Sino-German M&A Series (1)   Differences in Chinese and German Financial Statement Logic

In cross-border M&A transactions, understanding the differences in financial reporting logic across different countries is essential. This is particularly true in Chinese-German deals, where Chinese accounting standards (CAS) and the German Accounting Standard and Financial Reporting System (BWA / HGB) differ significantly in structure, purpose, and the way financial information is presented. For teams conducting Financial Due Diligence (FDD), these differences often have a direct impact on valuation analysis and assessment.

1. Chinese Financial Statements Logic

The Chinese Accounting Standards (CAS) aim to provide a true and fair view of a company’s financial position and operating results. Standard financial statements prepared under CAS typically include:

1. Balance Sheet (BS): reflects the financial position at a specific date (assets, liabilities, shareholder’s equity).
2. Profit and Loss Statement (P&L): reflects operating performance over a period (revenue, expenses, profit/loss).
3. Cash Flow Statement: reflects cash inflows and outflows over a period.
4. Statement of Changes in Equity: reflects increases and decreases in owners’ equity during the reporting period.
5. Notes: supplementary explanations to the financial statements.

Its key characteristics are:

• Profit structure based on the cost of sales method,
• a profit logic centered on net profit,
• and financial analysis typically structured around: Revenue → Gross Profit → Operating Profit → Net Profit.

Audit

In China, the requirement to conduct an annual statutory audit is generally not determined solely by the size of the company, but primarily by the nature of the enterprise and the applicable regulatory requirements. Companies typically subject to annual audits include listed companies, financial institutions (such as securities and futures companies), enterprises involved in specific regulatory matters — (for example bank financing, shareholder loans 〔e.g. loans granted by an overseas parent company to its Chinese subsidiary〕, or the provision of guarantees, or where the Chinese subsidiary distributes dividends to the German parent company), — as well as state-owned enterprises, centrally administered state-owned groups, and other large corporate groups.

2. German Financial Statements Logic

German accounting standards under the German Commercial Code (HGB) place particular emphasis on creditor protection and the principle of prudent business operation to ensure sustainable and sound corporate development. Financial statements prepared under HGB typically comprise:

1. Balance Sheet (Bilanz)
2. Profit and Loss Statement (GuV)
3. Notes (Anhang)
4. Management Report (Lagebericht)

Its key characteristics are:

• Profit structure under total cost method 
• Focus on cost structure and production value
• German financial statements logic typically follows: Production Value → Total Costs → Profit

Cash Flow Statement

Many non-listed companies in Germany do not prepare a cash flow statement.

Whether a German company is required to prepare a cash flow statement depends mainly on its size and listing status under the German Commercial Code (HGB). The general rules are as follows:

General companies (non-listed):

• Small companies: no cash flow statement required
• Micro companies: no cash flow statement required
• Medium-sized companies: generally, not required to prepare a cash flow statement in standalone financial statements

Business Management Report: BWA (Betriebswirtschaftliche Auswertung)

In daily operations, German companies commonly use the BWA for monthly management analysis, while official annual financial statements are based on HGB. The BWA is a widely used instrument for internal financial and management reporting in Germany and shows certain functional similarities to the management reports and periodic profit and loss statements commonly used in China.

Its key characteristics are:

• The Management Reporting (BWA) places particular emphasis on the operational and management perspective.
• Typically generated monthly to provide quick and timely insights into business performance
• Produced by tax advisors or accounting software (e.g., DATEV), and can be used for bank financing and internal management

Audit

In Germany, statutory annual audits are generally required only for medium-sized and large companies. According to the German Commercial Code (HGB), corporations are subject to statutory audit if, for two consecutive years, they meet at least two of the following three criteria:

• Total assets exceed EUR 6 million
• Annual revenue exceeds EUR 12 million
• Average number of employees exceeds 50 per year

3. Comparison of Chinese and German Financial Statements Logic

4. Differences in Expense Structures between Chinese and German Financial Statements 

In corporate financial analysis, China and Germany differ significantly in how expenses are classified. This difference also has a direct impact on financial analysis and Financial Due Diligence (FDD) logic.

Chinese financial statements generally classify expenses by function of expense, whereas the German system classifies them more often by nature of expense.

Chinese Financial Statements System Function of Expense Classification)

In Chinese profit and loss statements (P&L), expenses are typically categorized according to business functions, for example:

Characteristics:

• Facilitates departmental management control and departmental performance evaluation for management teams
• Clearly reflects costs by functional departments
• Better suited for internal management and budgeting purposes

In BWA reports or HGB financial statements, German companies tend to classify expenses according to their nature, for example:

Characteristics:

• Enables analysis of a company’s cost structure 
• Helps quickly identify key cost drivers
• More intuitive for operational management and cost control

5. Comparison of Profit and Loss Statement Structures between China and Germany

Chinese P&L logic (revenue-driven) – typical profit structure based on the cost of sales method:

Revenue
(−) Operating costs
= Gross profit

(−) Taxes and surcharges
(−) Selling expenses
(−) General and administrative expenses (G&A)
(−) R&D expenses
(−) Financial expenses
= Operating profit

(±) Non-operating income/expenses
= Profit before tax

(−) Income tax
= Net profit

German P&L logic (production-driven) – typical profit structure based on the total cost method

Revenue

(+) Change in inventories

(+) Other operating income
= Total output

(−) Material costs / cost of goods sold
= Gross profit

(−) Personnel expenses
(−) Depreciation and amortization
(−) Other operating expenses
= Operating result

(±) Financial result
= Net profit

6. Differences in Cost Structure Presentation between China and Germany

7. Comparison of Key Financial Indicators in German and Chinese Financial Reporting

China

Germany

In a typical BWA reporting structure, the calculation path is usually as follows:

• Revenue
  (−) Cost of goods sold / merchandise costs
  = Gross profit
• Gross Profit
  (−) Personnel expenses
  (−) Other operating expenses
  = EBITDA
• EBITDA
  (−) Depreciation and amortization
  = EBIT

8. Comparison of Management Focus: Chinese vs. German Companies

Example

Company revenue: EUR 1,000,000

Costs:

• Cost of goods sold: EUR 400,000
• Personnel costs: EUR 200,000
• Other expenses: EUR 150,000

Focus of Chinese analysis: Profit level        Focus of German analysis: Cost structure
Chinese accounting logic: Profit-oriented
German accounting logic: Cost-structure-oriented

9. Total Output Perspective: An Important Characteristic of German Accounting Logic

In corporate financial analysis, the German accounting and reporting approach — particularly under the principles of HGB and BWA— focuses not only on revenue, but also places significant emphasis on changes in total output. This represents a major difference compared to the analytical and reporting logic typically applied in Chinese financial statements. 

German Accounting Logic: Focus on the Value Actually Produced by the Company

Under German accounting principles, the value created by a company is not derived solely from products already sold, but also from products that have already been produced but not yet sold (inventory increases).

Example:

In this case, German financial analysis assumes that:

The company actually produced goods or services with a value of 130 during the period. Of this amount, goods worth 100 were sold, while goods worth 30 remain in inventory.

Therefore: Total Output = Revenue + Inventory Changes

Chinese Financial Reporting Perspective

In Chinese financial statements, analysis is generally centered on revenue.

Inventory changes are mainly reflected through:

• The balance sheet as inventory increases
• The profit and loss statement: gradually through cost recognition

They are not directly regarded as value created during the current period.

Accordingly, the company’s operating scale for the year would be understood as follows:

Revenue = 100

The inventory increases of 30 would not be regarded as revenue generated during the current period, but would instead be reflected in:

• Balance Sheet: Increase in inventory
• The Profit and Loss Statement: gradually through cost allocation/cost of sales recognition

Therefore, from the perspective of Chinese financial analysis, the company’s operating scale would be considered 100.

Summary:

• Chinese financial analysis places greater emphasis on realized sales revenue.
• German financial analysis places greater emphasis on the value created through the company’s overall production activities.

Impact on Company Valuation

• In cross-border M&A transactions or corporate analyses, relying solely on revenue as an indicator of company size or operational performance may lead to an underestimation of the actual business scale and operating capacity of certain German companies.
• This is particularly relevant in manufacturing industries, machinery and equipment producers, and sectors with long production cycles, where periodic increases in inventory levels are common.

When analyzing German companies, financial advisors typically consider total output, revenue, and inventory changes simultaneously in order to assess a company’s actual production capacity and operational scale more comprehensively. If only revenue is considered in Germany, the actual scale of German companies may be underestimated.

Practical Insights

Financial data reflects the past, Enterprise Value Shapes the Future

In M&A deals, buyers are not purchasing a company’s historical performance, but rather its future ability to create value. Therefore, when evaluating a company, investors look beyond historical financial data and focus equally on its core competitive strengths, such as stable customer relationships, an experienced management team, and sustainable order backlog. These factors often determine a company’s future growth potential and represent one of the most important sources of value in an M&A transaction. From an investor's perspective, a company's value is determined not only by how much profit it has generated in the past, but more importantly by its ability to sustainably generate profits and cash flows in the future. These factors typically form the foundation of a company's long-term value and are among the most important value drivers in mergers and acquisitions (M&A) valuations.

– Fang Fang

In M&A deals, the most important task of a buy-side advisor is not simply to verify historical financial data, but to identify key risks that could affect the company’s future value.

– Hong Lang

Outstanding management teams do not only answer questions during due diligence - they are able to support their statements with reliable data and facts. 

Financial due diligence is therefore not simply about verifying numbers, but about understanding how the business makes money.

– Jennifer Lv

Tax due diligence is not about how much tax has been paid today, but about how much tax may need to be paid in the future. A well-conducted tax due diligence can transform potential risks into negotiable deal terms.

– Ricky Ma

Companies in Germany tend to place greater emphasis on processes, while companies in China focus more on speed. The value of Sino-German cooperation lies in complementarity, not competition.

– Sara Zimmermann

Legal due diligence is not about finding a perfect company, but about identifying acceptable risks. Signing marks only the legal completion of the transaction - the real challenges often begin after closing.

– Frank Yang

In Chinese M&A transactions, the first priority is often to verify ownership. In Germany you verify profitability.

– Holger Schewe

Understanding financial statements is a technical skill - truly understanding a business is the real expertise. 

The aim of due diligence is not to validate a transaction, but to identify potential risks. Most failed acquisitions show warning signs early on - the key question is whether those signals are recognized in time.

– Dr. Michael Bormann

About the Sino-German M&A Team of bdp 

bdp is a professional advisory firm with an expert team specializing in Sino-German cross-border M&A consulting, dedicated to providing high-quality advisory services for Chinese and German companies in share acquisitions, divestments, and asset deals.

Built on profound understanding of the financial, tax, commercial, legal, and cultural environments in both China and Germany, combined with extensive experience in cross-border transactions, bdp supports its clients in making well-informed, efficient, and sustainable acquisition and divestment decisions in complex international transaction environments.

We provide integrated advisory services across the entire M&A process under one roof, including:

• Sell-side and buy-side M&A advisory 
• Company Valuation 
• Financial Due Diligence 
• Tax Due Diligence 
• Legal Due Diligence 
• Commercial analysis 
• Project communication and coordination between Chinese and German parties 

The interdisciplinary collaboration of bdp’s expert team plays a key role in increasing transaction success rates, optimizing transaction structures, and effectively reducing cross-border investment risks.

Through extensive market know-how and substantial experience in Sino-German projects, bdp has increasingly established itself as a trusted partner for companies engaged in Sino-German M&A transactions and business cooperation.

If you have any questions regarding M&A transactions in China and Germany, please feel free to contact us at: china.desk@bdp-team.de

The bdp Sino-German M&A Team looks forward to supporting and advising you throughout your cross-border transaction activities.

Review: Holger Schewe (Managing Director), Jennifer Lv (Partner)
Translation: Sara Zimmermann (Senior Manager, bdp China Desk)