Voluntary Implementation of IFRS in German Non-Listed Companies

Table of Contents:

Scenario

Executive Summary

1. Introduction

2. Expected benefits from the IFRS adoption

3. Differences between German GAAP and IFRS (1140)
3.1. Property, Plant and Equipment
3.2. Intangible Assets
3.3. Investment Property
3.4. Impairment
3.5. Provisions

4. Discussion on alleged consequences of the IFRS implementation

5. Critical review of information sources

6. Conclusion

7. References

8. Appendix
Procedure of the first-time adoption under IFRS 1

Declaration:

This project is the work of Nadine Wiese and has not been submitted for any other qualification or as a part of any other module assignment.

Scenario

I am a research assistant in a German non-listed company reporting to the finance director. He asked me to investigate the voluntary adoption of IFRS. Currently, we are preparing our financial reports under German GAAP. However, the finance director has recently read an article about IFRS and its advantages. He could imagine that our organisation could also benefit from international accounting standards. For that reason, he is now contemplating the potential option to voluntarily adopt IFRS. To support the finance director in this decision and the future strategic direction of our company relating to financial reporting systems, I am required to provide a report with further information on this topic. Especially, he wants to know which benefits for our organisation as well as our stakeholders can be expected. Furthermore, he is interested in changes that are likely to occur on our financial statements. And last but not least, he wants to be informed about general consequences associated with the implementation of IFRS. Consequently, I concentrated my research on these issues and the results are presented in the following report.

Executive Summary

This report addresses the question whether unlisted German companies should voluntarily adopt IFRS. Benefits for internal as well as external users are discovered including facilitated international comparability and higher quality of financial reports. Furthermore, a comparison reveals that equity figures and volatility are higher under IFRS than under German GAAP. It is discovered that national economic and political circumstances significantly influence reporting practices and thus quality and comparability. Combined with fair value accounting which is of lower reliability as there are no active markets from which values can be derived, IFRS not necessarily seems to be a better alternative compared to German GAAP. Moreover, because IFRS is primarily intended for listed companies and investors’ needs, IFRS only appears to be an alternative for non-listed companies that plan a listing. In general, the complex and costly implementation process must be outweighed thoroughly. If costs prevail other possibilities represent IFRS for SMEs or the continuation of German GAAP.

1. Introduction

Since 2005, listed German groups have been required to prepare their consolidated accounts under International Financial Reporting Standards, IFRSs. This can be seen as one step towards a worldwide employment of a single set of high-quality financial reporting standards. In general, advantages are stated like “comparability of company performance across borders, reduced compliance costs and the abolition of reconciliations” (Mackintosh 2007). These could facilitate the attraction of investors and make global capital markets more accessible. Furthermore, the comparability of financial results enables benchmarking among companies to improve operations and eventually leads to more efficient capital markets where investments fly to most profitable entities. However, do German unlisted companies benefit from IFRS, too?

For an answer, this report deals with the possible option of German non-listed entities to voluntarily adopt IFRS. The main emphasis is placed on the discussion which benefits can be reached and which consequences have to be considered.

IFRSs are said to be more qualitative. Nonetheless, will they result in more qualitative financial reports regarding decision-usefulness, transparency and relevance? In general, accounting quality depends on accountants and their previous practices. Hence, compliance is hardly achieved. Much support by auditors as well as trainings for accountants and managers will be required. Therefore, much time is expected to implement IFRS properly, and to really achieve global convergence.

Consequently, it is not obvious whether a voluntary implementation is indeed advisable. Especially, if non-listed companies are considered. Thus, in the following, it will be discussed which reasons argue for and against the adoption of IFRS rather than German GAAP.

The subsequent section presents benefits for external as well as internal users of financial reports that motivate companies to adopt IFRS. Afterwards, some differences between IFRS and German GAAP are exposed. This comparison includes accounting standards on Property, Plant and Equipment, Intangible Assets, Investment Property, Impairment and Provisions. The outcome of this is then used to figure out supposed consequences of the IFRS implementation. The decision-usefulness and quality of financial statements under IFRS are examined considering aspects such as fair-value accounting and earnings management. After all this, information sources used are analysed towards their relevance and reliability. And finally, benefits and consequences will be summarised to assist the decision whether a non-publicly traded German company should adopt IFRS or not.

2. Expected benefits from the IFRS adoption

As already mentioned, the adoption of IFRS implicates several assumed benefits. These refer either to external or internal users of financial statements. External users comprise investors, creditors, suppliers, customers and tax authorities. Internal users mainly include managers and directors.

External Users

Adopting IFRS will provide external users with internationally comparable financial reports which simultaneously reduce complex, costly information processing. Moreover, IFRSs are said to be more qualitative i.e. “more accurate, comprehensive and timely”. Furthermore, information transparency animate companies to act more in external users’ interests. (Ball 2006, p.11) External users, hence, can make better decisions. Advantages arising due to more qualitative information are decreased uncertainty and diminishing risks as well as more precisely determinable creditworthiness. Consequently, creditors as well as investors are expected to decrease their costs of capital. This, as a corollary, will result in benefits for both because they can feel more confident in obtaining their requirements. Further stated benefits include no off-balance sheet accounting and more disclosures (Jermakowicz 2004, p.59).

Internal Users

Alleged benefits for internal users comprise comparable financial reports that can be used for benchmarking. In this way, managers can improve their firm’s operational efficiency. Furthermore, expectations of external users for relevant data can be met and therefore more investors, even international ones can be attracted at even lower cost of capital. More operational benefits are e.g. to allure qualified foreign employees and to establish or enhance international business relationships due to an international communication basis. Moreover, it is said that IFRS enables the combination of internal and external reporting, thus leading to less time and cost efforts and to more comprehensive, inter-coordinated decisions within a company. (Weißenberger et al 2004, pp.172-173)

According to these benefits expected from the IFRS implementation, such a reorganisation seems to be a tremendous progress. Nonetheless, “complexities, effects and costs of IFRS” are often overlooked (Hoogendoorn 2006, p.24). Undesirable impacts include individual statements that usually have to be prepared under national GAAP for taxation purposes as well, and the enlargement of financial reports with statements of cash flow and changes in equity (Haller and Eierle 2004, pp.30f).

Consequently, the adoption of IFRS represents pros and cons that have to be considered and will influence the decision whether to voluntarily adopt IFRS.

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