BMW's Financial Reporting: Framework, Purpose, and Critical Analysis

This report provides a comprehensive analysis of BMW's financial reporting practices. It begins by outlining the regulatory framework, including the Company Act and the reporting standards (HGB and IFRS), and the conceptual framework that governs financial statement preparation. The report then explores the role of corporate governance in financial reporting, emphasizing its impact on transparency and stakeholder protection. It also examines the purpose of financial reporting for BMW's diverse stakeholders, including executives, shareholders, competitors, customers, and suppliers, and discusses how financial statements support BMW's growth objectives. The report critically assesses the different regulatory frameworks, comparing HGB and IFRS, and highlights the potential consequences of non-compliance with financial regulations, drawing parallels to the Enron case. Finally, it underscores the benefits of adhering to financial regulations for maintaining trust, expanding brand presence, and ensuring sustainable business practices.

Table of Contents
A. Context Financial Reporting......................................................................................3
1. Regulatory Framework.....................................................................................................3
a) The Company Act.............................................................................................................................3
b) The Reporting Standards.................................................................................................................4
c) Conceptual Framework...................................................................................................................4
2. Corporate Governance.....................................................................................................5
B. Purpose of Financial Reporting.................................................................................6
1. For BMW’s Stakeholders.................................................................................................6
2. For BMW’s Growth and Objectives.................................................................................7
C. Critical of different regulatory frameworks and governance of Financial Reporting.. 8
Reference.........................................................................................................................11
A. Context Financial Reporting.
1. Regulatory Framework.
When a financial statement is prepared by a company, certain regulations must be
followed to ensure that the entities in that financial statement are used in accordance
with the same rules and regulations to ensure comparative purposes. In addition, the
financial statements should ensure that the content of the report meets the criteria that
stakeholders of that organization.
a) The Company Act.
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According to the In the Accounting Directives Act, section 264 (2) HGB there is a
law that says "Account should show a TRUE and FAIR view", based on British
Company Act, section 149 (Reinke & Müller, n.d.). From that, “True and Fair”
view in auditting is defined as financial statements without significant errors and
presented honestly, fully information and financial position of an organization.
 True argues that financial statements need to be prepared in a practical,
accurate and consistent manner like IFRS. In addition, no material
misstatement is allowed in those reports to avoid misleading the
stakeholders. These mistatements can be from material errors or problems
in the transaction (FRC, 2014).
 Fair suggests that the information in the financial statements should be
presented truthfully with no misleading elements, and reflect the reality of
the company's transactions (Reinke & Müller, n.d.).
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b) The Reporting Standards.
The national accounting standard that BMW Group uses is Handelgesetzbuch or
HGB, which is accounting standard of the Germany that the companies should
prepare in their financial statements in this country (Kenton, 2019).
HGB that involve handling the registration of companies in Germany and the
regulations that they need to comply with. For example, HGB has rules on the use
of commercial brokers, agents and on the establishment and termination of
relationships with third parties. The responsibilities of HGB include hiring and
paying employees (van Tendeloo & Vanstraelen, 2005).
HGB influences performance as well as recording the figures and information in
the financial statements in order to comply with the regulations of the government
as well as relevant people in Germany, helping to maintain trust as well as brand,
and purity in the domestic market.
c) Conceptual Framework.
Conceptual Framework sets out the accounting principles for the preparing and
presenting the financial statements introduced by the IASB. It helps to generate
accounting information that meets the user needs and helps to make decisions.
Conceptual framework helps to identify "good practice" while preparing
accounting reports. The main drawback is that it provides a simple framework for
financial reporting for many users, such an approach may not meet the
requirements of all users in another situation.
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In addition, Conceptual Framework helps harmonize different financial reporting
methods and enhances the consistency in financial reporting. Knowledge of the
conceptual framework will also help the financial statements maker to apply
accounting standards more effectively. Knowledge of the conceptual framework
will assist the economic users of the financial statements in interpreting the
performance of entities.
2. Corporate Governance.
Corporate governance, according to Monks & Minow (2012), is understood as the
structures, policies and laws to guide, operate and control the entire business. It shows
the relationship between the members of the Board of Directors, management,
shareholders and stakeholders in that organization. Corporate governance needs to
balance the influences optimally for businesses to promote efficiency, openness,
transparency, contribute to better investor protection and improve competitiveness for
businesses.
Through the above details, corporate governance has numerous benefits affecting the
survival and growth of the business. First, it makes the company more open and
accountable to investors, so as to reduce disqualification and disparity among
shareholders. At the same time, it also provides effective tools to address the concerns
of stakeholders such as social development and environmental sustainability (Ha
2019).
Good corporate governance is required to prevent mismanagement to allow
companies to function more effectively, increase access to capital, reduce risks and
protect stakeholders. Lack of corporate governance can result in loss of revenue,
corruption and a bad image, not only for industry, but for society as a whole, or
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worse, it can impact society as a whole. An approach to corporate governance also
reduces risk and removes the corrosion elements within an organization.
B. Purpose of Financial Reporting.
The general purpose of financial statements, according to Mordi (2015), is to provide
information about an organization's performance, financial position and cash flow, and is
used by those who read the financial statements. In order to make those clear, they need to
analyze in terms of stakeholders and the company's development goals, namely the BMW
Group.
1. For BMW’s Stakeholders.
Every major company or group, including BMW, has stakeholders who contribute to
the development of the organization, and the company needs to respond to those
requirements to retain them (Mordi, 2015). Specifically, the main stakeholders of
BMW include executives, shareholders, suppliers, customers and competitors.
Therefore, the financial statements will provide the information needed to see if they
benefit from the company or not.
First, for executives, they use information from financial statements to plan, coordinate
and control business operations and financial decisions for an organization, and also to
make essential decisions for the business. The current debt-to-equity ratio, for
example, is critical in determining the amount of long-term capital that will need to be
raised for making other business decisions.
Shareholders are one of the key components of an organization and can enjoy the
organization's financial statements, including the BMW Group. The interests of
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shareholders will lie in what the company, namely BMW, is doing with the money
invested, and whether it will make a profit or a loss. The figures that shareholders are
interested in are profit before tax and interest and net sales to calculate as well as
ensure their profits and investment decisions.
Competitors may also be interested in a rival's financial performance in the same
business field to see whether their results are better or worse than their own, how they
have introduced new products to the marketplace and how they have done so. BMW
rivals may also be interested in comparing issues like the cost of the product on the
income statement to their own results.
The customer of the company (BMW) will be interested in the organization being able
to continue its future as a safe source of supply, and so they will be interested in
anything that can affect this, like production enrich, increasing of sales price, etc. In
addition, they also care about the quality, price of products, customer service and
ethical products in the financial statements.
For the suppliers, including BMWs, they usually care about balance sheets and income
statements. Specifically, they will be interested in whether the company can pay
regularly for sales. Therefore, they will also be interested in any items in the account
that may affect this liquidity such as bank overdrafts or loans, because they often point
to cash in the company that could make buyers unsafe in the future.
2. For BMW’s Growth and Objectives.
As mentioned above, the financial statements provide information necessary for the
company manager and stakeholders including the organization's performance, postion
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and cashflow. From that information, all stakeholders, both inside and outside the
organization, will evaluate and analyze them to get direction for corporate governance,
financial decisions, and guide the organization's philosophy and strategic goals.
For BMW Group, their goal is always to sell as many products as possible, expand the
brand and get the most profit possible for the organization and the requirements of the
people involved (Cun Hwee, 2015). More specifically, according to the 2012 financial
report, their goal is to achieve sales of more than two million products sold by 2016
and increase 8-10% of interest income before interest and tax margins in the car
segment. In that time (2012), the total number of products sold was about 1.5 million
and EBIT was about 8.3 billion EUR. Along with that, BMW also has a number of
other goals such as producing eco-friendly products and increasing sales around the
world. Based on tracking its sales on its annual financial statements, BMW gradually
adjusted the plan so that it could achieve that 2012 goal. Finally, according to the 2016
financial report, BMW from 1,540,085 products sold in 2012 has reached the
milestone of selling more than 2 million products (specifically 2,003,359 products), as
well as EBIT achieved 56.06% (2016).
C. Critical of different regulatory frameworks and governance of Financial Reporting.
BMW uses HGB-Germany accounting standard, and this standard has similarities and
differences with IFRS — International Financial Reporting Standards, according to the
financial reporting sense above. For fact, all principles use historical costs as the basis of
accounting, but IFRS allows the fair value of properties, intangible assets, financial assets
and facilities to be reassessed. And innovations in predetermined sectors but not in HGB.
Furthermore, HGB needs only a cash flow statement for consolidated financial statements
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and for publicly traded undertakings that are not expected to file consolidated financial
statements other than IFRS.
Therefore, for a multinational company like the BMW Group, stakeholders can be confuse
when reading the organization's financial statements, because each country has its own
accounting standards, or IFRS. Therefore, to overcome this problem, BMW Group also
started to use and integrate IFRS, because most of the organizations in the world or
stakeholders know about this accounting standard. It is this integration that helps not only
stakeholders understand the organization's report and make decisions, solutions to make
BMW more profitable as well as customers, investors for the organization.
In addition, any business, including the BMW Group, must comply with the provisions of
the financial statements, or will not suffer great consequences. To understand the
consequences of non-compliance, try putting BMW in the Eron Group's case even though
the two organizations are different in the field. In particular, they beautified their financial
statements using prepaid contracts, that is, recorded loans as sales; abuse of method and
SPE to conceal other financial information. Therefore, it made Enron not know where he
had a problem to fix, but the longer he hid it, the more the losses would increase, even
though the manager and accountant were profitable; but Eron went bankrupt, and the
consequences were obvious.
Through this, if BMW, first of all, does not comply with HGB or good governance, it is
likely that the financial statements will be affected, made too "beautiful" for personal use,
BMW will be able to face with losses up to billions of dollars, lost the trust of
shareholders as well as investors poured money into the organization. In addition, BMW
will also face liability before the German court, the huge compensation for customers,
investors and the biggest risk is the bankruptcy of the whole group. As for the people
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involved from other countries (because BMW is a multinational company), the company
will also have to compensate the costs for the host country including the main, investors,
customers, etc. , as well as that branch may lose market share if they fraudulently finance
in the host country, reducing the profitability and reputation of organizations in other
countries in the world.
However, if BMW does not make the same mistakes as above and follow the regulations
of finance and accounting (HGB), they not only do not have to face such scary scenarios,
but they can Increasing trust with customers, investors, and the government while
expanding the brand in the domestic market in Germany. At the same time, with those
involved in other countries, the financial reportings, which are consistent and
understandable, will help them trust the BMW brand more, both to increase customers and
investors, and to increase legitimate profits, helping the branch stand firm and thrive in the
host country. These are the undeniable benefits of complying with financial regulations
and management of financial statements for BMW Group from the past to the present and
for the future.
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