporting formats (external and internal)
- Internal performance ratios/KPI’s
- Service contracts
- Financial covenants
- Parameters of bonus agreements