In line with European Commission (EC) Regulation No. 1606/2002, listed companies in Germany are required to use International Financial Reporting Standards (IFRSs) in their consolidated accounts. The EC's 2006 publication on the implementation of IFRSs in EU member states points out that Germany permits IFRSs in the annual and consolidated accounts of all types of companies for information purposes only, and these entities are required to prepare financial statements in accordance w ith national accounting law for purposes of profit distribution, taxation, and financial services supervision. According to a number of publications on the subject, German accounting requirements, which are primarily contained in the German Commercial Code (HGB), differ from IFRSs. However, per the December 2007 update available from the Deloitte & Touche IAS Plus website, the German Ministry of Justice issued a draft of the German Accounting Law Modernization Act in November 2007 with the goal of modernizing the HGB, reduce the regulatory burden on companies, and in general to achieve closer alignment with IFRSs.

General Overview

As described in the 2006 United Nations Conference on Trade and Development (UNCTAD) report, the German Generally Accepted Accounting Principles (GAAP) are based on both codified and non-codified underlying principles. The codified principles are contained in the German Commercial Code (Handelsgesetzbuch, or HGB). However, accounting requirements contained in the HGB and other legal requirements lack guidance on specific issues such as leasing accounting. Therefore "additional literature and court decisions interpreting accounting issues are an essential part of the accounting system" (p. 4). In addition, the German Accounting Standards Board (GASB) sets German Accounting Standards (GASs) that are applied in the preparation of the consolidated financial statements. As described in the 2005 Institute of Auditors (Institut der Wirtschaftsprfer, or IDW) self-assessment, "the standards of the GASB provide recommendations on how to apply the accounting principles of the German Commercial Code and fill existing gaps within these accounting rules with respect to the consolidated financial statements" (p. 5-6). The Ministry of Justice (Bundesministerium der Justiz, or MoJ) can recognize and publish standards issued by the GASB. However, the MoJ's approval does not make the standards legally binding. The UNCTAD report pointed out that "there are still doubts as to the degree of legal authority of these standards. This is due partly to preparers and auditors questioning the legal authority of GASs and partly to lack of enforcement" (p. 9).

In addition to the HGB and GASs, accounting requirements are contained in the German Limited Liabilities Company Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, or GmbHG), German Stock Corporation Act (Aktiengesetz, or AktG), German Partnership Law for Limited Liability Partnerships (Gesetz über Partnerschaftsgesellschaften Angehöriger Freier Berufe, or PartGG), German Publicity Law(Publizitätsgesetz, or PublG), Regulation for the Accounting for the Banking Sector (Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute, or RechKredV), German Banking Act (Kreditwesengesetz, or KWG), Regulation for the Accounting of the Insurance Sector (Verordnung über die Rechnungslegung von Versicherungsunternehmen, or Rech Vers V), German Insurance Supervisory Law (Versicherungsaufsichtsgesetz, or VAG), Cooperative Association Law (Gesetz betreffend die Erwerbs- und Wirtschaftsgenossenschaften, or GenG), and the Regulations for the Accounting for Hospitals (Krankenhaus-Buchführungsverordnung, or KHBV). The HGB requires that annual financial statements be audited and also ensures the application of the required accounting standards by making violations legally punishable.

The UNCTAD report pointed out many differences between the German and international accounting system. The objective of financial statements prepared under IFRSs is to provide information to investors, while the German system focuses on providing information on distributable profits in order to protect creditors. According to the PricewaterhouseCoopers' 2007 "Doing Business" guide, "there is a strong emphasis on the principle of prudence, less on that of consistency, and none at all on the principle of matching income with its related expense." Furthermore, under the HGB regime, tax regulation also influences the preparation of financial statements. Germany recognizes the need for some degree of harmonization of accounting requirements with those accepted internationally. According to the UNCTAD report, since 1998 the national legislator has allowed listed companies to prepare consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) or the U.S. GAAP (instead of German GAAP), since German accounting practices were not only unknown outside Germany (specifically in the context of companies seeking listing on the New York Stock Exchange), but were also getting some negative publicity. Further, in anticipation of EU developments on harmonization of accounting practices, the German parliament set up a private institution, the German Accounting Standards Committee (DSRC) and its standard-setting arm the GASB. The 2006 European Commission (EC) report on the implementation of Regulation No. 1606/2002 points out that, beginning on January 1, 2005, listed companies in Germany are required to prepare their consolidated accounts in accordance with IFRSs (formerly the International Accounting Standards, or IASs) as issued by the International Accounting Standards Board (IASB) and endorsed by the EC. Germany permits IFRSs in the annual and consolidated accounts of all types of companies for information purposes only, and requires financial statements to be prepared in accordance with national accounting law for the purposes of profit distribution, taxation, and financial services supervision. As indicated in the IAS Plus December 2007 update, the German Ministry of Justice issued a draft of the German Accounting Law Modernization Act (Bilanzrechtsmodernisierunsgeetz, or BilMoG) in November 2007 that aimed to modernize the accounting law and reduce the regulatory burden on companies. Further, the update noted that "the proposed changes are generally in the direction of closer conformity of the HGB with IFRSs."

The UNCTAD report explains that, under the Accounting Enforcement Act (Bilanzkontrollgesetz, or BilKoG), a two-tier enforcement system was put in place. The German Financial Reporting Enforcement Panel (Deutsche Prüfstelle für Rechnungslegung DPR e.V., or FREP) forms the first tier and examines consolidated and separate financial statements of entities listed in Germany to monitor infringements and ensure compliance with the accounting requirements. However, the FREP has no authority to impose sanctions. The Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin), established in 2002 as an integrated financial supervisory authority for the banking, securities, and insurance sector, forms the second tier of the enforcement structure. The BaFin, by virtue of being a federal agency, is called upon by the FREP when further action is needed. It has the legal authority to impose sanctions in cases of violations.

The IDW and the Chamber of Statutory Auditors (Wirtschaftsprüferkammer, or WPK) are the two main professional bodies. The WPK is a public body under public supervision and membership is mandatory. The IDW is a private body that sets the auditing requirements. Membership is voluntary. The WPK and the IDW are listed as members on the International Federation of Accountants website.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

II

There is insufficient publicly available information addressing this principle.

IFRS 2: Share-based Payment (effective 2005)

II

There is insufficient publicly available information addressing this principle.

IFRS 3: Business Combinations (effective 2004)

NC

According to a 2003 KPMG report, "the requirements for a uniting of interests are easier to satisfy than under IFRS, but such accounting is applied optionally." There are also differences in the accounting for consolidation, goodwill, negative goodwill, deferred taxes, etc.

IFRS 4: Insurance Contracts (effective 2006)

II

There is insufficient information publicly available that directly addresses this principle.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

NC

According to the 2003 KPMG report, "there is no concept of discontinuing operations. A gain/loss on the sale or abandonment of a major part of an enterprise sometimes is presented as an extraordinary item" (p. 16).

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

II

There is insufficient publicly available information addressing this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

According to the 2003 KPMG report, "disclosures of certain risks are part of management report. There are no specific rules that are comparable to IFRS" (p. 17).

IAS 1: Presentation of Financial Statements (effective 2007)

NC

According to the 2003 KPMG report, "a statement of cash flows and a statement of changes in equity (from 2003) are required only for listed companies" (p. 5).

IAS 2: Inventories (effective 2005)

NC

According to the 2004 CBSO comparison, under German GAAP it is possible to use the partial cost method, whereas under IFRS the total cost method is used. The KPMG report further adds that payments received on orders can be deducted from inventories and "purchase market prices generally are considered to be more relevant than sales market prices in assessing the current market price (net realizable value) of inventory" (p. 12) .

IAS 7: Cash Flow Statements (effective 1994)

NC

According to the 2003 KPMG report, there are differences in classification of cash flows as cash flows from operating or investing activities. Moreover, presentation of cash-flow statements are required only for listed companies.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

II

There is insufficient information publicly available that directly addresses this principle.

IAS 10: Events after the Reporting Period (effective 2005)

II

According to the 2003 KPMG report, at the time of the assessment, treatment of events after the balance sheet date under German GAAP was similar to that of IFRS. However, IAS 10 has been subsequently revised and there is insufficient information publicly available that directly addresses comparability of the German requirements with the revised IAS 10.

IAS 11: Construction Contracts (effective 1995)

NC

According to the 2003 KPMG report, "revenue from construction contracts generally is recognized using the completed contract method, which is prohibited under IFRS" (p. 14).

IAS 12: Income Taxes (effective 2001)

NC

According to the 2004 CBSO comparison, "in individual accounting, there is a listing option with a corresponding limitation on profits distribution for active deferred taxes; listing is obligatory in the case of active deferred taxes arising from consolidation measures; listing is always mandatory in the case of passive deferred taxes." Additionally, the accounting for deferred tax assets on tax losses carried forward is not allowed under German GAAP, whereas it is required under IFRS.

IAS 14: Segment Reporting (effective 1998)

NC

According to the 2003 KPMG report, unlike IFRS "the segmentation is based wholly on the internal reporting structure" (p. 16).

IAS 16: Property, Plant and Equipment (effective 2005)

NC

According to the 2003 KPMG report, unlike IFRS "revaluations are not permitted" (p. 6). Additionally, dismantling, removal, and restoration costs cannot be capitalized and component accounting is not allowed. Further, the report noted that depreciation is tax driven and "compensation received for a lost asset is deducted from the carrying amount of the replacement asset" (p.7).

IAS 17: Leases (effective 2005)

NC

According to the 2003 KPMG report, "in practice the classification of leases generally is driven by tax guidelines. In many cases, lease contracts are classified as operating leases, but would be finance leases under IFRS" (p. 16). Additionally, "gains on sale and leaseback transactions often are recognized in the period of sale" (p. 16).

IAS 18: Revenue (effective 1995)

NC

According to the 2003 KPMG report, "under German GAAP, the legal structure of a transaction is more important than under IFRS" (p. 14). Additionally, unlike IFRSs, which use the percentage-of-completion method, "revenue from construction and fixed price service contracts generally are recognized using the completed contract method" (p. 14). Among other issues, the report pointed out that under German GAAP revenue is not defined. However in practice it is similar to IFRS. Also, there is no specific guidance on advertising barter transactions.

IAS 19: Employee Benefits (effective 2006)

NC

According to the 2004 CBSO comparison, in Germany, the current market value system is applied. Also, future wage and salary increases are not taken into account. The KPMG report further noted that there are differences in the valuation for defined benefit plan, the interest rates for discounting, and accounting for actuarial gains and losses.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

NC

According to the 2003 KPMG report, "grants in respect of biological assets generally are recognized as revenue over the useful life of the asset" (p. 14).

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

NC

According to the January 2003 IAS Plus update, "the main provisions of E-GAS 18: Foreign Currency Translation correspond with IAS 21 as potentially amended by the IASB's Improvements Project." The KPMG report further noted that, unlike the IFRS, "there are no legal requirements for translating the financial statements of foreign subsidiaries for consolidation purposes" (p. 8). Also, there are no legal requirements for hyperinflation accounting.

IAS 23: Borrowing Costs (effective 1995)

NC

According to the 2003 KPMG report, "general borrowing costs may not be capitalized" (p. 15).

IAS 24: Related Party Disclosures (effective 2005)

NC

According to the 2003 KPMG report, "except in respect of directors' remuneration, the disclosures are less extensive than under IFRS" (p. 16).

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

II

There is insufficient information publicly available that directly addresses this principle.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

NC

According to the 2003 KPMG report, "the exemptions from preparing consolidated financial statements are more extensive than under IFRS" (p. 5). Further, unlike IFRS where consolidation is based on the power to control, the German GAAP allows consolidation to be based on actual control in practice. Also, "a subsidiary may be excluded if the information necessary for consolidation cannot be obtained without disproportionate expense or undue delay...[and] a subsidiary is excluded if its operations are so different from those of the rest of the group that consolidation would impair fair presentation" (pp. 9-10). Per the German GAAP, instead of being treated as financial assets, subsidiaries excluded from consolidation may be treated as associates.

IAS 28: Investments in Associates (effective 2005)

NC

According to the 2003 KPMG report, there are differences in the way an associate is characterized and the accounting of goodwill. Further, unlike IFRS, under German GAAP "the accounting policies of an associate need not be consistent with those of the group" (p. 10).

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

NC

According to the January 2003 IAS Plus update, "the scope of E-GAS 18 includes provisions concerning financial reporting in hyperinflationary economies. The draft allows for use of several methods to translate hyperinflationary financial statements whereas IAS 29 stipulates a single method." Further, the KPMG report noted that "there are no rules on accounting for the effects of changing prices or hyperinflationary currencies" (p. 6).

IAS 31: Interests in Joint Ventures (effective 2005)

II

There is insufficient publicly available information directly addressing this principle.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

NC

Per the 2003 KPMG report, "disclosures of certain risks are part of the management report. There are no specific rules that are comparable to IFRS" (p. 17).

IAS 33: Earnings per Share (effective 2005)

NC

Disclosure of earnings per share is not required, according to the 2003 KPMG report.

IAS 34: Interim Financial Reporting (effective 1999)

NC

According to the 2003 KPMG report, "the results of any review by an independent auditor are disclosed" (p. 17), whereas there is no such requirement in the equivalent international standard.

IAS 36: Impairment of Assets (effective 2004)

NC

According to the 2004 CBSO comparison, unscheduled write-downs are compulsory when there is a permanent loss of value and "corporate enterprises can undertake an unscheduled depreciation of financial assets even if the loss of value is only temporary," however, under IAS, "a check has to be made on each balance sheet day to ascertain what signs there are, if any, that an asset has sustained a further loss in value." The KPMG report further noted that there are differences in recognition of impairment and "repurchase prices, costs, estimated selling prices or discounted cash flows can be the basis of measuring impairment losses" (p. 12). Also, unlike IFRS, "impairment losses are measured on an item-by-item basis, instead of using cash generating units" (p. 12).

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

The 2003 KPMG report noted that "the recognition of provisions is influenced by the prudence principle to a greater extent than under IFRS" (p. 12). Further, there are differences in the measurement of provisions. Only provisions that contain an interest rate component are discounted. Unlike IFRS, German GAAP does not allow capitalizing of provisions for decommissioning, and provisions are recognized for certain repairs and maintenance expenses.

IAS 38: Intangible Assets (effective 2004)

NC

There are differences between German GAAP and IFRS in accounting for amortization of intangible assets, according to the 2003 KPMG report.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

NC

According to the 2003 KPMG report, unlike IFRSs, financial rules regarding financial instruments are limited and accounting for financial instruments is based on historical costs vis-à-vis IFRSs where many financial instruments are stated at fair value. Also, "instruments with debt and equity features are not split-accounted" (p. 11).

IAS 40: Investment Property (effective 2005)

NC

According to the 2003 KPMG report, "there is no fair value accounting for investment property" (p. 10).

IAS 41: Agriculture (effective 2003)

NC

According to the 2003 KPMG report, there are no requirements for accounting for biological assets.