There are various accounting and tax issues that arise in the Automotive industry in particular, often based on industry practices. In the following, we provide a brief overview of selected topics:
The general conditions for toolmaking are changing constantly and at high speed. Despite all the efforts of vehicle manufacturers to keep unit numbers high by forming vehicle platforms, customer demands for different variants and individual equipment continue to rise. As a result, Automotive manufacturers and suppliers are facing major challenges as they need to find an efficient way to reduce lead times and costs while ensuring high tool and component quality.
In practice, complex agreements related to the treatment of tooling costs often arise between the OEM and the supplier. They can later be subject to renegotiation of unit prices, especially if planned unit quantities are exceeded. Through tooling cost grants, OEMs regularly contribute to their suppliers' tooling costs, but include these grants into their calculation of part prices.
When accounting for tooling costs and tooling cost grants, it must be assessed whether the tool is an in-house or customer tool. It must be clarified which party is the economic owner of the tool. In this context, legal ownership may differ from economic ownership.
Particularities may occur in the VAT treatment of the tools, since the tools are usually acquired by the OEM, but physically remain with the supplier (delivery without movement of goods). Here, too, the decisive factor is whether the tool is an in-house or customer tool. In addition, there may be questions regarding the treatment of prototype tools, consequences from relocations of tools or customs aspects.
During the project acquisition phase, Automotive suppliers regularly have to pay so-called entry fees to the OEM. In practice, these have very different names: "Upfront Fee," "Entrance Fee," "Nomination Fee," "Signing Fee," "Support Payment," "Pay-to-Play," "Give Back," or "Quick Savings”. There are no limits to the inventiveness of OEMs when it comes to contractual arrangements.
When accounting for these entry fees, the economic approach must be applied and a decision made as to whether these expenses are to be recognized directly in profit or loss or can be spread over the life of a production series by capitalizing the payments. In doing so, the contractual basis must be examined in detail, possible repayment claims must be identified and individual performance obligations from possible multi-component contracts must be separated.
The German Automotive industry is highly innovative and provides the whole world with inventions so that cars of the future can be even safer, cleaner and more digital on the road. To this end, suppliers and manufacturers from Germany are investing around 150 billion EUR in e-mobility, digitalization and new drive systems, new safety systems and environmental technologies by 2025, according to the German Association of the Automotive Industry e.V. (VDA). As such, the German Automotive industry accounts for more than one-third of total R&D spending in the global Automotive industry.
In practice, Automotive manufacturers and suppliers can face various challenges in this regard. For example, the contractual bases may offer scope for discretion (e.g. "Letter of Intent", "Nomination Letter"), or multi-component transactions may have to be separated from combined development and series supply contracts.
With regard to the accounting treatment of these expenses, a number of questions arise which must be considered for each individual case. It is necessary to examine whether the expenses incurred or to be incurred meet the requirements for capitalization of an asset, and furthermore whether the asset is to be allocated to fixed or current assets. In accordance with this classification, a decision must be made as to whether or which costs can be capitalized (acquisition or production costs) and how possible options are to be exercised. If necessary, these considerations must be made for IFRS, German GAAP and tax law and possible standardizations must be sought.
As the digitalization progresses, the IT costs of companies in the Automotive industry are also rising. This relates both to costs for self-created software and to customizing work to set up and further develop software purchased for a fee, e.g. as part of the introduction of the next generation of ERP systems such as SAP S4/HANA. There is also a clear trend towards moving applications to cloud solutions. Companies in the Automotive industry are looking for so-called software-as-a-service (SaaS) solutions. Platforms (Platform-as-a-Service/PaaS) and the entire infrastructure (Infrastructure-as-a-Service/IaaS) no longer have to be kept in the company, but are increasingly being located in a cloud.
However, the accounting requirements in IFRS and the German Commercial Code were largely formulated before the digital transformation of companies. This results in different complexities for the accounting of (self-created) software. We have taken this as an opportunity to examine the current status of the accounting treatment of IT costs in the German Prime Standard as part of a study
Due to strong price competition, it becomes apparent in the course of a project, sometimes even when the order is placed, that projects cannot be executed in a way that covers costs. One reason for this can be price concessions to the customer during the project. As a result, companies have to think about impairments to fixed assets or the recognition of provisions for onerous contracts. The requirements under IFRS and German GAAP differ in this respect. In addition, management has room for judgements, which must be exercised appropriately. This raises questions such as whether a legal or constructive obligation to deliver exists in fact and for how long, at what level the provisions are to be determined (at the level of an individual project, a plant or a brand) or which types of costs are to be included. As provisions for onerous contracts may not be recognized in the tax balance sheet, deferred taxes arise.
Christian Winkler