ifrs for non-publicly accountable entities a german...

Challenges in implementing the acquiscommunautaire

IFRS for Non-publicly Accountable Entities

A German Perspective

World Bank REPARIS conferenceVienna 25-26 March 2009

WP/StB Dr. Sven Morich

Assurance Accounting Services

IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers

26. March 2009

Agenda

1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary


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Part 1



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1. European and German SME accounting legislation

Initial position: IFRS in Germany and Europe

• Compared to rest of Europe: narrow transition of IAS regulation

Germany Consolidate financial statements Separate financial statements

capital market orientated IFRS-obligation (IAS-Reg)

not capital market orientated IFRS-option

Europe

GCC-obligation (IFRS only for information)

capital market orientated IFRS-obligation (IAS-Reg)IFRS-option (10 MS) / IFRS-

obligation(11 MS, mostly financial services)

not capital market orientatedIFRS-option

(all MS, moreover for financial services partlyIFRS-obligation)

IFRS-option(16 MS, moreover for financial services

partly IFRS-obligation)


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1. European and German SME accounting legislation

Scenarios and questions for SME accounting in Europe and Germany

Future of SME Accounting

Adopting IFRS Redrafting local GAAP

Stand AloneApproachfor SMEs

Using full IFRS

Reduce adminis-trative burden “State of the art”

and/or

Basis for tax accounts?

Capital maintenance and profit contribution?


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Part 2



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2. The IFRS for NPAEs project

Project History

• IASB deliberations began in July 2003

• Preliminary Views as DP in June 2004

• Discussions at numerous round table, working group and IASB meetings

• Exposure Draft (ED) „IFRS for SMEs“ published 15th February 2007

• Field studies- National Standard Setters (see next chapter)- IASB (results presented in April 2008)

• Process of redeliberating the ED from May 2008 until February 2009

• March 2009 IASB decision: No re-exposure!

• Final standard expected in Q3 2009


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Concept

• Final title: Still not 100% clear! (IFRS for PEs, NPAES, SMEs)

• Scope- General purpose financial statements of non public accountable

entities (i.e. no banks, or when holding assets in fiduciary capacity)- Decisions on scope rest with national regulatory authorities- No size criteria but size reference 50 employees

• Supposed users are investors, banks, suppliers but not owner managers

• Top-Down-Approach- Pervasive Principles based on full IFRS framework

• Two-Tier-Approach- No separate (third) simple set for micro entities


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Contents and hierarchy

• Contents:- Preface plus 38 sections plus glossary (about 250 pages)- Basis for Conclusion and Implementation Guidance (about 150 pages)

• Stand-alone Standard?- 3 Types of cross-references in the ED:

1. Rare transactions2. Alternative options3. De facto when using the hierarchy

• No mandatory fallback to full IFRS

• Several simplifications regarding recognition and measurement principles

• Reduced disclosure requirements

Most topics omited in final standard

Options deleted in final standard


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Accounting atmosphere in Germany

• Conservative accounting environment- Long accounting history German Commercial Code (GCC)- Reservations about IFRS

• The German “Mittelstand”:- Well organised middle market organisations- Strong political power

• The German “paradoxon“:- On the one hand strong voices against implementing an IFRS for

NPAEs at all- On the other hand heavy involvement of German constituents in the

IASB‘s due process and public debates


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Field Tests overview

• IASB Field Test of the ED- 116 entities from 20 countries participated- submitted recent annual financial statements and restated those

financial statements in accordance with the ED - responded to questions designed to identify specific problems

encountered in applying the ED

• ASCG‘s research agenda1. SME survey: 410 German SMEs were interviewed regarding their

evaluation of the proposed rules of the ED-IFRS for SMEs2. SME field test: 15 German SMEs preparing trial financial statements in

accordance with the ED-IFRS for SMEs3. SME bank study


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Part 3



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3. Empirical studies on NPAEs accounting in Germany

SME survey (overview)

• Parties involved:- Initiator and major actor: German Accounting Standards Committee

(GASC) - Cooperation partners: Federation of German Industries (BDI) and the

Association of German Chambers of Industry and Commerce (DIHK)

• Survey of enterprises with questionnaires - Addressee: director in charge of the annual accounts - Sample size: 4,000 enterprises

• 3 Main Objectives/Parts:- SMEs and International Accounting: Experience, knowledge and

need?- Frequency or relevance of particular issues in an SME environment- Assessment of accounting methods of the ED: Assessment of costs

and (external and internal) benefit for users of financial statements


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Level of knowledge of IFRS

• How would you describe your own level of knowledge about IFRS?

28%

7% 6%

37%

36% 33%

29%

36% 35%

6%

22% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

8-32 m EUR (n=108) 33-50 m EUR (n=76) >50 m EUR (n=220)

no knowledge little knowledge moderate knowledge good up to very good knowledge


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Objectives of separate financial statements

• How relevant to your entity are the following objectives of preparing separate financial statements?

5%

9%

12%

18%

23%

74%

77%

77%

81%

8%

14%

26%

19%

14%

19%

17%

16%

8%

86%

78%

63%

63%

63%

7%

6%

6%

11%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

basis for taxation (n=402)

information for owners (n=398)

information for company`s management(n=395)

information for banks (n=402)

basis for profit distribution (n=396)

information for suppliers (n=393)

information for employees (n=392)

information for customers (n=398)

information for potential investors (n=385)

no up to low relevance moderate relevance high up to very high relevance

Main advantages of the adoption of international accounting rules

• (International) comparability of financial statements (for business partners, within the group etc.)

• Request of the parent company/need for consolidated financial staments/simplification of consolidated financial statements

• (International) comparability with competitors and within the same industry

• Advantages in the raise of capital: credit terms/better assessment of solvency/better rating/Basel II

• Higher transparency (e.g. for foreign business partners)• More realistic information on the economic condition• Accounting policy• Meet requirements of banks and loan providersD

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n3. Empirical studies on NPAEs accounting in Germany

Slide 16IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers

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What do we learn from the SME survey?

• Main addressees of accounting: tax authority, management, owners, and banks

• German SME view: Main advantages of IFRS do not fit to the objectives of financial statements

• Relevant issues: - construction contracts, defined benefit plans, research and

development projects, m&a-activities, investments in non-publicly traded entities with an interest of more than 50 % as well as hedging of foreign currency risks occur regularly.

• Less relevant issues: - Lease with the SME as the lessor, share-based payments, investment

properties and discontinuing operations


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SME field test (overview)


(GASC) - Cooperation partners: Federation of German Industries (BDI) and

PricewaterhouseCoopers (PwC)

• Module approach- Preparing (parts of) financial statements under the ED IFRS for SMEs- Additional questionnaire- 15 SMEs participating with the help of their auditors

• Main Objectives:- Evaluate the understandability of the IFRS principles- Frequency or relevance of particular issues in an SME environment- Report experiences when applying the ED IFRS for SMEs


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Measurement the conception of ED IFRS for SMEs

© DRSC e.V.

Two key problem areas

Problems of internal organisation Problems of application

• Approach of a new accountingconcept (IT-System adaption )

• Determination of key assumptions(e.g. useful life or discount rates)

• professional terminology

• unsettled concept

• abstract definitions

• extensive disclosures

• subsequent measurement of goodwill

• impairment tests

• deferred tax


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What do we learn from the SME field test?

• Companies were hardly able to independently prepare financial statements, due to:- Lack of knowledge of IFRS- Time and resource constraints with regard to the field test- Complexity of IFRS for SMEs accounting requirements- Number of note disclosures

• Companies evaluation: - Support for general structure of ED IFRS for SMEs- Need for stand-alone document- Divided on accounting options (larger companies: yes; smaller

companies: no)- Simpler language needed


26. March 2009


SME bank study (overview)


(GASC)

• Research Design:- Semi-structured personal interviews (predefined + open questions)- 32 banks included in the study, reflecting the current banking market in

Germany- Sample also based on internal organisational units (front office, back

office, rating department) involved; leading to a total of 52 interviews

• Banks are one of the major user groups of financial statements of PEs, currently not much knowledge and evidence regarding what information is used by banks and how it is processed


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What do we learn from the SME bank study?

• Importance of financial statements for granting credits- 84% rated the share of financial statement data within the total amount

of information needed for credit decisions at over 50%

• Need to provide internationally comparable financial information- 50% saw a (very) high or at least partial need, 41% saw a little need

and 5% saw no need

• Opinion about a special IFRS for NPAEs- 24% assessed a special IFRS as an advantage, 24% were indifferent

and 41% assessed it as a disadvantage

• Frequency of IFRS compliant f/s received by banks - 46% received less than 5% IFRS compliant f/s, each 20% received

them between 5% and 10% or 10% and 20% respectively, 9% between 20 % and 50% and only 3% received more than 50% IFRS compliant f/s


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Agenda



26. March 2009

4. Proposal for a modernised German GAAP

The „Bilanzrechtsmodernisierungsgesetz“ (BilMoG)

• Reasons for mandatory changes:- Adoption of changes to the EU Directives (4th, 7th, 8th Directive)- Simplification Program of the German Government

• Voluntary changes:- Improve decision usefulness of statutory financial statements by

adopting some IFRS elements- Implement a long term alternative to IFRS - IFRS for SMEs as „competitive“ accounting standards product- Dealing with the financial crisis

• But: Still no relief option to use IFRS instead!


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4. Proposal for a modernised German GAAP

Recent developments

• First draft published in November 2007

• Near final draft discussed by the committee of legal affairs on 18 March2009

• Final BilMoG expected in the next weeks

• Major changes and main topics in the public debate: - First-time adoption and transition from current local GAAP- Capitalisation of development costs- Accounting for financial instruments- Measurement of Provisions (including Employee Benefits)- Deferred Taxes- Consolidation and Special Purpose Entities


26. March 2009

Agenda



26. March 2009

5. Conclusion and Summary

Final Thoughts

• IFRS is already the leading global accounting standard on capitalmarkets.

• At least for some industries there will be a constructive obligation forSMEs to prepare IFRS financial statements.

• It is unclear if and in which legal form the IFRS for NPAEs will be adoptedin Europe.

• Germany has found a (short term) solution with the „BilMoG“.

• What will happen to SME accounting in the long term?

EU Scenarios: 27 local GAAPs or IFRS with solvency test?

Thank you for your attention

Contact Person

Dr. Sven MorichPricewaterhouseCoopers AG WPGAssurance Accounting ServicesLise-Meitner-Str. 110589 BerlinGermany

Tel: +49 30 2636-4281E-Mail: [email protected]

© 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG WPG and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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