Question

What are some European accounting practices that differ from US accounting practices?

Answer 1

The basics of accounting systems work the same in the US and EU, all accounting systems are based on double entry bookkeeping.

The differences would come in financial reporting because there are some differences in IFRS (EU) and GAAP (US) accounting standards.

In most European countries, public entities are subject to IFRS and must prepare their accounts accordingly. While local GAAP is aligned to IFRS, it is here and in taxation that key differences emerge.

The European Union's alignment to the International Financial Reporting Standard (IFRS) for accounting purposes makes financial reporting in Europe quite streamlined for companies. Private entities need to follow the local GAAP (Generally Accepted Accounting Principles), but in most European countries it is aligned to IFRS.

Differences do exist however, and one source of difference is the fact that IFRS as adopted by the EU is sometimes behind the actual IFRS standards. This is because the EU goes through an endorsement process, and this can result in a gap of approximately six months between the implementation of a new standard, and implementation in practice.

With regard to private entities and local GAAP, it is in the few European countries where this is not aligned to IFRS, in which differences occur. For example, in Italy, goodwill should be amortised, revaluation is not allowed, there are specific capitalisation rules and useful lives and only operating leases are recognised.

Form of reports

A source of difference is not so much the accounting principles but in the form of accounting reports, and how you need to prepare the accounting information in order to be compliant with local rules.

Different countries = different tax rules

On the whole when it comes to financial reporting, the main source of difference is not so much on the accounting side at all, but on the tax side. This is evident in itself when we look at the varied rankings of EMEA jurisdictions in the Financial Complexity Index.

You need to follow local tax rules in order to file your returns and make tax payments in-country, and there is a variance between the IFRS / local GAAP and what you need to calculate and reflect for tax purposes.

It's not surprising to see these difference in the European tax landscape as the purpose is very narrow - to provide information to the governmental authority and pay taxes on your local profits and activities.

Tax is not regulated by an international body as in the case of IFRS, and tax regulation does vary depending on individual country policies and governmental targets.

Efforts to align

There are various initiatives in Europe that look to align tax regulation. The EU is making moves to harmonise VAT legislation, making the rules more similar across member countries. And the common tax base is a recent initiative that would see companies with activities in various EU countries cumulate their expenses and revenues for a consolidated calculation of the profits. These would then be split among countries depending on the level of activity. While there are these initiatives intended to make tax more consistent, there is at the end of the day, a distinct national, local, flavour.

Financial reporting checklist

When it comes to financial reporting in different jurisdictions, there are several aspects you need to consider.

• The format of the financial report country-to-country and specific requirements, which can vary in complexity.
• Differences in terms of the accounting treatment. Usually the difference areas are in, for example, foreign exchange rates, fixed assets and how depreciation is calculated, inventory valuation.

When you expand operations to a new country, you need to look at the form of the financial report and also the substance, because it's in these where local rules may be different to IFRS. You need to consider how you are going to incorporate those local rules into your general financial reporting system.

Impact on your bottom line

Knowing and understanding these differences in financial reporting in Europe is essential in order to be able to properly establish your operations, and understand the true cost of doing business in your new location.

Working with a third party provider in-country often proves to be the optimal solution for companies, as it gives them access to experts with the local language, and understanding of how swiftly accounting and tax rules at country-level can change.

Having professionals to hand who can technically assess the latest changes, and explain how they will impact your business – in practical terms – is invaluable.