Automotive supplier
AUTOMOTIVE AS A GROWTH ENGINE IN CENTRAL GERMANY

AUTOMOTIVE SUPPLIER INDUSTRY - ADDVALUE AS AN AUDITOR AND TAX ADVISER WITH EXPERTISE

Companies in the automotive supply industry are very important for the economy in Germany. Important automotive suppliers have also been based in the Central Germany region since 1990 and, together with the brand manufacturers in Dresden, Leipzig and Eisenach, form an important engine of economic development in East Germany. The companies are typically medium-sized. The classic business model and the challenges from a changing mobility environment are ultimately reflected in questions of accounting and taxation, which tax advisers and auditors can answer along the value chain. This chain ranges from the sub-suppliers of Tier 1 to Tier 3 OEM suppliers to the OEMs themselves to car dealerships with classic car dealerships and garages.

TRENDS IN THE AUTOMOTIVE INDUSTRY

The global automotive industry is undergoing profound change, which is due on the one hand to technological progress in the areas of drive technologies, driver assistance systems or autonomous vehicles and connectivity and on the other hand to changing usage behavior in the automotive and mobility sectors. Although the market volume of automobile sales in the global automotive and mobility industry is expected to increase from around USD 2.8 trillion to approximately USD 4 trillion in the period from 2017 to 2030, a decreasing market volume for the Car sales are forecast and the importance of shared mobility services and data-based services is expected to increase significantly. These topics largely determine the discussion about industry trends:
  • drive types
  • Mobility Services/New Mobility
  • electromobility
  • Autonomous Vehicles
  • Connected cars
  • As auditors and tax advisers for the automotive supply industry, we keep an eye on trends and shape them or react to them with our specialist knowledge alongside our clients.
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    SCRUTINIZE ACCOUNTING-RELATED PROCESSES IN THE AUTOMOTIVE INDUSTRY WITH THE RIGHT AUDITOR AND ADVISER

    The automotive industry is on the move and keeps society on the move. It started 4000 years ago with the invention of the wheel and accelerated in 1886 with the first internal combustion engine passenger car. Despite the dynamism, the industry shows a high degree of consistency in its basic processes. Characteristics of this are a wide range of coordinated business processes with many participants and a pronounced quality standard. This claim means that processes are accompanied by various types of controls. Today we are talking about manual or IT controls. 

    In practical work, we tend to observe an increase in controls with a simultaneous shift from manual controls to controls that are implemented in the IT system. In addition, controls are distinguished intended to prevent or detect errors or discrepancies. Commercial expertise says plausibly that controls prevent deviations from the defined process are better than controls that can only detect a deviation or an error afterwards. Our professional focus as auditors for the automotive industry is on accounting-related controls. This means controls that are intended to ensure that business transactions are recorded correctly and completely in the company's accounts. From many years of experience as a tax consultant or auditor in the automotive sector, we can use best practice to make a reliable assessment of processes with regard to the appropriateness of the effectiveness of the controls.

    In addition to the process characteristics, inventories and inventories are of essential importance for companies in this industry. Why is that? The supplier companies continue to deliver physical objects to the automobile manufacturers (OEM). The production usually takes place directly in the supplier company. In addition to employees, the raw materials required for production are of the utmost importance. The quality of these raw materials can range from materials of the most varied types, shapes and states of aggregation to intermediate products purchased from upstream suppliers. In addition, auxiliary materials and operating materials are usually used. The manufacturing process itself leads to unfinished and finished products or services. In addition, there are often goods and advance payments made for inventories, which complement the variety of balance sheet items within inventories. For many companies, the evaluation of unfinished and finished inventories is an important process for determining performance. Have you ever thought about how different capacity utilization affects this and what role planned costs, target costs and actual costs play? Beck's Balance Sheet Commentary is a standard work of commentary on the German Commercial Code (HGB) and provides a framework for solutions to such issues. 

    Our auditors for the automotive industry use this commentary as the basis for their advice or examination of the facts. Have you ever thought about how different capacity utilizations affect this and what role planned costs, target costs and actual costs play? Beck's Balance Sheet Commentary is a standard work of commentary on the German Commercial Code (HGB) and provides a framework for solutions to such issues. Our auditors for the automotive industry use this commentary as the basis for their advice or examination of the facts. Have you ever thought about how different capacity utilizations affect this and what role planned costs, target costs and actual costs play? Beck's Balance Sheet Commentary is a standard work of commentary on the German Commercial Code (HGB) and provides a framework for solutions to such issues. Our auditors for the automotive industry use this commentary as the basis for their advice or examination of the facts.

    AUDITING AND TAX ADVISORY FOR COMPANIES IN THE AUTOMOTIVE INDUSTRY

    Approximately 40 pages of comments are dedicated to the question of production costs according to § 255 HGB. For this reason, we are of the opinion that the position of inventories in their complexity is being misjudged for accounting purposes. Especially in the case of final audit services, it is absolutely necessary for our auditors to deal with the operational service processes before participating in the inventory. Inventory observations are only carried out at addVALUE by really experienced auditors or audit seniors who know the "pitfalls" of the annual inventory for companies. Ultimately, this should strengthen the responsibility of the management for the preparation of the annual financial statements and represents a valuable opportunity for feedback. Use our professional experience as an auditor for your inventory for a reliable inventory. As an expert in the automotive industry, we would also be happy to talk to you about alternative storage options, e.g. B. a permanent inventory or a random inventory. Participate in our knowledge of the advantages and disadvantages of different inventory methods.

    Inventories are exchanged for trade accounts receivable and profits are only recognized in accounting at the time sales are realized. Do you know criteria for when revenue is to be recognized? Do you know that the sale of an item can be sales when it leaves the factory premises or when it arrives at the buyer, depending on the delivery condition? Especially against the background of the correct period delimitation, the observance of delivery conditions plays a major role. As a tax adviser and auditor for the automotive industry, we would be happy to advise you on the interaction between the sales department and accounting in order to reduce the risk of incorrect accounting.
Another classic of accounting is the distinction between research costs and development costs. In particular, the accounting of intangible assets has gained in importance in recent years.

    RECOGNIZE AND MANAGE RISKS IN TIME.

    PECULIARITIES OF THE AUTOMOTIVE SUPPLY INDUSTRY IN ACCOUNTING AND TAXATION

    In the previous section, we, as auditors and tax advisers with experience in the automotive industry, touched on the "eternal" issues of the automotive supplier industry. In addition, there are also some special features of the industry.

    Nomination Fee

    In practice, more and more one-off payments to automobile manufacturers can be observed in connection with placing orders with automotive suppliers. In addition to the nomination fee, the following terms are also observed:
    • entrance fees
    • Quick Savings
    • consulting services
    There are many different ways of structuring such agreements. In addition to one-off payments, reductions in unit prices in series production can also be agreed. If the acquisition of an order is designed as a fixed contract with the right to supply, there is usually an asset (right) that has to be accounted for. If the supplier does not have any delivery rights associated with the nomination fee, it can generally be assumed that it will be recognized as an expense on an ongoing basis in the income statement. However, caution is required to ensure compliance with the law, and it is best to consult a tax advisor or accountant with expertise in the automotive sector. In the context of tax audits, such one-off payments are examined with regard to the existence of bribery or corruption, since then both a criminal offense has occurred and a ban on the deduction of business expenses applies. It is important to examine the framework conditions for one-off payments in order to be able to make a correct accounting assignment. Differences between the German HGB and IFRS or US GAAP must also be taken into account here.

    MANUFACTURE OF TOOLS

    The production of tools is usually associated with a high development effort. Therefore, subsidies are often paid by the OEM to the automotive suppliers. Third-party companies are often involved in the manufacture of the tools or commissioned directly. Tools are mostly used in the series production of automotive parts. A basic distinction is made between:
    • own tools
    • customer tools
    • prototype tool
    • series tool
    • tool grants
    With our experience as tax advisers and auditors for the automotive industry, we support you with:
    • Assessment of the recognition criteria for tools, ie who has to account for the tool on the basis of the agreements concluded
    • Evaluation of the tools (acquisition and production)
    • Allocation and recording of maintenance costs
    • Accounting for grants for tools
    • Clarification of the point in time at which sales are realized (work supply contract for tools)

    LOSS ORDERS

    In practice, supplier companies often carry out intensive calculations to evaluate the inventory of unfinished and finished products or services. The sales price is used as a reference point and compared with the production costs.

    In our experience, less attention has been paid to future losses from adverse delivery obligations. The obligation to deliver parts or components in the future at a sales price that has already been fixed in advance and below the future production costs represents a typical imminent loss from pending transactions with the obligation for accounting by a prudent businessman according to Section 249 (1) sentence 1 HGB. It is important at this point also the note that a provision for impending losses according to § 5 para. 4a EstG may not be formed in the tax balance sheet. Have you ever considered whether your inventory of supply contracts may contain impending losses from pending deals? Talk to us as an auditor and adviser with expertise in the automotive industry.

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