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

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Contents

  Page  

  List of abbreviations  II

Table of  figures  III

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  IV

- II - Listof abbreviations

BB Betriebs-Berater BewG Bewertungsgesetz BFuP Betriebswirtschaftliche Forschung und Praxis c.f. confer CPAs Certified Public Accountants DCF Discounted Cash Flow DSR Deutscher Standardisierungsrat ed. edited e.g. EStG f. ff. FASB FW Framework HGB Handelsgesetzbuch i.e. id est

IAS IASB IASC IFRS JWGSS no. number p. page SEC SFAS t 0, t 1 , … WP WPK ZIP Zeitschrift für Wirtschaftsrecht und Insolvenzpraxis

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Table of  figures Page  

  Figure 1 : Functions of annual financial reporting  

  Figure 2 : General valuation principles as to commercial code  

  Figure 3 : Valuation bases as to IFRS  

  Figure 4 : Measurement as to IAS 16  

  Figure 5 : Accounting of equity securities  

  Figure 6 : Measurement of fixed available-for sale securities  

  Figure 7 : Possible and current solutions of income determination  

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I. Introduction

Huge changes arose in the world of economy during the last decade. Due to globalisation and competition for scarce capital ¹ 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/IFRS ² 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

Source: own presentation in accordance with Coenenberg, A., Jahresabschluss und -analyse (2003), p. 19

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

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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:

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.