Financial reporting standards for SMEs A German position on IFRS for SMEs EFAA Conference, London - 13 May 2010 Prof. Dr. H.-Michael Korth (Member of the Board of EFAA)

2 I.Modernisation of German Commercial Code (1) The German Commercial Code has recently been fundamentally modernised. Which IFRS-rules should be adopted? Which rules of the German Commercial Code require improvement? Result: Act to Modernise Accounting Law – BilMoG (General application since ) Objective: To increase the informative content Approach

3 I.Modernisation of German Commercial Code (2) Deficits, which have been corrected –Elimination of various disclosure and valuation options –No correlation of the values in the commercial balance sheet with the values in the tax balance sheet –Elimination of information deficits by including additional information in the accompanying notes of financial statements

4 I.Modernisation of German Commercial Code (3) Rules that were adopted in line with IFRS for SMEs –Option to capitalise internally generated intangible fixed assets –Legal definition of hedge accounting (recognition of profit and loss of a hedging instrument and a hedged item at the same time) –Deduction of own shares held by the company from equity –Plan assets (Employment benefits as part of a pension scheme, which are unseizable, can be set off with corresponding pension obligations.)

5 I.Modernisation of German Commercial Code (4) Rules that were adopted in concordance with IFRS for SMEs –Discounting of provisions –Measurement of provisions at the best estimate of the amount required to settle the obligation at the reporting date –Valuation of financial instruments at fair value on the balance sheets limited to credit institutions and financial services institutions –Deferred taxes are calculated according to the temporary concept on basis of the individual balance sheet items.

6 II.IFRS for SMEs (1) Comments on IFRS for SMEs –IFRS for SMEs have a primary focus on the interests of investors. –The option of fair value approach leads to expenditure of work and a high volatility of profits, despite the limitation of the impairment test to triggering events. –For German partnerships the accounting rule for financial instruments with the option to cancel, leads to the effect, that no equity can be shown.

7 II.IFRS for SMEs (2) Comments on IFRS for SMEs –The required information in the notes is too extensive for SMEs (e.g. statement of changes in equity). –The depreciation of capital assets by distinctive components leads to a high expenditure of work.

8 III.European implementation of IFRS for SMEs (1) Scenario 1: Adoption on a European level by endorsement Concerns: - Future European accounting standards depends ultimately on a private accounting standards board (IASB). - IFRS for SMEs generate pro-cyclic effects regarding profits. Scenario 2: Direct adoption by individual member states Concerns: - Contradicts the objective to make financial statements comparable.

9 III.European implementation of IFRS for SMEs (2) Scenario 3: Modernisation of the 4 th and 7 th Directive Advantages:- European accounting standards are set by democratic legitimised bodies. - Chance to adopt the advantages of specific IFRS for SMEs- rules and eliminate the deficits and weaknesses of the 4 th Directive. - Consideration of country specific characteristics, e.g. partnerships Concerns:- Probably time-consuming process

10 IV.Proposals Information about the fair values of investments in the notes Publication -SMEs generally adopt 4 th Directive, however, n o publication, because no need -Only private owners -Ultimate company’s bank gets all financial information anyway -Any third party (investor) may receive related information on request.

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