University of Bayreuth, School of Law, Economics and Business Administration
Term-paper to “business taxation and auditing”
summer-semester 2004, 7. semester 19. of April 2004

A comparison and contrast of German and international
financial reporting issues. Fair Value Accouting –
current issues and possible solutions

by: Andre Tentscher

Contents

I. Introduction 1

II. Fair value accounting according to German law  1

A. Objectives and basic principles 1
B. Concepts of valuation 2

1. Valuation bases as to commercial code 2
2. Valuation bases as to tax law 5

III. Fair value accounting according to IFRS 6

A. Objectives and basic principles 6
B. Concepts of valuation  7

1. General survey of valuation bases  7
2. Definition and determination of fair value  7
3. Fundamental ideas for a fair value measurement 8
4. Impetus for a fair value measurement 9

a) IAS 16  9
b) IAS 39 10
c) IAS 40 11

IV. Comparison and contrasts of fair value accounting concepts 12

V. Conclusions and perspectives 14

References

List of abbreviations

CPAs = Certified Public Accountants
DCF = Discounted Cash Flow
DSR = Deutscher Standardisierungsrat
FASB = Financial Accounting Standards Board
IAS = International Accounting Standard(s)
IASB = International Accounting Standards Board
IASC = International Accounting Standard Committee
IFRS = International Financial Reporting Standard(s)
JWGSS = Joint Working Group of Standard Setters
SEC = Securities Exchange Commission
 

I. Introduction

Huge changes arose in the world of economy during the last decade. Due to globalisation and competition for scarce capital¹ a heightened discussion regarding different national accounting policies emerged. There has been an intensive controversy between continental-European and Anglo-American based accountancy. All companies listed on a stock exchange in the EU are obliged to present their group accounts in accordance with IAS/IFRS² from 2005 on. One crucial aspect of IRFS focuses on the increasing tendency to recognise a fair value which implies a departure from historical cost-based financial statement to a rather market value-based one. Subsequently, this paper introduces and compares the current valuation bases of the German commercial/tax law and IRFS. Because of the increasing importance of IFRS the major point reflects this consideration. Finally, contrasts will be emphasised and opportunities for a complete takeover of an advanced fair value accounting to German accountancy will be examined. For this reason a reference to the general objectives and principles both of the accountancies is inevitable and will be introduced in either case.

II. Fair value accounting according to German law

A. Objectives and basic principles

“A particular characteristic of German accounting is the conservative reckoning of profit in individual accounts, intended to guard against a too rosy view of net assets or net wealth.”³ Thereby the objective is to protect creditors’ interests which have strong impact on German law. That is evident when analysing the functions of annual financial reporting.

Figure 1: Functions of annual financial reporting [figure only in downloadfile]

Although profit measurement and regulation of profit distribution first of all determine the claims of information-orientated shareholders likewise owners, managers and tax authorities, protection of the creditors’ contractual income is still taken into consideration. Thus, the nominal guaranteed capital is maintained.⁴ That is mostly to see in the large impact of the prudence principle which focuses more on the interests of creditors by understating of profits than delivering reliable information for shareholders.⁵

A further particularity of German accounting is the close relationship between commercial and tax accounting which are based on the authoritative principle.⁶ Therefore, decisions made in commercial accounting immensely influence tax accounting, unless mandatory rules of taxation require other valuation bases.

B. Concepts of valuation

1. Valuation bases as to commercial code

Owing to the current balance sheet conception income determination by the ‘single net worth comparison’ (Einzelvermögensvergleich)⁷ two main questions arise. As soon as the question about recognition of a balance sheet item is affirmed, its measurement has to be settled. The reply plays a huge role for the net worth and results, since it affects the balance sheet result directly. Nevertheless, lots of problems derive from the measurement, because it often depends on the objectives of the valuer.⁸ General valuation principles are codified in §§ 252-256 HGB for business organisations of all types and supplemented by special provisions in §§ 279-283 HGB for limited companies. The following figure shall give an overview:

Figure 2: General valuation principles as to commercial code [figure only in downloadfile]

The paramount principle is the prudence principle and his specifications, namely the principles of realisation⁹ and imparity, which require a further explanation. Thus, the other principles will not be discussed in this paper. As mentioned above, German law is governed by the protection of creditors. Hence, the realisation principle permits only the recognition of realised profits. Unrealised - but realisable - profits must not be recognised as long as they are not realised.¹⁰

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1 c.f. Bruns, H-G., Der Gang an die New York Stock Exchange – das Beispiel der Daimler-Benz AG (WPK- Mitteilungen, Sonderheft 1997), p. 32

2 In the following IFRS refers to IAS/IFRS.

3 Ballwieser, W., Germany Individual Accounts, in: Ordelheide, Dieter/ KPMG (ed.), Transnational Accounting, Basingstoke and New York (1995), p. 1401

4 c.f. Moxter, A., Bilanzlehre I (1984), p. 93

5 c.f. Ballwieser, W., Germany Individual Accounts, in: Ordelheide, Dieter/KPMG, Transnational Accounting, Basingstoke and New York (1995), p. 1401

6 c.f. Federmann, R., Bilanzierung nach Handelsrecht und Steuerrecht (2000), p. 182 ff.

7 c.f. Sigloch, J., Rechnungslegung (2003), p. 32

8 c.f. Wöhe, G., Bilanzierung und Bilanzpolitk (1997), p. 337 f.

9 The realisation principle is interpreted here in broad terms and implies the matching of expenses.

10 c.f. Baetge, J., Kirsch, H-J., Thiele, S., Bilanzen (2002), p. 164