What is HGB?
The Handelsgesetzbuch (HGB) is a law that regulates the main commercial code for companies in Germany. The law regulates the preparation of financial statements and sets accounting guidelines and best practices.HGB is similar to generally accepted accounting principles (GAAP) in the United States.
Understanding HGB
The commercial code of Germany, Handelsgesetzbuch, was established on May 10, 1897. 1998 the code was updated to comply with new European community laws.
The HGB has been used in Austria since 1938. 2007, Austria replaced the HGB with a newer commercial code called the UGB. German accounting law was updated in 2010 with the Bilanzrechtsmodernisierungsgesetz (BilMoG).
HGB covers company registration in Germany and the regulations they must follow. For instance, HGB covers using commercial brokers and agents and establishing and terminating partnerships with third parties.
HGB’s mandates include paying employees’ salaries monthly. Non-compete clauses in employees’ hiring contracts must be written under the law. There are provisions for charter contracts for ships and salvage rights as well.
HGB is occasionally called “German GAAP.”
Comparison of Handelsgesetzbuch (HGB) and International Financial Reporting Standards (IFRS)
Germany’s commercial code and accounting laws have similarities and differences compared to International Financial Reporting Standards (IFRS). Germany’s laws and IFRS both rely on historical costs for accounting, but revaluations are generally not permitted under German law.
IFRS permits the revaluation of property, intangible assets, investment property, equipment, and inventions in specific industries. German accounting law provides exceptions to the fair value assessment of financial instruments held for trading by banks and financial institutions.
Income statements are generally similar under both sets of accounting laws, although some differences exist. German accounting practices do not include a comprehensive income statement. Income statements can be issued using either the cost of sales or total cost methods. Additionally, income derived from discounting provisions should be combined with other interest and comparable income.
Under IFRS, a company can present its income or expenses as a single comprehensive income statement or as two separate statements. The statements can display profit or loss components and another statement for additional income.
HGB only mandates a cash flow statement for consolidated financial statements, and publicly traded companies are exempt from filing consolidated financial statements. IFRS and German accounting practices classify cash flows by operating, investment, and financing activities.
HGB contains books covering merchants, partnerships, trading, commercial, and maritime transactions.
HGB and IB
The Handelsgesetzbuch can affect businesses outside of Germany that engage in commercial activities with German entities. Businesses from different countries that engage in contracts or commercial transactions often specify the governing law in their agreements. This helps establish the applicable legal framework for their dealings.
If a contract involving a German entity specifies German law as the governing law, the provisions of the HGB may be relevant to the interpretation and enforcement of that contract. Complying with the HGB may also affect tax obligations and transfer pricing for international businesses in Germany.
As mentioned earlier, the HGB includes accounting and financial reporting rules that can affect German entities’ financial statements and disclosures. The HGB also sets rules and standards for commercial transactions, such as sales contracts, agency agreements, and other trade activities. The HGB’s provisions may influence contract terms and obligations if businesses engage in transactions with German partners.
The HGB governs different business entities, like partnerships and corporations. When international businesses collaborate with German entities through joint ventures, subsidiaries, or other business structures, the legal framework of the HGB may apply to those entities. Additionally, the HGB contains provisions concerning commercial agents, which may be applicable when foreign companies appoint commercial agents or distributors in Germany.
What does the HGB regulate for commercial activities?
The HGB oversees business formation, management, accounting, financial reporting, contracts, and liability in commercial activities, establishing a legal framework for businesses to operate within.
How is the HGB enforced, and what happens if you don’t comply?
Like other codifications, the HGB is enforced through legal methods such as civil lawsuits, administrative enforcement, and potentially criminal charges. Failure to comply may lead to fines, penalties, compensation claims, and other legal repercussions.
Does the Handelsgesetzbuch (HGB) cover consumer protection, or is it primarily focused on businesses?
The HGB mainly focuses on commercial and business affairs rather than safeguarding consumers. Distinct laws and regulations govern consumer protection in Germany.
Bottom Line
The Handelsgesetzbuch, also known as the German Commercial Code, is a legal framework in Germany that regulates commercial activities and businesses. It covers commerce topics such as business entity formation and management, accounting and financial reporting, contracts and transactions, and the liability of business entities and officers.
Conclusion
- The Handelsgesetzbuch (HGB) is Germany’s commercial code and accounting standards for companies’ financial statement preparation and reporting.
- The HGB also requires corporate rules and regulations regarding worker treatment.
- The guidelines in the HGB are similar to the U.S. GAAP and IFRS, with a few differences.
- Germany’s laws and IFRS both use historical costs for accounting, but German law typically does not permit revaluations as IFRS does.
