Public Money & Management

ISSN: 0954-0962 (Print) 1467-9302 (Online) Journal homepage: https://www.tandfonline.com/loi/rpmm20

New development: The first-time adoption of

uniform public sector accounting standards—a
German case study

Bianca Mann & Peter Christoph Lorson

To cite this article: Bianca Mann & Peter Christoph Lorson (2019): New development: The first-
time adoption of uniform public sector accounting standards—a German case study, Public Money
& Management, DOI: 10.1080/09540962.2019.1672931

To link to this article: https://doi.org/10.1080/09540962.2019.1672931

Published online: 11 Oct 2019.

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PUBLIC MONEY & MANAGEMENT
https://doi.org/10.1080/09540962.2019.1672931

New development: The first-time adoption of uniform public sector accounting

standards—a German case study
Bianca Mann and Peter Christoph Lorson
University of Rostock, Germany

ABSTRACT KEYWORDS
The German state of Hesse switched in 2015 from its own accounting practice, based on the Accrual accounting;
country’s private sector commercial code (the Handelsgesetzbuch), to the German public comparability; public sector
sector accounting standards (Standards Staatlicher Doppik: ‘SsD’). Hesse was the earliest accounting; SsD (Standards
Staatlicher Doppik);
adopter of accrual accounting and the only state in Germany whose consolidated financial
transparency
statements were audited by an external audit company. This article examines Hesse’s critical
areas of non-compliance with the SsD and the potential impact on comparability and
transparency objectives and thus contributes to the literature on harmonization of
accounting systems, extends the literature on areas of conflict between differing accounting
rules in the public context and gives an exemplary case study of the situation in Germany.

IMPACT
The article updates academics and practitioners on the state of accrual-based public sector
accounting in Germany. The analysis reveals challenges in the implementation of new
uniform standards (Standards Staatlicher Doppik: SsD), leading to a weakening of
comparability and transparency objectives. The article provides standard-setters with insights
into critical implementation aspects, such as choices between simplified rules and more
realistic and useful accounting policies. The article demonstrates the importance of dialogue
with early adopters of new standards. The findings will also be of significance for the
European Public Sector Accounting Standards (EPSAS) project.

State of the art of German public sector earliest adopter of accrual accounting and the only
accounting one whose consolidated financial statements (CFS)
were audited by an external (private) audit company.
The European Public Sector Accounting (EPSAS) project,
The Hessian CFS with first-time SsD adoption in 2015
initiated by the European Commission and Eurostat, has
were published with an unqualified audit opinion.
added to the pressure on EU member states to change
Therefore, we chose Hesse’s CFS of 2015 (see Hessian
from cash-based to accrual-based accounting (Eurostat,
Ministry of Finance, 2015a) for our analysis.
2018). More than 20 EU member states are on the verge
Technically, the Hessian CFS follow the Hessian
of applying accrual accounting (Moretti, 2016). With
Consolidation Manual (HCM; Hessian Ministry of
accrual accounting spreading in Europe, the pressure to
Finance, 2015b) and, from 2008 to 2014, the HCM
reform is growing for countries that are still using cash
explained the Hessian adaption of HGB to public
accounting; Germany is one of those countries.
sector characteristics in detail. After Hesse had to
Germany opposes accrual accounting reforms at the
switch to SsD, the Hessian Ministry of Finance
state and federal levels, although the HGrG
modified the HCM 2015 to comply with SsD.
(‘Haushaltsgrundsätzegesetz’—the budgetary principles
However, by making use of the constitutionally-
law) offers the Länder (the federal states) the option
assured financial autonomy of Hesse, there was some
to change from cash-based accounting to the
divergence from SsD, which can be seen as non-
accrual-based German public sector accounting
compliance. Figure 1 illustrates the bases of the HCM.
standards: the so-called ‘SsD’—Standards Staatlicher
Doppik. Four (out of 16) Länder have made this
voluntary conversion. All of them were early adopters
The case of Hesse: first-time SsD adoption
of accrual accounting in Germany, before the SsD
analysis
were released. They derived their own accounting
regimes from the German private sector accounting The items we used for our SsD adoption analysis were
standards that are laid down in section 3 of the HGB taken from the following sources:
(‘Handelsgesetzbuch’—the German commercial code).
However, since 2015 these Länder had to use another . A chapter in Hesse’s CFS notes which is devoted to
HGB adaption: the SsD. The state of Hesse was the the first-time application of SsD (Hessian Ministry
© 2019 Informa UK Limited, trading as Taylor & Francis Group
2 B. MANN AND P. C. LORSON

property, plant and equipment); and it did not

contain a section on non-compliance.

Assessment of fields of non-compliance

CFS notes: Structure and accruals of bonds
The CFS notes report primarily on the changes required by
the SsD in the structure of the statements of financial
position and financial performance and on the
associated adjustments to the previous year’s figures. The
main change was in the accrual accounting of bonds,
which resulted in a more appropriate allocation of
revenues and expenses to the relevant accounting periods.

Figure 1. Bases of the Hessian accounting regime.

of Finance, 2015a, p. 91f.). This dealt mainly with
changes in presentation and structure.
. The HCM 2015 (Hessian Ministry of Finance, 2015b)
which contains a list of seven SsD policies which had
not been (entirely) adopted by Hesse. In principle, the
HCM is intended for internal use and is not publicly
available on Hessian official websites. However, it can
be found in third party archives.
. Hesse’s CFS 2015, in which we found five more areas
of interest.
Table 1 gives an overview of the CFS 2015’s SsD
compliance. The table shows that the CFS did not
fully comply with the SsD; at times it followed its own
accounting guidelines (for example the useful life of
HCM: Recognition of investment grants
The HCM reported several deviations. Under SsD,
investment grants are meant to be capitalized if four
cumulative conditions are met. However, in Hesse,
investment grants are not capitalized but are, instead,
recorded as expenses. This could be SsD compliant if
at least one pre-condition for capitalization is infringed
in every case.
HCM: Measurement of buildings
For its opening balance sheet in 2008, Hesse developed
its own accounting policy to account for buildings
completed before 2007, because the relevant SsD
had not been released. Hesse continued with its
amortized cost valuation of buildings in the CFS 2015,
instead of remeasuring the buildings with the

Table 1. Compliance of identified CFS items with SsD or HGB.

Compliance to Own
Data source Item HGB SsD policy
(1) CFS notes (first-time (1.1) Structure of the statements of financial position and financial × ✓
adoption chapter) performance
(1.2) Accruals of bonds: increase in prepaid expenses and recognition of × ✓
deferred income
(2) HCM (deliberative (2.1) Recognition of provided investment grants ✓ (✓)
deviations from SsD) (2.2) Measurement of buildings
Opening balance sheet × (✓) ✓
Subsequent balance sheets ✓ n/a
(2.3) Measurement of media inventory ✓ ×
(2.4) Allocation and reversal of retained earnings
• Subgroup level × × ✓
• Consolidated level ✓ ✓
(2.5) Recognition of certain provisions (provisions without obligations ✓ ×
towards a third party, provisions for uncertain liabilities)
(2.6) Offsetting of plan assets and pension provisions ✓ (✓)
(2.7) Disclosure of indirect pension obligations ✓ ×, ✓(since
SsD 2016)
(3) Diverse information (3.1) Useful life of property, plant and equipment (✓), partly n/a (✓), partly n/a ✓
in CFS (3.2) Measurement of pension provisions
• Method ✓ ✓
• Discount rate × ✓
(3.3) Accounting for entities with voting majority but restricted control ✓ ×
(3.4) Accounting for Fraport AG based on its IFRS statements (instead of n/a, but discussed as × n/a ✓
HGB figures) in literature
(3.5) Waiver of the statement of changes in equity × × ✓
✓: Compliant
×: Non-compliant
n/a: Unregulated
(✓): Probably compliant

simplified SsD policy (such as deemed cost). The result
was more realistic asset values.
HCM: Measurement of media (for example
printed books and journals)
For the measurement of media inventory, the SsD
prescribes a simplified method—valuing the
accumulated acquisition costs of the previous five
years. Instead of following SsD, Hesse continues with
its more complex and realistic HGB policy that
includes individual and some group valuations of media.
HCM: Retained earnings
Hesse deviates from both HGB and SsD in the
allocation and reversal of retained earnings by
posting them with (rather than without) an effect on
net income. As this procedure apparently only applies
to subgroup level, it does not affect the CFS.
HCM: Recognition of provisions
Hesse recognizes more types of provisions than are
covered by SsD, namely provisions without
obligations towards a third party and provisions for
uncertain liabilities. This produces a more complete
(and more cautious) presentation of the debt level.
HCM: Offsetting of plan assets and pension
provisions
The HGB requires plan assets—provided that they are
purpose exclusive—to be netted with pension
provisions. SsD, on the other hand, require separate
statements. According to the HCM, the SsD regulations
were not adopted. However, since the pension
provisions are not netted out in the CFS, it must be
assumed that Hesse does not have any purpose
exclusive plan assets. Therefore, the contradiction of
the standards has no impact in practice.
HCM: Disclosure of indirect pension obligations
For disclosures of indirect pension obligations (which
are not reported under SsD), Hesse decided to
continue their HGB reporting in the CFS notes. This,
again, leads to a more complete presentation of the
debt level.
CFS: Useful life of property, plant and
equipment
Our reading of the CFS revealed a number of conflicts.
For the useful life of property, plant and equipment, for
example, the HGB requires systematic depreciations
without specifying the depreciation procedure. The
PUBLIC MONEY & MANAGEMENT 3
SsD require straight-line depreciation in accordance
with fiscal useful life tables; these tables were not
designed for the public sector, so some line items
need to be added (the useful life of some
infrastructure: bridges and roads for instance). Hesse
opted for straight-line deprecation but uses (internal)
useful life tables and therefore could, ultimately, be
compliant with both HGB and SsD.
CFS: Measurement of pension provisions
Concerning the measurement of pension provisions,
the HGB does not specify a valuation method but
requires the use of the average market interest rate
issued by the Bundesbank. Hesse follows the SsD
regulations that require the pension scheme entry
age normal method in combination with a public
sector specific interest rate (issued by the German
Federal Ministry of Finance) for authorities that are
not eligible for insolvency. This leads to a higher (and
more cautious) reporting of pension provisions and
therefore of debt levels. In addition, because of a
change in the interest calculation period in the HGB,
the SsD extended their average calculation period in
2016 from seven to 10 years which approximates (but
does not equal) both interest rates. Previously, the
SsD’s shorter interest period in relation to HGB
produced an unreasonably high debt estimate, which
Hesse had openly addressed in the management
commentary accompanying the CFS (see the
explanation in the next section of this article). This
indicates a constructive dialogue between standard-
setters and SsD adopters.
CFS: Accounting for entities with voting majority
but restricted control
Entities of which Hesse holds a voting majority with
restricted control are accounted for by using the
equity method instead of disclosing a financial asset
at cost (according to SsD) and thus more realistically.
CFS: Accounting for Fraport AG
The measurement bases of equity investments are
neither regulated in SsD nor HGB, but the HGB
commentary literature favours HGB (instead of IFRS)
figures (DRSC, 2013: p. 8.8; Küting, Hayn, & Zündorf,
1998). Hesse’s CFS value of investments in associates
is mainly determined by the value of the airport
operator Fraport AG. The subsequent annually
measurement of the investment in Fraport AG is
based on Fraport’s consolidated IFRS statements
(probably because of data constraints) leading to
non-compliance in favour of a more informative
valuation than using Fraport AG’s individual HGB
statements.
4 B. MANN AND P. C. LORSON
CFS: Waiver of the statement of changes in
equity/net assets
Hesse does not disclose a statement of changes in
equity as required by the SsD and HGB for
consolidated accounts. The statement of changes in
equity is a common component of CFS used for
stakeholder information and a fair presentation of
changes in assets and equity. By opposing both
standards, Hesse takes advantage of its financial
sovereignty and creates its own regulations.
To summarise: we found that Hesse generally
refrained from SsD application if the adjustment
meant a qualitative step back (except for the missing
statement of changes in equity). Nevertheless, this
kind of true and fair view override is not part of any
German financial accounting regime. Nor are SsD
explicitly designed as a minimum requirement, but
are meant to be applied in their entirety to ensure
comparable databases across the German states.
Reflections on transparency and
comparability objectives
Out of all public sector accounting objectives and
functions that the SsD refer to, we consider
transparency and comparability to be the most
valuable. Transparency is a prerequisite for
accountability and important to have as a basis for
good decision-making. Comparability is indispensable
for finance statistics and also of major importance for
any decision-making about partial privatizations of
state services. In this regard, comparability requires
full compliance and transparent open reporting on
non-compliance. Transparency and comparability are
the key objectives of the EPSAS project (EC, Eurostat,
2018), so our results are important.
Even though the SsD adaption was obligatory and
the standards binding, Hesse used its financial
sovereignty as a federal state to oppose SsD
adjustments if more informative accounts could be
produced in another way. This is a problem for
Germany in terms of the comparability objective. As
Hesse’s CFS 2015 complied with its HCM 2015, the
state did not face any sanctions and received an
unqualified audit opinion.
The valuation of buildings in the Hessian case
exemplifies the need for standard-setters to develop
standards in co-operation with users and preparers.
However, the case of the use of interest rates in the
measurement of pension provisions shows us that
dialogues may already be taking place.
Focusing on the objective of transparency, Hesse
underpins the need for explicit information on SsD
non-compliance. It is a problem that Hesse’s CFS does
not fully explain these items, nor does the
unqualified audit opinion indicate any (even partial)
Table 2. Summary of implications of the findings of the
Hessian case.
Hidden non-compliance Unqualified audit opinion; Incomplete
disclosures on non-compliance
Legal non-compliance Financial autonomy
Justified and comprehensible Continuation of more informative
non-compliance accounting policies
non-compliance with SsD (because of full HCM 2015
compliance).
In other respects, Hesse is voluntarily enhancing
transparency for example the management
commentary highlights the volatility and the
bandwidth of its total debt level depending on
alternative discount rates. According to the CFS,
Hesse’s pension liability, for example, could be 4.4
billion EUR higher (2.2% interest) or 2.2 billion EUR
lower (2.9% interest). Additionally, Hesse presents its
entities and companies included in the consolidation
in detail. Therefore, transparency about the debt level
of this federal state is high. However, the CFS 2015 is
not a whole of government account and the debts of
individual Hessian municipalities are not declared.
Our case study has some warnings and lessons for
the EPSAS. For example, the liability status in EPSAS
CFS might vary, based on the structure of every
member state. Centralized countries will disclose
regional debts in their national accounts but federal
countries might only show their national debt
without the liabilities of the municipal or communal
level, as Hesse does.
In addition, Hesse was able to use its constitutionally
assured financial sovereignty to alter the SsD. EPSAS will
need to be implemented as an EU regulation to be
unchangeable in every member state (at least at the
central level of federal member states), in which case it
will deliver on the comparability objective. However, it
is questionable whether the EC is actually entitled to
interfere in its member states’ sovereignty to the
extent EPSAS could become binding at the Länder
level (Gröpl, 2014). A solution would be to give room
for true and fair view overrides for subnational
accounting policies (this could be included in an EPSAS
Conceptual Framework following the example of IAS
1.19) or in explicit first-time adoption rules for early
adopters of accrual accounting. Both procedures
would be an implementation dilemma: they impair the
comparability objective, but can enhance the
information content of EPSAS CFS. The worst-case
scenario would be hidden (material) non-compliance
because then neither comparability nor transparency
would be achieved. Table 2 summarises the implications.
Limitations
Our analysis is based on publicly-available documents.
We analysed these documents to the best of our

abilities but we cannot rule out any errors (in particular
with Table 1). We did not take materiality considerations
into account. We want to stress that in highlighting the
missing adjustments, we do not want to expose or
condemn early adopters: Instead, we appreciate their
effort and hope to carry forward their constructive
work with this article.
Disclosure statement
No potential conflict of interest was reported by the author(s).
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