US-GAAP: A Measure of Financial Competitiveness for Multinational Companies - Research Paper

Paper Type:  Research paper
Pages:  5
Wordcount:  1237 Words
Date:  2023-03-25


The rapid development of the global economic market has introduced stiff competition among multinational companies. For a better comparison of the overall financial competitiveness of companies, investors have obliged a fair representation of companies' worth through the use of comparable General Accepted Accounting Principles (GAAP). The United States (US) is the most substantial economic market globally, and many multinational companies have adopted US-GAAP as a measure of their firms' financial competitiveness. The US requires that companies operating in the country should use US-GAAP to consolidate their financial statements, terming this as a way of enhancing corporate economic competitiveness in the global market. German responded to this accounting trend, creating the German GAAP (HGB), which corresponds to the consolidation of firms' financial statements in line with the International Accounting Standards (IAS). The paper will thus compare and contrast US-GAAP to HGB in terms of their codes and application to elicit differences between the two accounting standards.

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Main Differences Between US-GAAP and German GAAP (HGB)

The US-GAAP was developed to internalize the operations of firms in the US economy. The origin of US-GAAP is traced to the influence of the common law that governs corporate activities in the US market. US-GAAP was then created to enhance the interests of investors in the local and international markets. US-GAAP is treated explicitly in the US, meaning that any principles not represented in the law are allowed to operate in corporate action. In contrast, HGB was created to enhance fair dealings between firms and their stakeholders (Demir & Gur, 2016). Some scholars have ascertained that German introduced HGB as an accounting principle to scrutinize corporate returns to internalize taxation on corporate profits.

The principle of fair representation requires firms to state the current economic circumstances of a firm. According to HGB, the realized profits of a firm, and the depreciated values of the firm's assets are to be shown in the financial statements of a company. The reason behind this is that HGB is created on the principle of conservatism. In contrast, US-GAAP is meant to show the fair value of a firm in terms of assets and returns. For example, a firm will represent its asset value as $21 based on HGB principles. This value represents the acquisition price of the asset less its annual depreciation. HGB does not include the revaluation value of the asset, and the purpose in this is to protect the interests of creditors. Creditors, for instance, require the lowest asset value as security for extending loans to a company (Miah, 2019). Under the US-GAAP, the fair view of the company is enhanced. For instance, in the same company represented in this example, the firm's assets will be served at the market price, which is usually higher than the acquisition price (higher than $21). The fundamental difference between US-GAAP and HGB under the principle of fair representation lies between the interests of investors and creditors. Investors, for instance, require the actual value of the consolidated financial focus of the company since their investment is on the company as a whole and not a single institution and thus prime the use of US-GAAP. Creditors, on the other hand, may lend to an individual institution in a company and therefore require a separate legal presentation from the company as a whole, making HGB ideal in catering for their interests.

Under the accrual principle, companies are expected to report accounting transactions as they occur. This principle, however, differs when it comes to US-GAAP and HGB. US-GAAP records financial transactions as they happen in the accounting period. For instance, companies using US-GAAP can split projected revenues for a specified period under the percentage of completion method. Under the percentage of completion method, contract revenues are matched with contract costs, which then results in reporting of profits based on the proportion of contractual work completed. The financial statements prepared to result in a fair distribution of revenues and expenses over the contractual period. This case is quite different when it comes to HGB. Under the accrual principle, HGB requires taxes and costs to be realized when they are realized. Under a contractual term, for instance, a company is likely to make huge losses before an investment starts to earn returns after completion. A company using the HGB accounting principle would then transfer ownership risks of completed proportions of a contractual investment. For example, under an asset investment in a construction contract, a company using HGB accounting will transfer ownership of completed parts to purchasers (Kim & Lin, 2019). Purchasers then record the completed parts as depreciated asset values in their books of accounts, even if such assets cannot be used to generate revenues before completion of the construction contract.

The principle of substance over form requires that a firm records the economic materials of financial transactions and not their legal structures. This necessity is to present a fair view of the company. For instance, there are differences when it comes to valuing assets and liabilities of acquisitions under the US-GAAP and HGB, and this means that capitalization of goodwill also shows variations under the two accounting principles. HGB requires goodwill to be capitalized within a finite useful life of the company. It means that goodwill is only amortized within its anticipated It useful life under HGB, which in most cases, is five years. US-GAAP considers the capitalization of goodwill differently. US-GAAP acknowledges that goodwill has infinite life, and the asset value determines its value. Capitalization of goodwill under the US-GAAP is based on impairment tests and not amortization, as it is the case with HGB. It means that the amount of goodwill for a company can be reduced at a specified time when an asset value is impaired under US-GAAP (Zambon, 2016). The principle requires that companies assess the carrying value of goodwill with infinite useful life for annual impairment. The amount of goodwill for a company is likely to reduce if the carrying value of assets exceeds their fair value.


The paper has introduced a brief report on the differences between German-GAAP and US-GAAP. Based on the analysis, it is possible to view significant financial differences between companies, which might then lead to adverse effects on the annual financial reports of multinational companies. For instance, US-GAAP is focused on enhancing the interests of investors, while HGB concentrates on the importance of all stakeholders. There are legal as well as economic effects in this difference created by US-GAAP and HGB. The success of a multinational company is likely to be affected when the two countries prime their local accounting principles, hence a need to consolidate financial statements of multinational companies using a single accounting principle such as IAS.



Kim, J. H., & Lin, S. (2019). Accrual anomaly and mandatory adoption of IFRS: Evidence from Germany. Advances in Accounting, 47, 100445.

Miah, M. S. (2019). IFRS-Local GAAP Reconciliation Statements and Accounting Information Quality. IFRS-Local GAAP Reconciliation Statements and Accounting Information Quality (February 26, 2019).

Zambon, S. (2016). Regulatory Changes in Accounting for Goodwill and Intangible Assets: A Study of Their First Impact on European Companies Listed on US Markets. In Visualising Intangibles: Measuring and Reporting in the Knowledge Economy (pp. 23-44). Routledge.

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US-GAAP: A Measure of Financial Competitiveness for Multinational Companies - Research Paper. (2023, Mar 25). Retrieved from

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