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.
Table of Contents
I. Introduction
II. Fair value accounting according to German law
A. Objectives and basic principles
B. Concepts of valuation
1. Valuation bases as to commercial code
2. Valuation bases as to tax law
III. Fair value accounting according to IFRS
A. Objectives and basic principles
B. Concepts of valuation
1. General survey of valuation bases
2. Definition and determination of fair value
3. Fundamental ideas for a fair value measurement
4. Impetus for a fair value measurement
a) IAS 16
b) IAS 39
c) IAS 40
IV. Comparison and contrasts of fair value accounting concepts
V. Conclusions and perspectives
Research Objectives and Key Themes
This paper examines the ongoing shift from historical cost-based accounting to market-oriented fair value accounting, primarily driven by the international adoption of IFRS. The research question addresses the compatibility of fair value concepts with the German accounting system, specifically regarding the tension between shareholder information needs and traditional creditor protection.
- Comparison of valuation principles between German commercial/tax law and IFRS.
- Evaluation of the "prudence principle" versus the "decision usefulness" principle.
- Analysis of specific IFRS standards (IAS 16, 39, 40) regarding fair value implementation.
- Development of potential solutions for integrating fair value approaches into German accounting while maintaining creditor safety.
Excerpt from the Book
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:
Summary of Chapters
I. Introduction: The introduction outlines the shift in accounting policies due to globalization and the mandatory adoption of IFRS for EU-listed companies starting in 2005.
II. Fair value accounting according to German law: This chapter details the German focus on creditor protection, the prudence principle, and how valuation is handled within commercial and tax law frameworks.
III. Fair value accounting according to IFRS: This chapter covers the Anglo-Saxon "decision usefulness" approach, the definition of fair value, and the specific application of these principles in standards like IAS 16, 39, and 40.
IV. Comparison and contrasts of fair value accounting concepts: This section highlights the fundamental differences between the historical cost approach in Germany and the mixed-concept approach in IFRS, proposing a potential model for integration.
V. Conclusions and perspectives: The final chapter summarizes the findings, arguing that an evolution toward fair value is inevitable despite the challenges of maintaining traditional German creditor protection.
Keywords
Fair Value, Accounting, IFRS, German Commercial Code, HGB, Historical Cost, Creditor Protection, Decision Usefulness, Valuation, IAS 16, IAS 39, IAS 40, Financial Reporting, Prudence Principle, Revaluation Surplus
Frequently Asked Questions
What is the core subject of this paper?
The paper explores the transition from historical cost-based accounting to fair value accounting and its implications for German financial reporting.
What are the central themes discussed?
The main themes include the conflict between shareholder-oriented information needs and creditor-oriented prudence, and the technical implementation of fair value measurement.
What is the primary research goal?
The goal is to determine how German accounting can integrate advanced fair value concepts without undermining its traditional objective of protecting creditors.
Which scientific methodology is used?
The paper utilizes a comparative legal and normative analysis, contrasting German accounting statutes (HGB) with international standards (IFRS).
What is covered in the main body of the text?
The main body systematically contrasts the German "prudence principle" with the IFRS "decision usefulness" framework and provides detailed analyses of IAS 16, 39, and 40.
Which keywords best characterize this work?
Key terms include Fair Value, IFRS, HGB, Creditor Protection, Valuation Bases, and Decision Usefulness.
How does IAS 39 handle equity securities?
IAS 39 classifies equity securities based on their purpose (held-to-maturity, trading, or available-for-sale), resulting in different requirements for fair value measurement and income statement impacts.
What is the author's proposed solution for German law?
The author suggests using a revaluation surplus as a temporary "storage" for unrealized profits to satisfy shareholder transparency while ensuring funds remain non-distributable to maintain creditor protection.
- Quote paper
- Andre Tentscher (Author), 2004, A comparison and contrast of German and international financial reporting issues. Fair Value Accouting - current issues and possible solutions, Munich, GRIN Verlag, https://www.grin.com/document/60135
