Financial reporting standards for SMEs

A German position on IFRS for SMEs

EFAA Conference, London - 13 May 2010Prof. Dr. H.-Michael Korth

(Member of the Board of EFAA)

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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 1.1.2010)

Objective: To increase the informative content

Approach

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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

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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.)

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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.

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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.

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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.

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III. European implementation ofIFRS 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.

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III. European implementation ofIFRS for SMEs (2)

Scenario 3: Modernisation of the 4th and 7th 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 4th Directive.

- Consideration of country specific characteristics, e.g. partnerships

Concerns: - Probably time-consuming process

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IV. Proposals

Information about the fair values of investments in the notes

Publication- SMEs generally adopt 4th Directive, however, no 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.

Thank you for your attention!