- 1 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. Accounting by Small and Medium-sized Entities (SMEs) - German Case Study - Kati Beiersdorf Accounting Standards Committee of Germany Vienna, 15 March 2006

- 2 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. Agenda A.Development and Characteristics of National GAAP B.Accounting by SMEs in Germany C. Future Developments

- 3 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.1German Accounting Legislation 1861 First Uniform Accounting Regulation independent of legal form or size of entities (AGHGB) Accounting Laws differentiating between legal forms, e.g. corporations, partnerships (e.g. AktG, GmbHG) Link between financial and tax accounting regulated by law 1897 For all companies: „German Accepted Accounting Principles“, obligation to publish financial accounts depending on legal form (HGB) Continuing differentiation: accounting regulations for corporations; in addition: differentiation between sizes (Aktienrechts(not)verordnung, AktG) Focus of accounting regulation: corporations = differentiation by legal form 1969 New level: Accounting regulations mandatory for all legal forms, but dependent on size (PublG) = differentiation by legal form and size

- 4 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.1German Accounting Legislation 1985 Implementation of 4th, 7th and 8th European Directives (BiRiLiG) and Restructuring of German Accounting Legislation  from fragmentation by laws specific to legal forms to generally accepted principles for all entities First time: broad accounting regulations for all companies within the German Commercial Code (Third Book of HGB) Differentiation by Legal Form Part one: all merchants Part two: supplementary rules for corporations Part three: cooperatives Differentiation by Size Corporations and commercial partnerships (part two): small, medium-sized, large Other companies must comply with PublG when certain size criteria are met First Level: Second Level:

- 5 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.1 German Accounting Legislation 1998 Option for capital market oriented companies to prepare their consolidated financial statements in accordance with internationally accepted accounting standards (US GAAP, IFRS) (KapAEG) = additional differentiation by capital market orientation and form of financial statement (single or consolidated) Modernisation of German Accounting Legislation Globalisation and Internationalisation drive further Developments Importance of Information Several Criteria for Differentiation between different GAAP current 2004 Implementation of EU-Directive, IFRS-Regulation (BilReG)

- 6 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.2IFRS Regulation – Member State Options Group Accounts Individual Accounts LISTED Companies NON-LISTED Companies IFRS MANDATORY since 2005 Member State Option Member State Option Member State Option

- 7 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.3Member State Options – Germany IFRS: Prohibited German GAAP Accounts Still Mandatory Group Accounts Individual Accounts LISTED Companies NON-LISTED Companies IFRS MANDATORY since 2005 Obligation Effective from 2007 for Listed debt instruments and users of US GAAP IFRS: Option IFRS: Prohibited German GAAP Accounts Still Mandatory Large Companies may file IFRS financial statements with the Federal Gazette

- 8 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. A.4Characteristics of German Accounting Legislation Consolidated Financial Statements: provide Information Objective / Purpose Single Financial Statements: determine distributable profits tax purposes information, stewardship Prudence: Imparity Principle German Accepted Accounting Principles Creditor oriented Investor oriented Focus Realisation Principle historical cost convention no recognition of unrealised gains Anticipation of Losses recognition of expected or unrealised losses required principle of lower of cost or market value (write- downs)

- 9 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. Agenda A.Development and Characteristics of National GAAP B.Accounting by SMEs in Germany C. Future Developments

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. 2003: 3.38 mil SMEs with about 20 mil employees Source: IfM Bonn (2004), SMEs in Germany Facts and Figures 2004, page ,2 70 % sole proprietorships 15,4 % private limited companies 12,6 % partnerships 2 % other legal forms B.1„Mittelstand“ – Relevance of SMEs in Germany SME-Definition by IfM: number of employees < 500 annual turnover < 50 mil €

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. B.2 Accounting Options for SMEs Remarks: integration in international market (e.g. 1/6 of profits in SMEs with annual turnover of 25 – 50 mil € from international transactions) education for companies, auditors, tax and accounting advisors in two systems necessary demand for SMEs to apply IFRS because of consolidation by parent companies, demand by banks, international creditors or international capital markets Accounting for SMEs National GAAP majority of SMEs applies National GAAP Advantages well known standards with long tradition prudence principle Disadvantages no acceptance internationally lack of information IFRS larger, international and capital market-oriented companies exercise option Advantages internationally accepted informative presentation of financial position Disadvantages at present two financial statements required debt/equity problem

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. B.3Differential Financial Reporting under German GAAP Levels of Differentiation (1) Accounting Criteria for Differentiation (1) Legal Form (2) Size all merchants corporations and commercial partnerships other… (2) Auditing(3) Publication(4) Enforcement Total AssetsAnnual TurnoverEmployees Small < mil €< 8.03 mil €< 50 Medium-sized < mil €< mil €< 250

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. B.4Differential Financial Reporting under German GAAP (1) Accounting: Examples Legal FormAll MerchantsSupplementary Regulation for Corporations components of financial statements balance sheet, income statements PLUS notes, management report supplementary regulation for consolidated financial statements PLUS statement of changes in shareholders‘ equity, cash flow statement and (optional) segment reporting recognition and measurement write-downs based on prudent business judgement no such write-downs measurement options less options: e.g. if write-downs no longer apply lower carrying amount cannot be retained (2) Auditing Size of EntityLargeMedium-sizedSmall audit of annual reportrequired exempted

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. B.4Differential Financial Reporting under German GAAP (3) Publication Requirements Size of EntityLargeMedium-sizedSmall preparing f/s within3 months 6 months file f/s with commercial register within 12 months balance sheetyesyes, shorter version profit/lossyes no notesfullsimplifiedsignificant simplifications management reportyes no publication in federal gazette yesno (4) Enforcement Listed SecuritiesNo Listed Securities examined by financial reporting enforcement panelyesno

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. Agenda A.Development and Characteristics of National GAAP B.Accounting by SMEs in Germany C. Future Developments

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. C. Future Developments Current Developments: Modernisation of German Accounting Legislation Discussion of alternative systems of deter- mining the distributable profit Discussion to separate tax and accounting legislation Increasing demand for accounting according to IFRS in SMEs High costs of different accounting systems Accounting for SMEs Decisive Factors in Germany German GAAP is creditor oriented Tax link IASB-Project: IFRS for SMEs Future Uniform accounting regulation in accordance with IFRS (IFRS and IFRS for SMEs) ? SME-Project: Consideration of SME-specific aspect Accounting simplifications

© Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V. Zimmerstraße Berlin Tel. +49 (0) Fax +49 (0) Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e. V.