Consolidated financial statements in IAS/IFRS and German GAAP – Major differences explained

Table of Contents

Executive Summary

List of Abbreviations

List of Tables

List of Figures

1 Introduction

2 Main Part
2.1 General differences of consolidated financial statements in German GAAP and IAS/IFRS
2.2 Explanation of a major difference between the German GAAP and IAS/IFRS

3 Conclusion

Executive Summary

Due to a regulation of the European Union (EU) concerning financial accounting issued on June 6th, 2002, all listed companies in EU are obligated to provide their Consolidated Financial Statements (CFS) in accordance with financial accounting principles of International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) from January 1st, 2005. This regulation enables a necessary harmonization of accounting principles within the EU and supports a clear comparability of CFS worldwide.

The object of this study is to analyze major differences of CFS in German GAAP and IAS/IFRS. Thereby, variations of both accounting standards are compared and a major difference is explained thoroughly with a concrete example.

The major differences of CFS in IAS/IFRS and German GAAP result from different aims of both accounting standards. The German GAAP is strongly based on prudence principle for protection of creditors and authoritative principle (tax accounting based on commercial accounting). In comparison, the IAS/IFRS deliver potential investors realistic and decision useful information about assets, finance, and profit situations of a company (true and fair view / fair presentation principle). These basic principles could be reflected in several key points of the both accounting standards whose differences are clarified in this study.

Furthermore, an essential key point of CFS namely the basis of consolidation (contains enterprises included in the consolidation and capital consolidation methods) is illuminated with a concrete example. Hereby, the relation between the control influence of the parent enterprise on its “sub-entities” and the correspondent capital consolidation methods are studied.

List of Abbreviations

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List of Tables

Table 1 – Comparison of CFS according to the German GAAP and IAS/IFRS

Table 2 – Different consolidations in accordance with the German GAAP and IAS/IFRS

List of Figures

Figure 1 – Basis of consolidation according to the IAS/IFRS

Figure 2 – Structure of a group company consists of parent A-AG and “sub-entities”

1 Introduction

Due to a regulation of the European Union (EU) concerning financial accounting issued on June 6th, 2002, all listed companies in EU are obligated to provide their Consolidated Financial Statements (CFS) in accordance with financial accounting principles of International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) from January 1st, 2005.^[1] This regulation enables a necessary harmonization of accounting principles within the EU and supports a clear comparability of CFS worldwide. The internationalization of financial accounting based on IAS/IFRS principles contributes to increase the transparency in EU capital markets and facilitate the capital procurement and investment in international stock markets. According to the EU regulation the IAS/IFRS principles may also applied legally for non-listed companies and individual financial statements from 2005. It is merely a matter of time that the national financial accounting standards like the German GAAP (Generally Accepted Accounting Principles) will be replaced by the IAS/IFRS.

There are considerable variations of CFS in German GAAP and IAS/IFRS which result from the different aims of both accounting standards. 1 The German GAAP is strongly based on prudence principle for protection of creditors and authoritative principle (tax accounting based on commercial accounting). From this reason, the CFS in German GAAP does not present a positive picture about the financial status of a company. In comparison, the IAS/IFRS deliver potential investors realistic and decision useful information about assets, finance, and profit situations of companies (true and fair view / fair presentation principle). The CFS in IAS/IFRS is characterized by high reliability, transparency, understand ability, and international comparability of companies.

The object of this study is to analyze the differences of CFS in German GAAP and IAS/IFRS. Thereby, variations of both accounting standards are compared and a major difference is explained explicitly with a concrete example.

2 Main Part

2.1 General differences of consolidated financial statements in German GAAP and IAS/IFRS

The CFS in German GAAP and IAS/IFRS shows differences in several key points which are presented in the synopsis in table 1. It is to point out that despite generally identical conception rules, small variations could be occurred.^[2],^[3],^[4]

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^[1] Schmolke et. al (2006). p. 512–518.

^[2] Küting et. al (2005). p. 559–567.

^[3] Auer (2003). p. 173–195.

^[4] KPMG (2003). IFRS compared with US GAAP and German GAAP. Available from

http://www.oeci.at/pics/2_bild/kongresse_messen/IFRS%20vs%20US-GAAP%20vs%20dHGB.pdf

(accessed on 20.10.2008).