- 1 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e

- 1 - © Kati Beiersdorf, ASC of Germany / 15 March 2006

®Deutsches Rechnungslegungs StandardsAccounting 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



®Committee e. V.

Agenda

A. Development and Characteristics of National GAAP

B. Accounting by SMEs in Germany

C. Future Developments



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A.1 German Accounting Legislation

1861 First Uniform Accounting Regulation independent of legal form or size of entities (AGHGB)

1870 - 1892

• 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)

1931- 1965

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



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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 FormPart one: all merchantsPart two: supplementary rules for corporationsPart 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:



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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)



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A.2 IFRS Regulation – Member State Options

Group Accounts Individual Accounts

LIS

TE

D

Co

mp

an

ies

NO

N-L

IST

ED

C

om

pa

nie

s

IFRS MANDATORY

since 2005

Member State Option

Member State Option

Member State Option



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A.3 Member State Options – Germany

IFRS: Prohibited

German GAAP Accounts

Still Mandatory

Group Accounts Individual Accounts

LIS

TE

D

Co

mp

an

ies

NO

N-L

IST

ED

C

om

pa

nie

s

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



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A.4 Characteristics 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)



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Agenda






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2003: 3.38 mil SMEs with about 20 mil employees

SM Es in % of all enterprises subject to VAT

99,7

Source: IfM Bonn (2004), SMEs in Germany Facts and Figures 2004, page 5 - 12.

turnover of SM Es in % of all turnovers subject to VAT

41,2• 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 €



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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 GAAPmajority of SMEsapplies National GAAP

Advantages• well known standards

with long tradition• prudence principle

Disadvantages• no acceptance

internationally• lack of information

IFRSlarger, international andcapital market-orientedcompanies exerciseoption

Advantages• internationally accepted• informative presentation

of financial position

Disadvantages• at present two financial

statements required • debt/equity problem



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B.3 Differential 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 Assets Annual Turnover Employees

Small < 4.015 mil € < 8.03 mil € < 50

Medium-sized < 16.06 mil € < 32.12 mil € < 250



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(1) Accounting: Examples

Legal Form All Merchants Supplementary 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 optionsless options: e.g. if write-downs no longer apply lower carrying

amount cannot be retained

(2) Auditing

Size of Entity Large Medium-sized Small

audit of annual report required required exempted



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(3) Publication Requirements

Size of Entity Large Medium-sized Small

preparing f/s within 3 months 3 months 6 months

file f/s with commercial

register within12 months 12 months 12 months

balance sheet yes yes, shorter version yes, shorter version

profit/loss yes yes no

notes full simplified significant simplifications

management report yes yes no

publication in federal

gazette yes no no

(4) Enforcement

Listed Securities No Listed Securities

examined by financial reporting enforcement panel yes no



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Agenda






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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

DecisiveFactors inGermany

• 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



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10969 Berlin

Tel. +49 (0)30 20 64 12 0

Fax +49 (0)30 20 64 12 15

www.drsc.de

[email protected]

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Deutsches Rechnungslegungs StandardsAccounting Standards Committee of Germany

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Documents

- 1 - © Kati Beiersdorf, ASC of Germany / 15 March 2006 ® Deutsches Rechnungslegungs Standards Accounting Standards Committee of Germany ® Committee e