similarities and differences: ifrs and german gaap

Similarities and Differences: IFRS and German GAAP

www.pwc.de

May 2018

http://www.pwc.de


May 2018


Published by PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft

By Prof. Dr. Rüdiger Loitz, Guido Fladt, Björn Seidel and Thorsten Seidel

May 2018, 124 Pages, Soft cover

All rights reserved. This material may not be reproduced in any form, copied onto microfilm or savedand edited in any digital medium without the explicit permission of the editor.

This publication is intended to be a resource for our clients, and the information therein was correct to the best of the authors’ knowledge at the time of publication. Before making any decision or taking any action, you should consult the sources or contacts listed here. The opinions reflected are those of the authors. The graphics may contain rounding differences.

© May 2018 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft.All rights reserved.

In this document, “PwC” refers to PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL). Each member firm of PwCIL is a separate and independent legal entity.

Similarities and Differences: IFRS and German GAAP 5

Foreword

Foreword

The application of IFRS is required for consolidated financial statements of public companies that are listed in any EU member state; other companies have the option to apply IFRS in their consolidated financial statements. So it is for a lot of German listed companies already a day-to-day business.

The use of IFRS in separate entity financial statements in Germany is voluntary and only allowed for presentation purposes. German commercial law continues to require the application of German statutory accounting and reporting requirements (German GAAP) especially for profit distribution, tax and statutory presentation and disclosure purposes.

However, the convergence towards the use of IFRS simultaneously influences the development of German GAAP.

The publication takes account of authoritative pronouncements issued under IFRS and German GAAP and is based on the most recent version of those pronouncements.

This publication is not all-encompassing. It focuses on those differences that wegenerally consider to be the most significant or most common. When applying theindividual accounting frameworks, companies should consult all of the relevantaccounting standards and, where applicable, national law.

We hope that this publication will be useful in identifying the key differencesbetween the two accounting frameworks and help you gain a broad understanding of IFRS.

Prof. Dr. Rüdiger LoitzLeader Capital Markets & Accounting Advisory Services

Guido FladtLeader National Office

6 Similarities and Differences: IFRS and German GAAP

Contents

Contents

A Accounting framework ......................................................................................7

B Financial statements ..........................................................................................8

C Consolidated financial statements ...................................................................15

D Business Combinations ....................................................................................26

E Revenue Recognition .......................................................................................34

F Pensions and other long-term benefits .............................................................40

G Non-financial assets.........................................................................................47

H Financial assets ...............................................................................................73

I Liabilities .........................................................................................................82

J Financial liabilities ..........................................................................................84

K Equity instruments ..........................................................................................90

L Derivatives and hedging ..................................................................................92

M Deferred taxes ...............................................................................................106

N Share-based payments ................................................................................... 111

O Foreign currency translation ......................................................................... 113

P Related parties............................................................................................... 118

Q Other issues ...................................................................................................120

Contacts ...............................................................................................................122


Accounting framework

IFRS German GAAP

Historical cost is the primary basis of accounting for non-financial assets. However, IFRS permits the revaluation to fair value of some intangible assets, property, plant and equip ment, investment property and inventories in certain industries (for example commodity broker/dealer). IFRS also requires that biological assets be reported at fair value less costs to sell. The measure ment of financial assets depends on their classifi cation (generally fair value).

Historical cost is the main accounting convention. No revaluations are allowed. An exception applies to banks/financial institutions, where all financial instru ments held for trading are to be measured at fair value (see Financial assets). A second exemption applies to assets which are deprived of all other creditors access and exclusively relate to the coverage of pension obligations or comparable long-term liabilities. They also have to be measured at fair value (before being offset against such liabilities).

Historical cost or fair value

A Accounting framework

IFRS German GAAP

Entities may depart from a standard under IFRS (extremely rare in practice), if management of that entity concludes that compliance with the standard or inter pretation would render financials to be misleading. The reasons for such a conclusion and departure along with the financial impact need to be disclosed.

Departure from the German Commercial Code is not allowed. If specific circum stances result in the financial statements not showing a true and fair view, additional disclosures are required in the notes (extremely rare in practice).

Fair presentation over-ride

First-time adoption of accounting frameworks

IFRS German GAAP

Full retrospective application of all IFRS effective at the reporting date for an entity’s first IFRS financial state ments, with some optional exemptions and limited mandatory exceptions. Comparative information is prepared and presented on the basis of IFRS. Almost all adjustments arising from the first time application of IFRS are adjusted against opening retained earnings for the first period presented on an IFRS basis. Some adjustments are made against goodwill or other classes of equity.

A merchant has to prepare financial statements for the first time according to German GAAP when commencing business (opening balance sheet). A corporation (parent) with registered office in Germany has to prepare a consoli dated financial statement (either according to German GAAP or, in certain circum stances according to IFRS), if it can exercise a controlling influence over another enterprise (subsidiary).


Financial statements

B Financial statements

Components of financial statements

IFRS German GAAP

A complete set of financial statements comprises:• statement of financial position as at the

end of the period;• statement of profit or loss and other

comprehensive income for the period;• statement of changes in equity for the

period;• statement of cash flows for the period;

and• notes, comprising significant accounting

policies and other explanatory information;

• comparative information in respect of the preceding period.

An entity may present either a single statement of profit or loss and other compre hen sive income or two separate, but consecutive state ments of profit or loss and of com prehensive income, which shall begin with profit or loss.

An entity may use titles for the statements other than those stated above. Further requirements apply when accounting policies are applied retrospectively or items are reclassified.

For the requirement to present a segment report and earnings per share, please refer to the respective sections.

Similar to IFRS for consoli dated financial statements, as well as for single-entity financial statements of publicly traded companies.1

For single-entity financial statements, statement of cash flows and statement of changes in equity are not required.2

It is optional for companies that have to prepare consoli dated financial statements to include segment reporting. Publicly traded companies that do not have to prepare consolidated financial state ments can add segment reporting to their individual financial statements.

Additional to financial state ments a manage ment report has to be prepared (see “Management report”).

1 A company is publicly traded under German GAAP when it utilises an organised market for trading its issued securities (as defined by the German Securities Trading Act) or when it has applied for an accreditation to trade its issued securities on an organised market.

2 However, small and micro-companies have permission to prepare condensed financial statements and are exempt from including a manage ment report. Further, micro-companies do not have to supplement their financial statements with notes if details are already shown under the financial statements. Size-classes depend on companies’ exceeding or falling below certain thresholds concerning revenue, profit and/or number of employees. Companies have to exceed or fall below two out of those three thresholds in two consecutive years. Some companies are exempt from preparation of financial statements when their revenue and profit are below certain thresholds in two consecutive years.



IFRS German GAAP

There are certain minimum line items which should be presented separately in the state ment of financial position.

The presentation of a classi fied balance sheet (current/non-current distinction) is required, except when a liquidity presen-tation provides infor mation that is reliable and more relevant.

Current assets/liabilities include items due or expected to be realised within 12 months after the reporting period. Deferred taxes are classified as non-current in the state-ment of financial position with a current/non-current break up discussed in the notes.

Items on the face of the balance sheet are presented in increasing order of liquidity. Entities with specific legal forms (for example corporations) are required to use a particular balance sheet format. Additional requirements exist for financial services institutions and insurance companies.

Separate presentation of fixed assets and current assets is required. Current assets are those not intended for long-term use in the business.

Offsetting of assets and liabilities is only allowed under restrictive conditions.

Offsetting assets and lia bili ties is only allowed or compulsory under restrictive conditions.

Non-controlling interests are presented separately within equity.

Non-controlling interests are presented as a part of equity.

Statement of financial position (balance sheet)

Income statement/statement of comprehensive income

IFRS German GAAP

Expenses may be presented either by function or by nature, whichever provides information that is reliable and more relevant depending on historical and industry factors and the nature of the entity. Additional disclosure of expenses by nature, including depreciation and amortization expense and employee benefit expense, is required in the notes to the financial statements if functional presentation is used on the face of the income statement.

While certain minimum line items are required, no prescribed statement of comprehensive income format exists.

Entities that disclose an operating result should include all items of an operating nature, including those that occur irregularly or infrequently or are unusual in amount, within that caption.

In general similar to IFRS. Under German GAAP there is no “statement of com prehensive income”.

Income statement may be presented using the total cost (nature of expense) or the cost of sales (function of expense) method. For both methods a minimum structure is required. For certain legal forms, especially corporations, the income statement is required to follow a detailed structure.



IFRS German GAAP

Entities should not mix functional and nature classifications of expenses by excluding certain expenses from the functional classifi cations to which they relate.

The term “exceptional items” is not used or defined. However, the separate disclosure is required (either on the face of the com prehen sive/separate income statement or in the notes) of items of income and expense that are of such size, nature, or incidence that their separate disclosure is necessary to explain the performance of the entity for the period.

In each case, the amount and nature of the individual income and expenses of exceptional magnitude or of exceptional importance have to be disclosed insofar as the amounts are not of minor importance.

“Extraordinary items” are prohibited.

Entities are permitted to present items of net income and other comprehensive income either in one single statement of profit or loss and other comprehensive income or in two separate, but consecutive, statements.

Items included in other comprehensive income that may be reclassified into profit or loss in future periods shall be presented separately from those that will not be reclassified. Entities that elect to show items in other comprehensive income before tax are required to allocate the tax between the tax on items that might be reclassified and tax on items that will not be reclassified subsequently. The amount of income tax relating to each item of other comprehensive income should be disclosed either in the statement of profit or loss and other comprehensive income or in the footnotes.



IFRS German GAAP

All owner changes in equity will be presented in a statement of changes in shareholder’s equity.

This statement will present:• total comprehensive income for the

period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests;

• for each component of equity, the effects of retrospective application or retrospective restatement in accordance with IAS 8;

• amounts of transactions with owners in their capacity as owners; and

• for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting froma) profit or loss,b) other comprehensive income, andc) transactions with owners in their

capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

A statement of changes in equity is only required for consolidated financial statements as well as for publicly traded companies which do not have an obligation to prepare consolidated financial statements.

German Accounting Standard 22 (GAS 22)3 requires the group statement of changes in equity to include the changes in the following components of group equity:• subscribed capital of the parent entity

(incl. ordinary shares and preference shares)

• treasury shares• uncalled unpaid capital • capital reserves• revenue reserves • currency translation differences • retained profit/accu mulated losses

brought forward• consolidated net income/net loss for the

financial year attributable to parent entity• equity attributable to non-controlling

interests • accumulated other gains and losses

recognised directly in equity and relating to minority share holders (incl. translations differences and other items).

The statement of changes in equity must be presented as a primary statement.

Statement of changes in equity (SoCIE)

3 German Accounting Standards (GAS) are generally applicable to all parent entities that prepare consolidated financial statements under sec. 290 HGB as well as under sec. 264a subsec. 1 HGB (in conjunction with sec. 290 HGB) and to entities that are required to prepare consolidated financial statements under sec. 11 PublG and set out procedures for consolidated financial statements. Application to separate financial statements is encouraged by individual German Accounting Standards (for example GAS 22).



Statement of cash flows – format and method

IFRS German GAAP

Standard headings, but limited flexibility of contents.

The statement of cash flows should report cash flows during the period classified by operating, investing and financing activities.

The statement of cash flows may be prepared using the direct method (cash flows derived from aggregating cash receipts and payments associated with operating activities) or the indirect method (cash flows derived from adjusting net income for non-cash transactions – for example depreciation). The indirect method is more common in practice.

Non-cash financing and investing transactions are to be disclosed.

Under HGB a statement of cash flows is only required for consolidated financial statements as well as for publicly traded companies which do not have an obli gation to prepare consoli dated financial statements.

According to GAS 21 the state ment of cash flows shall report cash flows classified by operating (presented either using the direct or indirect method), investing and financing activities (presented using the direct method).

Special regulations apply to statements of cash flows of financial services institutions (GAS 21 App. 2) and insur ance enterprises (GAS 21 App. 3).

IFRS German GAAP

Cash includes cash on hand and demand deposits. Cash equi valents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

An investment normally qualifies as a cash equivalent when it has a maturity of three months or less from acquisition date.

Cash and cash-equivalents may also include bank overdrafts repayable on demand that form an integral part of an entity’s cash management. Short-term bank borrowings (these are not included in cash or cash equivalents and are consider ed to be financing cash flows).

Cash funds (defined as highly liquid funds) only include cash and cash equivalents.

Investments classified as cash equivalents must be readily convertible to cash without significant losses in value and may be subject to only minor changes in value.

Cash equivalents therefore gener ally have maturities of not more than three months, measured from the date of acquisition.

Liabilities to credit institutions that are repay able on demand and other short-term borrow ings that are used for an entity’s cash management are required to be included in cash funds.

Statement of cash flows – definition of cash and cash equivalents



IFRS German GAAP

Changes in accounting policies are accounted for retrospectively.

Comparative information is restated and the amount of adjustment relating to prior periods is adjusted against retained earnings of the earliest period presented (except when it is impractic able to change comparative information). The effect of retrospective adjustments on each item of equity is presented separately in the SoCIE.

Accounting policy changes resulting from the adoption of a new accounting standard are accounted for in accor dance with the transition provisions of that standard.

A third statement of financial position as at the beginning of the preceding period shall be presented if an accoun ting policy is applied retro spec tively and this has a material effect on the infor mation in the statement of financial position at the beginning of the preceding period.

Changes in accounting policies are generally accounted for prospectively.

The resulting effect of a change is recognised in the current year income state ment if not determined otherwise (for example by transition provisions of specific GASs).

Changes in accounting policies have to be dis closed. Adjustment of the opening balance or restate ment of the previous year is not required. To ensure comparability with previos years figures in these cases, additional information has to be disclosed.

Accounting polices, errors, estimates – changes in accounting policy

Accounting polices, errors, estimates – correction of errors

IFRS German GAAP

Material prior period errors shall be corrected by retro spective restate ment (except to the extent that it is impractic able to deter mine either the period-specific effects or the cumulative effects of the error). Compara tives are restated and, if the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented are restated and the opening statement of financial position should be presented.

The effect of errors in previous reporting periods shall be strictly included in the determination of net profit or loss in the current period.

Additional disclosures, for example nature of the error, amount of the correction, are to be provided in the notes if necessary to ensure com para bility with compara tives. Restatement is re quired only in excep tional circumstances.



IFRS German GAAP

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in the period of change, if the change affects that period only; or the period or the change and future periods if the change affects both. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recog nised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

The effect of a change in an accounting estimate shall be included in the income state ment for the period in which the change is made (similar to IFRS).

Accounting polices, errors, estimates – changes in accounting estimates


Consolidated financial statements

4 IFRS 10 provides a single definition of control that applies to all entities. This definition is supported by extensive application guidance that explains the different ways in which a reporting entity (investor) might control another entity (investee). All entities are required to apply this guidance. Previously, control through voting rights was addressed by IAS 27, while SIC 12 placed greater emphasis on exposure to variable returns. However, the relationship between these two approaches to control was not always clear. IFRS 10 links power and returns by introducing an additional requirement that the investor is capable of wielding that power to influence its returns.

Investments in subsidiaries – definition of subsidiary

IFRS German GAAP

Under IFRS parent-subsidiary relationships are determined by the “control concept”.4

Under HGB the existence of a parent-subsidiary relationship is based solely on the possibility of controlling influence by the parent company.

Control exists if the investor (parent) has: • power over the investee (subsidiary),• exposure to variable returns from its

involvement with the investee, and• has the ability to use its power over the

investee to affect its returns.

Paragraph B3 of Appendix B to IFRS 10 identifies the factors an investor should consider during its assessment of control over an investee. These are: • the investee’s purpose and design; • what the relevant activities are; • how decisions about those relevant

activities are made; • whether the rights of the investor give it

the current ability to direct the relevant activities;

• whether the investor is exposed, or has rights, to variable returns from its involvement with the investee; and

• whether the investor has the ability to use its power over the investee to affect the amount of the investor’s returns.

Controlling interest exists when the parent (directly or indirectly through subsi diaries):• holds the majority of voting rights;• enjoys the right to appoint or dismiss

the majority of the members of the administrative, management or supervisory body governing financial and operating policies, and is at the same time a shareholder;

• enjoys the right to exercise a controlling influence on financial and operating policies (based on a control agreement/articles of association); or

• in substance obtains the majority of the risks and rewards of an entity that has a narrow, well-defined purpose (see “Special purpose entity”).

C Consolidated financial statements



IFRS German GAAP

Sometimes it is clear that an investee is controlled by means of equity instruments that give the holder propor tionate voting rights, such as an ordinary share in an inves tee. Where this is the case, and there are no other arrangements in place (for example other parties holding potential voting rights, or other contractual arrange ments that may result in another party having some power over the investee) that alter decision-making, the assessment of control focuses on which party, if any, is able to exercise voting rights sufficient to direct the investee’s relevant activities. In the most straightforward case, the investor that holds a majority of those voting rights, in the absence of any other factors, controls the investee. (IFRS 10 App B para B6). Where situations are not straightforward an investor may need to consider some or all of the factors identified in paragraph B3 above.

In some circumstances voting rights may not significantly impact an investee’s returns. The investee may be on ‘auto-pilot’ such that relevant activities are pre-determined or directed via contractual arrangements. Assessment of the purpose and design of an investee may, therefore, help determine who has control.

According to HGB the possibility of controlling influence is conclusively presumed to exist when the parent holds the majority of voting rights (50% + 1), but has no de facto control. An example for this case is the lack of the parent’s actual controlling influence because another shareholder holds participating rights.

In such a case, the following should be considered in assessing an entity’s purpose and design:• Downside risks and upside potential that

the investee was designed to create. • Downside risks and upside potential that

the investee was designed to pass on to other parties in the transaction.

• Whether the investor is exposed to those risks and upside potential.

In this case, HGB offers an inclusion option for the relevant subsidiary. When all inclusion options for subsi diaries have been duly exer cised and accordingly no subsidiary is subject to con solidation, the obligation to prepare consolidated financial statements is not applicable.

Under HGB potential voting rights that could be exercised at the present time are not taken into consideration.



IFRS German GAAP

De facto control describes the situation where an entity owning less than 50% of the voting shares in another entity that is controlled by voting rights is deemed to have control when it has the practical ability to direct the relevant activities.

An entity may own instru ments that, if exercised or converted, give the entity voting power over the relevant activities of another entity; these are termed ‘potential voting rights’.

If the terms are such that the holder of the potential voting rights could not conceivably be expected to exercise them, they are disregarded. This might arise where the terms lack economic subs tance, for example if the exercise price is set delibera-tely at a prohibitively high level or exercise of the rights would be severely detrimental to the investor for other reasons. The assess ment of substance is based on the terms rather than on the specific holder’s inten tions or financial ability.

IFRS 10 applies to all entities with the following exception. If the entity meets the definition of an investment entity it is exempt from consolidating most of its controlled investments. Instead, it records most controlled investments as financial assets at fair value through profit or loss.

No comparable regulation with regard to investment entities.



Investments in subsidiaries – Special purpose entity (SPE) or Structured entity

IFRS German GAAP

This section deals with inves tees that are consi dered to be structured entities. SIC 12 used the term ‘special purpose entities’ (SPEs) to mean those entities that are created to accomplish a narrow and well-defined objective. Appendix A to IFRS 12 defines a structured entity as “an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activi ties are directed by means of contractual arrangements.”5

This question of control is not decided solely by legal ownership. Under IFRS 10, the key to determining whether an investor should consolidate a structured entity is whether the investor controls that structured entity. The difference with structured entities is that often the normal substantive powers (such as voting rights) are not the means by which the investee is controlled. Rather relevant activities are directed by means of contracts. If those contracts are tightly drawn, it may initially appear that none of the parties has power. As a result, additional analysis is required to ascertain which party controls the structured entity.

Please note the extensive disclosure requirements under IFRS 12, even for un consolidated structured entities.

Regarding SPEs control is considered to exist if from a substance-over-form pers pective the parent entity assumes the majority of the risks and rewards associated with an entity, which serves to achieve a strictly limited and precisely defined pur pose for the parent entity.

Differences exist with regard to the control concept in general. See “Definition of subsidiary”.

By implementing this regu lation the legislators seeks to prevent entities from eliminating significant assets and liabilities from their consolidated financial statements by means of certain legal formalities.

The classification of an entity as SPE is not limited to cer tain entity forms. How ever, special funds are excluded from the definition of a spe cial purpose entity. These are: • special investment funds

(sec. 2 subsec. 3 InvG), • comparable foreign investment funds, • open-ended domestic special AIFs

with fixed fund rules within the meaning of section 284 KAGB that have been established as investment funds under German law,

• comparable EU investment funds; • or foreign investment funds that are

comparable to open-ended domestic special AIFs within the meaning of section 284 KAGB that have been established as investment funds under German law.

5 IFRS 10 provides a single definition of control that applies to all entities. This definition is supported by extensive application guidance that explains the different ways in which a reporting entity (investor) might control another entity (investee). All entities are required to apply this guidance. Previously, control through voting rights was addressed by IAS 27, while SIC 12 placed greater emphasis on exposure to variable returns. However, the relationship between these two approaches to control was not always clear. IFRS 10 links power and returns by introducing an additional requirement that the investor is capable of wielding that power to influence its returns.



Investments in subsidiaries – Non-consolidation of subsidiaries

IFRS German GAAP

All subsidiaries that are controlled by the parent (see “Definition of a subsidiary”) are consolidated, except for subsidiaries excluded from consolidation for materiality reasons. Further an invest ment entity shall not consoli date its subsi diaries or apply IFRS 3 when it obtains control of another entity.6

A subsidiary that meets, on acquisition, the criteria to be classified as held for sale in accordance with IFRS 5 applies the presentation for assets held for sale (for example separate presentation of assets and liabilities to be disposed of), rather than normal line-by-line consoli dation presentation.

A subsidiary may be excluded from the consolidated financial statement if:• there are significant long-term restrictions

on parent’s rights in respect of assets or management of that subsidiary;

• the information required cannot be obtained with out disproportionate expense or undue delay;

• the shares of the subsi diary are held exclusively for resale in the near future;

• the subsidiary is not significant in relation to the requirement to present a true and fair view of the group (if several subsidiaries fulfill this requirement, the entities shall be consolidated if they are collectively not insignificant).

Subsidiaries excluded from consolidation are generally accounted for using the equity method (if applicable).

When all inclusion options for subsidiaries have been duly exercised and accor ding ly no subsidiary is sub ject to consoli dation, the parent company is not obliged to prepare a consolidated financial statement.

6 Unless the investment entity’s subsidiary provides services that relate to the investment entity’s investment activities; in this case it shall consolidate that subsidiary and apply the requirements of IFRS 3 to the acquisition of any such subsidiary.

IFRS German GAAP

Consolidated financial state ments are prepared by using uniform accounting policies for like transactions and events in similar circum stances for all of the entities in a group.

Uniform accounting policies are required. Special industry accounting princi ples for banks and insurance companies applied by a subsidiary shall be retained (unless the special industry rules require different). If special industry accounting principles are applied, disclosures are required.

Investments in subsidiaries – uniform accounting policies



Investments in joint arrangements – definition and types

IFRS German GAAP

A joint arrangement is an arrangement of which two or more parties have joint control.

A joint arrangement has the following characteristics:

a) The parties are bound by a contractual arrangement.

b) The contractual arrange ment gives two or more of those parties joint control of the arrangement.

A joint arrangement is either a joint operation or a joint venture.

A joint operation is a joint arrangement whereby the parties that have joint control (see control concept) of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers.

German GAAP does not distinguish between different types of joint ventures. The term “joint venture” under German GAAP refers to “joint arrangements” under IFRS. A joint venture is defined as an entity that is controlled jointly by one of the entities included in the consolidated financial statements and by one or several other enterprises which do not belong to the group. Joint control of an enterprise exists when strategic decisions relating to the business, capital expenditures and financing activities of the enterprise require the consent of all the venturers. Joint control must be actually exercised; the sole ability for joint control is not sufficient. For the accounting treatment of joint ventures see “Jointly controlled entities”.

Note: tenancy in common (so called “Bruchteils gemein schaft”) is not considered as joint venture. The accounting of a tenancy in common is similar to the accounting of a Joint operation under IFRS. However, the distinction between joint ventures and tenancy in common is already important for the separate financial statement of the investor.



Investments in joint arrangements – Presentation of jointly controlled entities

IFRS German GAAP

A joint operator shall recognise in relation to its interest in a joint operation:1. its assets, including its share of any

assets held jointly;2. its liabilities, including its share of any

liabilities incurred jointly;3. its revenue from the sale of its share of

the output arising from the joint operation;4. its share of the revenue from the sale of

the output by the joint operation; and5. its expenses, including its share of any

expenses incurred jointly.

Under HGB a joint venture is accounted by using either the proportionate consolidation method or the equity method.

A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRSs applicable to the particular assets, liabilities, revenues and expenses.

A joint venturer shall recognise its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard.



7 The IASB noted that paragraph 2(a) of IFRS 3 excludes, from the scope of IFRS 3, only the accounting by the joint arrangements themselves in their financial statements.

Investments in joint arrangements – Accounting for contributions to a jointly controlled entity

IFRS German GAAP

A venturer that contributes non-monetary assets, such as shares, property, plant and equipment or intangible assets, to a jointly controlled entity in exchange for an equity interest in the jointly controlled entity recognises in its consolidated income statement the portion of the gain or loss attributable to the equity interests of the other venturers, except when the contribution lacks commercial substance, as that term is described in IAS 16 Property, Plant and Equipment. If such a contribution lacks commercial substance, the gain or loss is regarded as unrealised and is not recognised unless IAS 28.31 also applies. Such unrealised gains and losses shall be eliminated against the investment accounted for using the equity method and shall not be presented as deferred gains or losses in the entity’s consolidated statement of financial position or in the entity’s statement of financial position in which investments are accounted for using the equity method.

When an entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, it shall apply, to the extent of its share, all of the principles on business combinations accounting in IFRS 3, and other IFRSs, that do not conflict with the guidance in IFRS 11 and disclose the information that is required in those IFRSs. This applies to the acquisition of both the initial interest and additional interests in a joint operation in which the activity of the joint operation constitutes a business.7

A contribution to a jointly controlled entity in exchange for an equity interest is recognised in the same way as an exchange of assets.

Cost of the acquired equity interest can be either:• carrying amount of the consideration

given;• fair value of the consideration given; or• the carrying amount of the consideration

given plus any amount necessary to compensate for the income tax resulting from the exchange.

If the consideration comprises the exchange of shares issued through an increase of capital, in the financial statements of the joint venture, any value within the range of par value of these shares and the fair value of the consideration received could be the cost of the contribution.

Intra-group profits and losses must be eliminated. Only the portion of gain or loss attributable to the equity interests of the other venturers is recognised.

These considerations also apply to the formation of a joint operation if, and only if, an existing business, as defined in IFRS 3, is contributed to the joint operation on its formation by one of the parties that participate in the joint operation. However, those paragraphs do not apply to the formation of a joint operation if all of the parties that participate in the joint operation only contribute assets or groups of assets that do not constitute businesses to the joint operation on its formation.



Investments in associates – Definition of associate

IFRS German GAAP

An associate is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.

Significant influence is presumed if the investor holds 20% or more of the voting power of the investee. Significant influence is usually also evidenced in one or more of the following ways:• representation on the board of directors

or equivalent governing body of the investee;

• participation in policy-making processes, inclu ding participation in decisions about dividends or other distributions;

• material transactions between the entity and its investee;

• interchange of managerial personnel; or• provision of essential technical

information.

In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individu ally or in combination) that affect potential rights, except the intention of management and the financial ability to exercise or convert those potential rights.

An associate is an entity in which the group has significant influence and which is neither a subsidiary nor a joint venture of one of the group’s entities. Signifi cant influence is defined as participation in the financial and operating policy decisions of an investee without the ability to control the investee (directly or indirectly).

Significant influence is rebuttably presumed if an investor holds, directly or indirectly, 20% or more of the voting rights of an investee.

Indicators for the existence of a significant influence are:• representation on the management board

or equivalent governing body of the investee;

• participation in financial and operating policy making processes of the investee;

• interchange of managerial personnel;• material business relation ships with the

investee;• provision of essential know-how by the

shareholder.

The qualification as “associate” requires the actual exercise of significant influence. The sole possibility of exercising significant influence is not sufficient.

Investments in associates – Presentation of associate results (in separate financial statements)

IFRS German GAAP

When separate financial statements are prepared, investments in associates shall be accounted for either: • at cost; or• in accordance with IAS 39/IFRS 9; or• using the equity method as described in

IAS 28.

Investments accounted for at cost or using the equity method that are classified as held for sale or distribution shall be accounted for in accordance with IFRS 5.

Investments in associates are included under investments in separate financial statements and are measured at cost less impairment losses. See “Financial assets – Subse quent measurement”.



Investments in associates – Equity method

IFRS German GAAP

The investor presents its share of the investee’s (that is the associate’s or joint venture’s) profits and losses in the income statement. This is shown at a post-tax level. The investor recognises in equity its share of changes in the investee’s equity that have not been recognised in the investee’s profit or loss.

Under the equity method, on initial recognition the inves tor’s investment in the investee is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of post-acquisition profits or losses of the investee less dividends received. Adjust ments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other com pehensive income (for example from revaluation of property, plant and equipment and from foreign exchange translation differences).

On acquisition of the invest ment, the investor accounts for the difference between the acquisition costs and the investor’s share of fair value of the net identifiable assets as goodwill or as negative consolidation difference in an separate computation.

The investor’s investment in the investee is stated at cost, plus its share of post-acquisition profits or losses, plus or less its share of post-acquisition movements in reserves, less dividends received. Goodwill shall be amortised over its estimated useful life in a separate computation. As a general principle, goodwill shall be amortised using the straight-line method.

Investments in associates – Presentation of associate results (in consolidated financial statements)

IFRS German GAAP

In consolidated financial statements, an investor accounts for an investment in an associate using the equity method (see “Equity method”).

If an equity method invest ment meets the held for sale or distribution criteria in accordance with IFRS 5, an investor records the invest ment at the lower of its (1) fair value less costs to sell and (2) carrying amount as of the date the investment is classified as held for sale.

In consolidated financial statements, an investment in an associate is accounted for using the equity method.



IFRS German GAAP

If an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses. The interest is the carrying amount of the investment in the associate or joint venture determined using the equity method together with any long-term interests that, in substance, form part of the entity’s net investment in the associate or joint venture. For example, an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that associate or joint venture. Such items may include preference shares and long-term receivables or loans, but do not include

A negative equity value for an associate is not recognised in consolidated financial state ments. The negative equity value shall be rolled forward in the separate computation. The investment shall be recognised as an asset as soon as the accumulated negative amounts are compensated by profits or shareholder contributions.

trade receivables, trade payables or any long-term receivables for which ade quate collateral exists, such as secured loans. Losses recognised using the equity method in excess of the entity’s investment in ordinary shares are applied to the other components of the entity’s interest in an asso ciate or a joint venture in the reverse order of their seniority (ie priority in liquidation). Further losses are provided for as a liability only to the extent that the investor has incurred legal or constructive obligations to make payments on behalf of the associate or joint venture.

The investor has to determine whether it is necessary to recog nise any additional impairment loss with respect to the investor’s net invest ment in the associate or joint venture and with the respect to the investor’s interest in the associate or joint venture that does not constitute part of the net investment and the amount of that impairment loss. Because goodwill that forms part of the carrying amount of an investment in an associate or joint venture is not separately recognised, it is not tested for impairment separately. Instead, the entire carrying amount of the invest ment is tested for impair ment as a single asset, by comparing its recoverable amount with its carrying amount. An impairment loss recognised in those circum stances is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in the associate or joint venture.

Disclosure of information is required about the results, assets and liabilities of significant associates and joint ventures.

The equity-method carrying amount has to be reviewed at each group reporting date. If the equity-method carrying amount exceeds the fair value of the investment in the asso ciate, an impairment loss shall be recognised.

Impairment losses initially reduce the goodwill which is being rolled forward in the separate computation. Once goodwill has been written down in full, the remaining equity value is reduced. The reversal of an impairment on the equity value is only allowed as far as it is not based on goodwill.


Business Combinations

IFRS German GAAP

Business combinations within the scope of IFRS 3 are accounted for as acquisitions. A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. The acquisition method applies. IFRS 3 excludes from its scope business combinations involving entities under common control, a formation of a joint venture and the acquisition of an asset or a group of assets that does not constitute a business, as defined by IFRS 3.

A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing either a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. A business generally consists of inputs, the processes applied to those inputs and the resulting outputs that are or will be used for generating revenues. Thus the application of IFRS 3 does not depend on the acquisition of a legal entity.

A business combination under German GAAP is the acquisition of an entity. According to GAS 19/GAS 23 entities pursue commercial or economic interests indepen dently of their legal form by means of an organisation that is apparent to third parties.

Types of business combinations

D Business Combinations

IFRS German GAAP

The acquisition date is the date on which the acquirer obtains control of the acquiree. The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabili ties of the acquiree – the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identi fying the acquisition date.

A subsidiary shall be included in the consolidated financial statement as from the date on which a parent-subsidiary relationship arose, i. e. the date the acquirer (parent) obtains control over the acquiree (subsidiary). Pre condition for the existence of a parent-subsidiary relation ship usually is that the acquirer is the beneficial owner of the shares. Thus, the date of initial consoli dation is generally the date on which beneficial ownership of the shares passes to the acquirer. This can differ from the date on which the shares are transferred in rem.

Acquisition date



IFRS German GAAP

Shares issued as considera tion are recorded at their fair value at the acquisition date. The published price of a share at the acquisition date is the best evidence of fair value in an active market.

Similar to IFRS (carefully estimated fair value).

Share-based consideration

IFRS German GAAP

If part of the purchase consideration is contingent on a future event, IFRS requires the recognition of the contingent consideration at the acquisition-date fair value as part of the consideration. An obligation to pay contin gent consideration shall be classified as a liability or as equity.

Financial liabilities are remeasured to fair value at each reporting date. Any resulting gain or loss is recognised in the income state ment. Equity-classified contingent consideration is not remeasured at each reporting date. Settlement is accounted for within equity.

If part of the purchase consideration is contingent on a future event, such as achieving certain profit levels (“earn-out clause”), future payments of the acquirer shall be recognised as a provision and as an increase in the acquisition costs to the extent that the future payment can be reliably measured and it is probable that the earn-out conditions will be met.

Changes in the value or probability of the contingent consideration reflect adjust-ments to the initial acqui sition. Usually, (the present value of) the change in contingent consideration (present value of acquisition date) has to be recorded against goodwill, all other changes shall be recorded in profit and loss.

Contingent consideration

IFRS German GAAP

If a parent entity is required to prepare consolidated financial statements for the first time (for example: disconti nuation of the exemption rule of sec. 291, 292 or 293), initial consolidation date of a subsidiary is the beginning of the fiscal year for which the consolidated financial state ment is prepared for the first time, unless the parent-subsidiary relationship arose during the fiscal year. This simplification rule may also be applied correspondingly for subsidiaries that have previously not been included in the consolidated financial statement (i. e.: inclusion options according to sec. 296 HGB).



IFRS German GAAP

Certain contingent consideration arrangements may be tied to continued employment of the acquiree’s employees. Consideration of the facts and circumstances and specific indicators provided in IFRS is necessary to determine whether the form of the contingent considera tion should be recognised as compensation expenses or as part of the consideration transferred. The terms of continuing employ ment by the selling shareholders who become key employees may be an indicator of the substance of a contingent consideration arrangement. Arrangements in which the contingent pay ments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.

Not specified.

Contingent consideration arrangements requiring continued employment

IFRS German GAAP

Transaction costs are expensed in the periods in which the costs are incurred, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with other IFRSs.

Transaction costs are expenditures in addition to the purchase price that serve to acquire the shares (sec. 255 (1) HGB). Only such expenditures that are directly attributable and that arise following the fundamental purchase decision shall be recognised as transaction costs.

Transaction costs



IFRS German GAAP

The identifiable assets acquired and liabilities assumed (including contin gent liabilities) that existed at the acquisition date are recog nised by the acquirer separately from goodwill. These assets and liabilities are measured at their acquisition-date fair values.

An exception to the recogni tion and measurement principle applies to deferred taxes, employee benefits and indemnification assets. Further more an exception to the measurement principle applies to reacquired rights, share-based payments and assets held for sale. These items are accounted for in accordance with the require ments of particular standards or other rules in IFRS 3.

Similar to IFRS. All assets, liabilities, prepaid expenses and deferred income, and special reserve shall be recognised in full in the revaluation balance sheet. All items (with exception of provisions and deferred taxes) shall be measured with their fair value on the acquisition date. Provisions shall be measured with the settlement amount (prudent business judgement); defer red taxes for temporary differences between the (fair) value and the tax base of an asset, liability, item of prepaid expense or deferred income, or a special reserve shall be measured at the entity-specific tax rate of the relevant subsidiary.

However, an asset or liability shall not be recognised separately if it cannot be measured reliably; in this case it merges into purchased goodwill.

Acquired assets and liabilities – General

IFRS German GAAP

The acquirer may recognise restructuring provisions as part of the acquired liabilities only if the acquiree has at the acquisition date an existing liability for restructuring recognised in accordance with the guidance for provisions (IAS 37). Liabilities for future losses or other costs expected to be incurred as a result of the business combination cannot be recognised.

Provisions for restructuring shall only be recorded in the revaluation balance sheet if the acquired subsidiary has already entered into an obli gation to another party in this respect at the initial consolidation date.

Acquired assets and liabilities – Restructuring provisions

IFRS German GAAP

An intangible asset is recognised separately from goodwill if it arises from contractual or other legal rights or is capable of beingseparated or divided and sold, transferred, licensed, rented or exchanged.

Acquired in-process research and development is recog ni sed as a separate intangible asset if it meets the definition of an intangible asset.

All intangible assets that fulfill the general recognition criteria shall be recognised.

Also intangible assets that have not been recognised in the single financial statement of the subsidiary due to the exercise of the recognition option for intangible assets (sec. 248 (2) sentence 1 HGB) or for which there was a recognition prohibition (sec. 248 (2) sentence 2 HGB) shall be recognised separately in the revaluation balance sheet.

Acquired assets and liabilities – Intangible assets(for example in-process research and development (IPR&D))



IFRS German GAAP

A contingent liability is recog ni sed at the acquisition date if it meets the definition of a liability and if its fair value can be measured reliably.

The contingent liability is measured subsequently at the higher of the amount that would be recognised in accor dance with IAS 37 or the amount initially recognised less, if appropriate, cumu lative amortisation recognised in accordance with IAS 18.

Contingent assets are not recognised.

Indemnification assets are recognised as assets of the acquirer at the same time and on the same basis as indemni fied items are recog ni sed as liabilities of the acquiree.

Contingent liabilities of an acquired entity shall only be recorded when they meet the definition of a liability according to German GAAP.

Generally, contingent assets are not recognised. However, according to GAS 23 (contin gent) claims of the subsi diary against external third parties shall be recog ni sed if they are recoverable and if the expenses or losses to which the compensation obligation of the obligor relate have already been recognised within provisions in the revaluation balance sheet.

Acquired assets and liabilities – Contingencies

IFRS German GAAP

Fair values determined on a provisional basis can be adjus ted against goodwill within 12 months of the acquisi tion date. Subsequent adjustments are recorded in the income statement unless they are to correct an error.

If at that date where the parent entity obtained control over the subsidiary a pur chase price allocation cannot be definitely determined, the values shall be adjusted within a period of 12 months subsequent to the date when control was obtained. Adjust ments to acquisition accounting shall be recogni sed directly in equity.

Acquired assets and liabilities – Subsequent adjustments

IFRS German GAAP

Customer base, non-contrac tual customer relationships, and favourable contracts shall generally not be recognised as separate assets and, thus, merge into purchased goodwill.



IFRS German GAAP

In cases where an acquirer acquires less than 100% of an acquiree, there is a choice on a transaction-by-trans action basis. Non-controlling interests can be measured at either fair value (full goodwill method) or the non-con trol ling interest’s proportio nate share of the acquiree’s net identifiable assets.

Similar to IFRS, however the full goodwill method may not be applied.8

“Non-controlling interests” have to be presented in a separate balance sheet item within equity (sec. 307 (1) HGB).

Minority interests/non-controlling interests

IFRS German GAAP

Goodwill is an asset and separately recognised. Goodwill is measured at the acquisition date as the excess of a) over b):

a) the aggregate of:• consideration transferred• amount of any non-controlling interests

in the acquiree• acquisition-date fair value of the

acquirer’s previously held equity interest in the acquiree

b) acquisition-date amount of the identifiable net assets acquired

Goodwill arises as the difference between the cost of the acquisition and the acquirer’s share of the fair value of the identifiable assets and liabilities acquired (full goodwill method shall not be applied). Goodwill may be allocated to different lines of business of an acquired subsidiary. Goodwill is recogni sed as an intangible asset with a finite useful life.

For all subsidiaries where goodwill has been charged to group equity in accordance with the prior choice for the treatment of goodwill (i. e. before BilMoG), this treat ment may be retained.

Where an entity acquires less than 100% of a business and non-controlling interest is measured at fair value goodwill will include amounts relating to both the acquiring entity’s interest and the non-controlling interest in the business acquired. In the case where noncontrolling interest is measured at its proportionate shares in the acquiree’s identifiable net assets goodwill will only include amounts relating to the acquiring entity’s interest in the business acquired.

Goodwill – Initial recognition and measurement

8 If prior to the initial application of BilMoG consolidation has been carried out according to the book value or pooling of interest method, these values may be retained and need no adjustment.



IFRS German GAAP

A bargain purchase is a busi ness combination in which the amount of (b) above (net assets acquired) exceeds the aggregate amounts of (a) above (aggregate of consi dera tion transferred, amount of non-controlling interest and fair value of previously held interests). The acquirer reassesses the identification and measurement of the assets acquired and liabilities assumed and the measure ment the consideration trans ferred, the non-control ling interests and prior held interests (if any).

Any excess remaining after reassessment is recognised in profit or loss on the acquisition date.

Generally, if a negative consolidation difference (badwill) is caused by a bargain purchase it shall be recognised as income on a systematic basis over the weighted average remaining useful life of the finite-lived assets that have been acquired.

However, badwill can be have different reasons. Thus, it can have the characteristics of equity or debt or – in excep tio nal cases – it can also arise solely from consoli dation procedures (so called technical negative consoli dation difference). GAS 23 provides illustrative rules for the treatment of badwill depending on the reason of its inaccurance.

Goodwill – Bargain purchases

IFRS German GAAP

Goodwill is not amortised but tested for impairment annually and – furthermore – if there is an indication that goodwill may be impaired.

Goodwill is assigned to a cash generating unit (CGU) or group of CGUs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely inde pendent of the cash inflows from other assets or groups of assets. Each unit or group of units which the goodwill is allocated shall not be larger than an operating segment in accordance with IFRS 8.

German GAAP requires goodwill to be amortised over its economic life. Amorti sation shall allocate the cost of goodwill over the financial years in which is expected to be used. If goodwill is allo cated to several business lines of a subsidiary then a separate amortisation shall be recorded for each busi ness line. GAS 23 names factors that may be relevant for estimating the expected useful life. If it is not possible to estimate the useful life in exceptional cases, purchased goodwill should be amortised over a period of ten years.

German GAAP requires an explanation of the economic life for each purchased goodwill in the notes to the financial statements.

Goodwill – Assignment subsequent accounting



IFRS German GAAP

When an entity obtains control of an acquiree in stages by successive share purchases the business combination is accounted for using the acquisition method at the acquisition date. The previously held equity interests are fair valued at the acquisition date and a gain or loss is recognised in profit or loss. The fair value of the previously held interest then forms one of the components that is used to calculate goodwill.

Not specified. According to prevailing opinion, the acquiree’s identifiable assets and liabilities are remeasured to fair value at the date when the entity finally became a subsidiary. All assets and liabilities of the acquiree should be recognised in the consolidated financial state ments based on their fair values at this date. The adjust ment to any previously held interests of the acquirer is treated without an effect on income.

Step acquisitions

IFRS German GAAP

The recoverable amount of the CGU or group of CGUs (i. e. the higher of its fair value less costs of disposal and its value in use) is compared with its carrying amount.

Any impairment loss is recog nised in operating results as the excess of the carrying amount over the recoverable amount. The impairment loss is allocated first to goodwill and then on a pro rata basis to the other assets of the CGU or group of CGUs to the extent that the impairment loss exceeds the book value of goodwill. Impairment loss recognised for goodwill shall not be reversed in a subsequent period.

There is no explicit require ment in German GAAP to perform an annual impairment test for goodwill. However, GAS 23 states that the remaining useful life of goodwill should be reviewed at each reporting date.

Goodwill shall be written down it is expected to be impaired permanently. GAS 23 lists possible indications for a permanent goodwill impairment. If one or more of these factors apply or if there is other evidence of expected perma nent impairment, the recoverability of goodwill shall be tested.

Goodwill is impaired if its carrying amount exceeds its fair value. In contrast to other assets, impairment of pur chased goodwill shall not be reversed.

Goodwill – Impairment testing and measurement

IFRS German GAAP

IFRS does not specifically address such transactions. Entities elect and consistently apply either acquisition or predecessor accounting for all such transactions.

The accounting policy can be changed only when criteria for a change in an accounting policy are met in the appli cable guidance in IAS 8 (i. e., it provides more reliable and more relevant infor mation).

Not specified.

Business combinations involving entities under common control


Revenue Recognition

IFRS German GAAP

Revenue is a subset of income that arises from the sale of goods or rendering of services as part of an entity’s ongoing major or central activities (ordinary activities). Transactions that do not arise in the course of an entity’s ordinary activities do not result in revenue.

One primary standard (IFRS 15) provides a com prehen sive framework for recog nising revenue from con tracts with customers. It contains principles that an entity will apply to report useful information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to customers.

The core principle requires an entity to recognise revenue to depict the transfer of goods or services to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.

Sales revenues comprise the revenues from the sale of products and from services rendered, no matter whether the income is related to ordinary activities of the enterprise or not.

The standard sets forth a five-step model for recog nizing revenue from contracts with customers:1. Identify the contract with a customer2. Identify the performance obligations (PO)

in the contract3. Determine the transaction price4. Allocate the transaction price to the

performance obligations5. Recognise revenue when (or as) each

performance obligation is satisfied.

Revenues may only be recognised if they are realised at the balance sheet date (realisation principle). Under specific circumstances, dividends may be recognised earlier than under IFRS in single-entity financial statements.

German GAAP requires measure ment of revenues at the fair value of the consideration received or receivable (usually cash or cash equival ents).

Where the inflow of cash or cash equivalents is deferred, discounting to a present value is required under German GAAP (only if the underlying obligation contains an interest component).

In principle the application of the percentage of completion method is prohibited.

General (IFRS 15)

E Revenue Recognition


Revenue Recognition

IFRS German GAAP

In a first step, the standard requires the entity to identify the contract with the custo mer and whether it should combine, for accounting purposes, two or more con tracts (including contract modifications), to properly reflect the economics of the underlying transaction. An entity will need to conclude that it is “probable”9 at the inception of the contract, that the entity will collect the conside ration to which it will ultimately be entitled in exchange for the goods or services that are transferred to the customer in order for a contract to be in the scope of the revenue standard.

No comparable explicit regulation with regard to identifying a contract, but in principle similar to IFRS. If several individual contracts are considered as a uniform transaction because of their close economic connection, they might be considered as a multi element arrangement. A differentiation is to be made with regard to the realization of its individual components.

An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the custo mer) if one or more of the following criteria are met: • the contracts are nego tiated with a single

commercial objective, • the amount of consi de ration in one

contract depends on the other contract, or

• the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with the guidance for identifying performance obligations.

A contract modification is treated as a separate contract only if it results in the addition of a separate performance obligation and the price reflects the “standalone selling price”10 of the addi tio nal performance obligation. The modification is otherwise accounted for as an adjust ment to the original contract either through a cumulative catch-up adjustment to revenue or a prospective adjustment to revenue when future performance obli ga tions are satisfied, depending on whether the remaining goods and services are distinct. While aspects of this model are similar to existing literature, careful conside ration will be needed to ensure the model is applied to the appropriate unit of account.

Step 1: Identify the contract with a customer

9 The term “probable” means more likely than not – that is, greater than 50 percent likelihood.10 The stand-alone selling price is the price the good or service would be sold for if sold on a stand-alone basis.


Revenue Recognition

IFRS German GAAP

An entity should assess goods or services promised in a contract with a customer and should identify as a per for mance obligation each promise to transfer a good or service to the customer. These promises may not be limted to those explicitly in cluded in written contracts. An entity accounts for each promised good or service as a separate performance obli gation if the good or ser vice is capable of being distinct (i. e., the customer can benefit from the good or service either on its own or together with other resources readily available to the customer); and is distinct within the context of the contract (i. e., the good or service is separately identifiable from other promises in the contract).

No comparable explicit regulation with regard to identifying performance obligations, but similar to IFRS, as long as principal performance obligations are concerned.

Different principal perfor mance obligations may arise from multi element arrange ments, if several different services (amongst others for example financing trans actions) are regulated in a single contract or several individual contracts are considered as a uniform transaction because of their close economic connection. Despite the uniform con si de ration of these transactions, a differentiation is to be made with regard to the realization of the individual components.

Sales-type incentives such as free products or customer loyalty programs, for exam ple, might be perfor mance obligations under IFRS 15. If so, revenue will be deferred until such obligations are satisfied, such as when a customer redeems loyalty points. Other potential changes in this area include accounting for return rights, licenses, and options.

Step 2: Identify the performance obligations (PO) in the contract

Step 3: Determine the transaction price

IFRS German GAAP

The transaction price reflects the amount of consideration that an entity expects to be entitled to in exchange for goods or services delivered. This amount is measured using either a probability-weighted or most-likely-amount approach; whichever is most predictive. The amount of expected consideration captures:1. variable consideration if it is “highly

probable” that the amount will not result in a significant revenue reversal if estimates change,

2. an assessment of time value of money (as a prac ti cal expedient, an entity need not make this assess ment when the period bet ween payment and the transfer of goods or services is less than one year),

3. noncash consideration, generally at fair value, and

4. consideration payable to customers.

The general revenue recog nition criteria apply.


Revenue Recognition

Step 4: Allocate the transaction price to the performance obligations

IFRS German GAAP

For contracts with multiple performance obligations, the performance obligations should be separately accoun ted for to the extent that the pattern of transfer of goods and services is different. Once an entity identifies and determines whether to sepa rately ac count for all the per for mance obli gations in a con tract, the trans action price is allocated to these separate perfor mance obligations based on relative stand alone selling prices.

The best evidence of stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately. The selling price is estimated if a stand-alone selling price is not available. The standard provides some possible estimation methods. If the stand-alone selling price is highly variable or uncertain, entities may use a residual approach to aid in estimating the standalone selling price. An entity may also allocate discounts and variable amounts entirely to one (or more) performance obligations if certain conditions are met.

No specific guidance for multiple element arrange ments.

The general revenue reco gni tion criteria apply. For this purpose, the total remune ra tion of the multi component arrangement must be divided between the individual compo nents in the ratio of the fair values of the individual components and then a sepa rate realization of each of these individual components must be examined.

Step 5: Recognise revenue when (or as) each performance obligation is satisfied – Transfer of control

IFRS German GAAP

An entity shall recognise revenue when (or as) the entity satisfies a performance obli gation by transferring a promised good or service (i. e. an asset) to the custo mer. An asset is transferred when (or as) the customer obtains control of the asset. For each performance obli gation an entity shall deter mine at contract incep tion whether it satisfies the perfor mance obligation over time or at a point in time.

Control of an asset refers to the ability to to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control in clu des the ability to prevent other entities from directing the use of and obtaining the benefits from, an asset. Deter mining when control transfers will require a sign ifi cant amount of judge ment.

An entity shall recognise revenue when the entity satisfies the principal perfor mance obligation (for example trans fer of beneficial owner ship of an asset, similar to IFRS) and (additionally) the entity has an indefeasible right to the consideration agreed.

The realisation principle applies – revenue is only to be recognised when it has been realised at the balance sheet date.


Revenue Recognition

Step 5: Recognise revenue when (or as) each performance obligation is satisfied – Over time revenue recognition

IFRS German GAAP

An entity satisfies a perfor mance obligation over time if one of the following criteria is met:1. the customer simulta neously receives

and consumes the benefits provided by the entity’s performance as the entity performs;

2. the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or

3. the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Entities need to apply to the specific facts and circum stances of individual perfor-mance obligations.

If control is transferred continuously over time, an entity may use output methods (for example, units delivered) or input methods (for example, costs incurred or passage of time) to measure the amount of revenue to be recognised. The method that best depicts the transfer of goods or services to the custo mer should be applied consistently throughout the contract and to similar con tracts with customers. The notion of an earnings process is no longer appli cable.

Service transactions are generally accounted for using the completed contract method.

The completed contract method follows the general measurement principles. Accordingly revenue may only be recognised if it has been realised at the balance sheet date.

An exception applies when the entitlement to compen sation for partial performance is certain. In such cases partial revenue may be recognised.

Construction contracts are generally accounted for using the completed contract method. The percentage of completion method is allowed only in exceptional circum stances.11

11 ADS provides a list of criteria which have to be fulfilled in order to apply the percentage of completion method under German GAAP.


Revenue Recognition

Step 5: Recognise revenue when (or as) each performance obligation is satisfied – Point in time revenue recognition

IFRS German GAAP

If none of the criteria indi ca ting that a performance obli gation is satisfied over time are met, the entity satisfies the performance obligation at a point in time.

To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a perfor mance obligation, the entity shall consider the require ments for control. In addition, IFRS 15 provides the following indicators to con sider in determining when the customer obtains control of a promised asset:• the entity has a present right to payment

for the asset,• the customer has legal title to the asset,• the entity has transferred physical

possession of the asset,• the customer has the significant risks and

re wards of ownership of the asset, and• the customer has accepted the asset.

The realisation principle applies – revenue is only to be recognised when it has been realised at the balance sheet date.

Revenue from products (and services) may be realised, when:• products have been delivered and risk

and rewards have been transferred; and• the supplier is indefeasibly entitled to

receive a consideration.

These indicators are not a checklist, nor are they all-inclusive. All relevant factors should be considered to determine whether the customer has obtained control of a promised asset.

Contract cost guidance

IFRS German GAAP

Costs related to satisfied perfor mance obligations and costs related to inefficiencies should be expensed as incurred. Incremental costs of obtaining a contract (for example, a sales commission) should be recognised as an asset if they are expected to be recovered. As a practical expedient, an entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period (of the asset the entity otherwise would have recognised) is one year or less. Entities should evaluate whether direct costs incurred in ful filling a contract are in the scope of other standards (e. g., inventory, intangibles, or fixed assets). If so, the entity should account for such costs in accordance with those standards. If not, the entity should capitalise those costs only if the costs relate directly to a contract, relate to future performance, and are expected to be recovered under a contract.

No comparable regulation with regard to contract costs.


Pensions and other long-term benefits

General considerations – Classification of pension schemes

IFRS German GAAP

Post-employment benefits (e. g. pensions) are classified either as defined contribution plans (DC plans) or defined benefit plans (DB plans), depending on the economic substance of the individual plans. Under DC plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. There fore actuarial risks and investment risks remain with the employee. All other plans are DB plans.

The classification as DC plan or DB plans does not apply to German GAAP. Instead, depen ding on whether a separate external fund is used to settle the pension entitlements, the plan has to be treated as an indirect pension plan or direct pension plan. In case of indirect pension plans the external fund meets the employees’ claims, however, the entity remains liable for potential benefit reductions by the external fund (for example direct insurance, pension and support funds). In case of direct pension plans the entity is obliged to meet the employees’ claims directly. Thus, Contractual Trust Arrange ments normally are classified as direct pension plans as well. Direct pension obligations are split into new and “legacy” commitments (i. e. pension plans established before 1987).

F Pensions and other long-term benefits

General considerations – Differences of the categories

IFRS German GAAP

For DC plans only the contri butions that are paid for each period for the rendered emplo yee services are recog nised as ongoing ex penses. For DB plans a liability is recognised in the balance sheet and an ex pense is recognised for the accrual of the liability in profit or loss. Actuarial assumptions are required to measure the obligation and the expense from DB plans so that actuarial gains or losses (recognised in OCI) may arise. Moreover, the obligation is measured on a discounted basis.

It is possible to account for obligations arising from indirect pension plans off-balance and to account for the contributions as an expense (underfunding then must be disclosed in the notes). Obligations arising from direct pension promises basically lead to a provision which has to be recognised in the balance sheet and to an expense for the accrual of the provision which has to be recognised in profit or loss. Obligations arising from “legacy” commitments may be accounted for as off-balance sheet liabilities (the amount not recognised as a provision must be disclosed in the notes). Actuarial gains and losses are not recognised separately in an “OCI statement”. All gains and losses are recognised immediately in the income statement. Interest-related fluctuations are not as high as under IFRS because the discount rate is determined by a ten-year average.



General considerations – Other long-term employee benefits

IFRS German GAAP

Other long-term employee benefits include for example jubilee benefits, deferred compensation or bonuses that are not due to be settled within 12 months after the end of the period in which the employees render the related service. Long-term employee benefits are accounted for in the same way as DB plans with the exception that actuarial gains and losses and all past service costs are recognised immediately through profit or loss.

Other long-term employee benefits are long-term in nature, comprise a benefit characteristic and are subject to biotmetric risks (for example benefits relating to part-time employment prior to retirement, benefits in the case of death or disability or jubilee benefits). They are largely treated in the same way as pension obligations. The most prominent difference between the accounting for pension obligations and other long-term employee benefits is the discount rate. Pension obligations are discounted by the ten-year average market rate whereas other long-term employee benefits are discounted by the seven-year average market rate.

Measurement of obligation – Actuarial valuation method

IFRS German GAAP

The projected unit credit method (PUCM) is used to determine the present value of the entity’s defined benefit obligation (DBO).

No actuarial valuation method is specified. Use of actuarial techniques shall result in an economically reasonable amount (PUCM is a permis sible actuarial valuation method).

Measurement of obligation – Use of realistic parameters

IFRS German GAAP

Actuarial valuation techniques are used to make a reliable estimate of the atmount of bene fits that employees have earned in return for their services. Based on the pension promise these techniques have to include realistic assumptions (for example salary and/or pension in crea ses, turnover rates and mortality probabilities) that will influence the cost of the benefits.

The regulation to use realistic parameters for the calculation of pension and similar obli ga tions is comparable to IFRS.



Measurement of obligation – Discount rate

IFRS German GAAP

The rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The cur rency and term shall be consistent with the currency and estimated term of the DBO.

Determination of the discount rate is based on a specific law (RückAbzinsV). Every month the German Federal Bank publishes a yield curve based on the average market yields for the past seven and ten years respectively. Pension obligations are discounted by the ten-year average market rate whereas other long-term employee benefits are dis counted by the seven-year average market rate. Regar ding pension obligations there has to be made an addi tional auxiliary calculation using the seven-year average market rate as well. The difference between the amount using the ten-year average market rate (i. e. the balance sheet recognition amount) and the amount using the seven-year average market rate has to be dis closed in the notes. The discount rate shall basically be chosen consistent with the remaining term of the obli gation, but in order to simplify the calculation, it is accept able to assume a dura tion of 15 years if no material over- or underesti mation of the obli gations results from doing so.

Plan assets – Criteria

IFRS German GAAP

Plan assets comprise:• assets held by a long-term employee

benefit fund; and• qualifying insurance policies (issued by

an insurer that is not a related party as defined in IAS 24).

In both cases above, the assets shall be held solely for the purpose of paying or funding employee benefits and cannot be used by the employer for any other pur pose, including settlement of liabilities on the employer’s liquidation.

In general the criteria for plan assets are similar to IFRS, in particular the assets shall be held solely for the purpose of paying or funding employee benefits and cannot be used by the employer for any other purpose, including settlement of liabilities on the employer’s liquidation. However German GAAP additionally requires plan assets to be non-operating assets whereas plan assets need not to be held by a separate legal entity.

Assets held by a separate legal entity only meet the criteria of potential plan assets if employer qualifies as their beneficial owner (for example based on trust agreements). Assets held by a separate external fund that is obliged to settle the pensions in the context of an indirect pension plan normally do not qualify as plan assets.



Plan assets – Valuation units

IFRS German GAAP

Plan assets should be measured at fair value. The fair value of insurance policies should be estimated using, for example, a discounted cash flow model with a discount rate that reflects the associated risk and the expected maturity date or expected disposal date of the assets. Qualifying insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan are measured at the present value of the related obligations.

Plan assets should be measured at fair value.

If benefits payable under a plan are determined solely by reference to the fair value of the underlying assets, the obligation basically has to be measured at the fair value of the assets (but not below the present value of guaranteed benefits).

The prevailing view is that this is also valid for insured benefits to the extent the insurance policies match the amount and timing of the benefits payable under the plan.

Plan assets – Distribution-barrier

IFRS German GAAP

No specific guidance under IFRS. As plan assets should be measured at fair value unrealised gains are recog nised in the balance sheet and profit and loss statement to the extent the fair value measurement leads to a measurement above historical costs. These unrealised gains are not available for dividend distribution.

In addition, the difference which arises from discounting pension obligations with the ten-year average market rate as opposed to using the seven-year average market rate (which has to be used for other obligations) is also subject to a dividend distr ibu tion-barrier. There has to be made an auxiliary calcu lation to determine this differential amount which besides has to be disclosed in the notes.



Recognition – Actuarial gains/losses

IFRS German GAAP

Actuarial gains and losses are recognised in other com prehen sive income.

Actuarial gains and losses are changes in the present value of the defined benefit obli gation resulting from:1. experience adjustments (the effects

of differences between the previous actuarial assumptions and what has actually occurred); and

2. the effects of changes in actuarial assumptions.

Actuarial gains and losses are recognised immediately in the income statement.

Recognition – Treatment of surpluses

IFRS German GAAP

If the fair value of plan assets exceeds the present value of DBO, this surplus has to be tested for whether it can be recognised as an asset or not (so-called asset ceiling test).

Each surplus (fair value of plan assets exceeds present value of pension obligation) shall be accounted for as an asset. Such an asset is to be recognised as a separate line item (“Excess of plan assets over post-employment benefit liability”).

Recognition – Net defined benefit liability

IFRS German GAAP

The net defined benefit lia bility (asset) is the deficit or surplus, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.

The deficit or surplus is:1. the present value of the defined benefit

obligation less2. the fair value of plan assets (if any).

The asset ceiling is the present value of any eco nomic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods.

The net defined benefit liability (asset) is the net total of the present value of the pension obligation and the fair value of plan assets. A deficit has to be recognised as “provision for pensions” whereas a surplus has to be recognised as “Excess of plan assets over post-employment benefit liability”.

Due to the fact that assets held by a separate legal entity only meet the criteria of poten tial plan assets if the employer qualifies as their beneficial owner (for example based on trust agreements) there is no need for an asset ceiling regulation comparable to IFRS.



Recognition – Net pension expense

IFRS German GAAP

An entity shall recognise the components of defined benefit cost as follows:1. service cost in profit or loss;2. net interest on the net defined benefit

liability (asset) in profit or loss; and3. remeasurements of the net defined

benefit liability (asset) in other comprehensive income.

Remeasurements of the net defined benefit liability (asset) comprise:1. actuarial gains and losses;2. the return on plan assets, excluding

amounts in clu ded in net interest on the net defined benefit liability (asset); and

3. any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

Actuarial gains and losses are changes in the present value of the defined benefit obli gation resulting from:1. experience adjustments (the effects

of differences between the previous actuarial assumptions and what has actually occurred); and

2. the effects of changes in actuarial assumptions.

All gains and losses are recognised immediately in the income statement. Thus actuarial gains and losses are not recognised separately in an “OCI statement”.

Income and expenses from discounting pension pro visions shall be offset with interest on plan assets.

Presentation and disclosures – Presentation

IFRS German GAAP

The entity may choose whether net interest components should be included as an operating expense or as a component of finance income.

The actual return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset) is recognised in other comprehensive income.

Income and expenses from discounting pension pro visions shall be offset with interest on plan assets. The net amount has to be in clu ded in finance income.

German GAAP provides a choice regarding profit or loss derived from discount rate-related fluctuations, profit or loss due to changes in the fair value of plan assets and non-interest income from plan assets. All three com po nents may consistently be recognised in operating or finance income/expense.



Presentation and disclosures – General disclosures

IFRS German GAAP

An entity shall disclose information that:1. explains the characteristics of its defined

benefit plans and risks associated with them;

2. identifies and explains the amounts in its financial statements arising from its defined benefit plans; and

3. describes how its defined benefit plans may affect the amount, timing and uncertainty of the entity’s future cash flows.

See IAS 19.135 ff. for the extensive disclosure requirements.

In particular, the following disclosures are required:• actuarial method used• information regarding the valuation

parameters (e. g. discount rate, assumed salary trend)

• book value and fair value of plan assets• present value of obligations (if offset

against plan assets)• components of the net interest expense/

income• deficits arising from indirect pension

schemes• amount not recognised for legacy

commitments• difference between the present value

of the pension obligations using the ten-year average market rate (i. e. the balance sheet recognition amount) and the amount using the seven-year average market rate (auxiliary calculation)

Transition rules – Transitional liability

IFRS German GAAP

Not applicable. In case the implementation of German GAAP modifications due to “BilMoG” (in FY 2009 or 2010) had resulted in a higher present value of the pension obligations, there had been a choice whether to recognise the increase over a period of up to 15 years (minimum recognition: 1/15 p. a.) or immediately. Either way the increase has to be recognised in profit or loss. Thus, some entities will recognise an additional expense in the amount of 1/15 p. a. until the end of FY 2024. The expense shall be included in other operating expenses and shall be pre sented separately (within the income statement or in the notes)

Similarities and Differences IFRS and German GAAP 47

Non-financial assets

Property, plant and equipment – Initial measurement

IFRS German GAAP

An item or property, plant and equipment (PPE) that qualifies for recognition shall initially be measured at its cost (i. e. cost of acquisition (see section “Acquisition cost”) or cost of conversion (see section “Costs of conversion”).

PPE is initially measured at its acquisition costs or pro duc tion costs.

Acquisition costs comprise all expenses that arise to acquire an asset and to bring it into its operational condition as far as the expenses can be directly assigned to asset (see section “Acquisitions costs”). Production costs comprise expenditures incurred through the con sumption of goods and the use of services to manu facture, enlarge or improve an asset significantly beyond its original condition (see section “Costs of conversion”).

Property, plant and equipment – Subsequent measurement

IFRS German GAAP

Subsequently PPE is accounted for using the cost model (cost less accumulated depreciation and impairment losses) or the revaluation model (which must be adopted for an entireclass of PPE).

If the revaluation model is used:• an increase on revaluation is credited

directly to equity (“revaluation surplus”), unless it reverses a revalua tion decrease for the same asset previously recognised in profit or loss and

• a decrease on revaluation is charged directly against any related revaluation sur plus for the same asset; any excess is recognised as an expense.

According to German GAAP, subsequent measurement of PPE shall be based on the cost model (cost less accu mu lated depreciation and impairment losses). The revaluation model is not permitted.

For assets that are design ated as plan assets see section “Plan assets”.

Not applicable.

G Non-financial assets

48 Similarities and Differences IFRS and German GAAP


Property, plant and equipment – Separate depreciation of significant parts of PPE (“component approach”)

IFRS German GAAP

An item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately (component approach). How ever, parts that have the the same useful life and the same depreciation method may be grouped in deter mining the depreciation charge.

Separate depreciation of signi ficant parts not specified under German GAAP is only permitted under specific conditions but not required.

Consistent with the com po nent approach, replace ment cost is recognised as PPE if the recognition criteria are met. The carrying amount of the replaced parts is dere cogni sed.

The residual value, useful life and depreciation method are reviewed at least at each financial year-end.

Similar to IFRS. Under German GAAP, impairment can only be applied to an asset as a whole.

Property, plant and equipment – Acquisition cost

IFRS German GAAP

PPE comprises the cost directly attributable to the asset. The following costs are included in the initial mea sure ment of purchased PPE under IFRS:• purchase price (incl. import duties and

nonrefundable purchase taxes, less trade discounts and rebates)

• any costs directly attri but able to bringing the asset to the location and conditions necessary for it to be capable of operating

• the initial estimate of the costs of dismantling and removing the item and restoring the site on which it was located Examples of directly attributable costs:

• initial delivery and handling costs• installation and assembly costs• costs of employee benefits arising directly

from the construction or acquisition of the item of PPE

• costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment)

• professional fees• costs of site preparation

PPE comprises the cost individually attributable to the asset. The following costs are included in the initial measure-ment of purchased PPE under German GAAP:• purchase price (incl. import duties and

nonrefundable purchase taxes, less trade discounts and rebates)

• any costs directly attribut able to bringing the asset to the location and conditions necessary for it to be capable of operating

• costs of site preparation• initial delivery and handling costs• installation and assembly costs• costs of testing the asset for proper

functionality• professional fees (not advisory fees paid

in the context of inducing the acquisition decision)

The cost of dismantling and removing the asset and restoring the site are not included in the initial mea sure ment of the asset. In case of a legal or contractual obli-gation, a provision has to be recognised over the useful life of the asset on a straight line basis.



Costs of conversion

IFRS German GAAP

Costs of conversion comprise the costs directly attributable to the asset:• direct material costs• direct labour costs• variable production over heads such as

indirect materials and indirect labour costs

• fixed production overheads such as depreciation and maintenance of factory buildings and equip ment, and the cost of fac tory management and administration allocated based on the normal capacity of the production facilities

Research costs, selling costs and general administrative overheads are explicitly excluded from the cost of conversion.

Costs of conversion comprise:• direct material cost• direct labour cost• special cost of production• an appropriate share of indirect

material cost, indirect production costs, indirect labour costs and depreciation/amortisation to the extent that they are attributable to the production process

The consideration of appro priate shares of general and administrative costs, expen ses for social amenities of the company and the costs of voluntary social benefits and occupational pensions as part of the conversion costs is optional. For the optional consideration of borrowing costs see section “Capitali sation of borrowing costs”. Measurement policies used in a financial statement shall be retained.

Research costs and selling expenses are explicitly excluded from costs of conversion.

Capitalisation of borrowing costs

IFRS German GAAP

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (asset that necessarily takes a substantial period of time to get ready for its inten ded use or sale) are capitali sed as part of the cost of the asset.

For general purpose borrowings, borrowing costs are determined by applying the capitalisation rate (borrowing costs divided by the weighted average outstanding borrowing balance) to the expenditures on the qualified asset.

Borrowing costs may include: • interest expense calculated using

effective interest method• finance charges of finance leases• exchange differences arising from foreign

currency borrowings regarded as an adjustment to interest costs

Borrowing costs may only be capitalised if they are used to finance the production of an asset and to the extent that they are directly attributable to the production period. They may not be capitalised if they relate to acquisition costs.

The amount of borrowing costs that has been capitalised in the reporting period has to be disclosed in the notes.



Internally generated intangible assets – General

IFRS German GAAP

An internally generated intangible asset is recognised if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliable.

Internally generated non-current intangible asset may be recognised (option) if certain conditions are met (for example highly probable that planned intangible asset will arise, development costs can be reliably attributed to the asset).

Recognition of internally generated brands, mast heads, publishing titles, customer lists or similar non-current intangible assets is prohibited.

Expenditure incurred during the research phase is expensed when incurred. Expenditure incurred during the development phase is capitalised from the point when the recognition criteria of an intangible asset are met.

Similar to IFRS. If research and development phase cannot be separated reliably, capitalisation of development costs is not allowed.

It is not allowed to recognise internally generated goodwill as an asset.

It is not allowed to recognise internally generated goodwill as an asset.

Internally generated intangible assets – Recognition

IFRS German GAAP

To assess whether an inter nally generated intangible asset meets the criteria for recognition, an entity classi fies the generation of the asset into a research and a development phase. Expendi tures arising from research (or from the research phase of an intangible pro ject) shall be recognised as an expense when incurred. Costs in the development phase are capi tal ised if all of the following six criteria are demonstrated:• technical feasibility of com pleting the

intangible asset• intention to complete the intangible asset• ability to use or sell the intangible asset• how the intangible asset will generate

future eco nomic benefits (the entity should demonstrate the existence of a market or, if for internal use, the use-fulness of the intangible asset)

• availability of adequate resources to complete the development

• ability to measure reliably the expenditure attributable to the intangible asset during its development

Non-current intangible items in the process of creation may be recognised if (GAS 24):• the item is an asset under development• the item meets the general recognition

criteria for assets• it is highly probable that the planned

intangible asset will arise• development costs can be reliably

attributed to the intangible asset• no explicit prohibition on recognition

exists (for example internally generated brands, mastheads, etc.)



IFRS German GAAP

If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats all expenditure as if it were incurred in the research phase only.

Distinction between research phase and development phase is crucial: expenditures from the research phase – in contrast to expenditures from the development phase – shall not be recognised.

Research is the original and planned investigation under taken to gain new scientific of technical know ledge or ex perien ces of general nature, about whose usa bility and economic pros pects no statements can be made.

Development is the appli cation of research findings or other knowledge to develop/enhance new/existing goods or process.

Capitalisation of development expenditures is prohibited if the research and develop-ment phase cannot be reliably separated.

Expenditures on internally generated brands, mast heads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. There fore, such items are not recognised as intangible assets. Also, internally gene rated goodwill shall not be recognised as an asset.

Similar to IFRS.

Development costs initially recognised as expenses cannot be capitalised in a subsequent period.

Similar to IFRS. Development expenditures that already have been recognised as expense in financial state ments (for example prior year) may not be included in the cost of the intangbile asset.

Note: when internally gen er ated intangible assets are recognised, profits may only be distributed if the reserves available for distri bution (+/– profit or loss brought forward) remaining after such a distribution are at least of the same amount as the recognised intangible assets (less deferred tax liabilities recognised for these intangible assets).



Internally generated intangible assets – Measurement and amortisation

IFRS German GAAP

Initial recognition at cost, which comprises all expen ditures that can be directly attributed or allocated to creating, producing and preparing the asset from the date when the recognition criteria are met (see “Acqui sition cost”).

Sub sequently intangible assets are accoun ted for using the cost model or the revaluation model (provided fair value can be determined with reference to an active market).

An entity should assess whether the useful life is finite or indefinite. If finite, the useful life is the expected period available for use or the number of production or similar units expected to be obtained from the asset. • Intangibles with a finite useful life are

amortised over their useful life. The depreciable amount is allocated by a systematic method that reflects the pattern in which the asset’s future economic benefits are expected to be con sumed. If the pattern cannot be determined reliably, the straight-line method should be used. The residual value is assum ed to be zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or there is an active market and residual value can be determined by reference to that market and it is probable that such a market will exist at the end of the asset’s useful life. The amortisation period and method should be reviewed at each financial year-end.

Acquired intangible assets are initially measured at acquistion costs. Subse-quently intangible assets are accounted for using the cost model (= cost less accumu-lated depreciation and impair ment losses). Use of the revaluation model is prohibited.

Non-currrent intangible assets must be amortised over their expected entity-specific useful life. If, in exceptional cases, the entity-specific useful life of an internally generated intangible asset cannot be estimated reliably, the asset shall be amortised over a period of ten years. Intangible assets that can be used indefinitely are not amortised. If maintenance measures are the reason why these intangible assets can be used indefinitly, these assets have a useful life and must be amortised.

• An intangible asset with an indefinite useful life is not amortised but tested for impairment annually and whenever there is an indication that the intangible asset may be impaired. Its useful life is reviewed each period. If there is a change in circum stances, the asset should be changed to one with a finite life.



Inventories

IFRS German GAAP

Carried at lower of cost and net realisable value. Reversal is required for subsequent increase in value of previous write-downs. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incor porated are expected to be sold at or above cost.

FIFO or weighted average method is used to determine cost. LIFO is prohibited. Constant values can be used under certain conditions.

IAS 23 identifies limited cir cum stances where borrowing costs are included in the cost of inventories.

Advance payments are presented in other assets.

Inventories are initially measured at acquisition/production cost. Subse quently, inventories are measured at (strict) lower of cost or market value (re place ment costs or net realisable value depending on circum-stances). When the reasons for an impairment/write-down no longer apply, a lower carry ing value resulting from a previous impairment/write-down may not be retained (reversal of impair ment).

FIFO, LIFO and weighted average may be used. Cons tant values may be used under certain conditions.

Advance payments are pre sen ted as separate balance sheet item within inventories.

Investment property

IFRS German GAAP

Investment property is pro perty (land and/or buil dings) held in order to earn rentals and/or for capital appreciation including pro perty being con structed or developed for future use as invest ment pro perty. The defi nition does not include owner occupied pro perty or property held for sale in the ordinary course of business.

Investment property may be accounted for on a historical-cost basis or on a fair value basis. When fair value is applied, the gain or loss arising from a change in the fair value is recognised in the income statement and the carrying amount is not depre ciated.

Where fair value is not reliably measurable for an investment property under construction or development, the property may be measured at cost until completion of the construc tion or the date when fair value becomes reliably mea sur able, whichever is earlier.

No specific guidance for investment property under German GAAP (similar to treatment of PPE): • initial measurement at acquisition/

production cost• cost model (revaluation model is

prohibited)• write-down if permanently impaired (see

“Impairment of long lived assets”)

For investment property that is designated as plan asset see section “Plan Assets”.



Impairment of long-lived assets held for use

IFRS German GAAP

An entity should assess at each reporting date whether there are any indications that an asset may be impaired. Irrespective of indication, an annual impairment test is also required for intangible assets with indefinite useful lives and not yet ready for use (as well as for goodwill).

IFRS uses a one-step impair ment test. The carrying amount of an asset is com pared with the recover able amount, which is the higher of:• the asset’s fair value less costs of

disposal; and• the asset’s value in use.

In practice, individual assets do not usually meet the definition of a CGU. As a result assets are rarely tested for impairment individually but are tested within a group of assets.

Fair value less costs of dis posal represents the amount obtainable from the sale of an asset or CGU in an arm’s-length transaction between knowledgeable, willing parties less the costs of disposal.

Fixed assets must be written down to the lower of cost or market value if it is permanently lower than the carrying amount. Impairment is permanent if it lasts longer than half of the remaining useful life of the asset (maximum of 3–5 years).

Value in use represents the future cash flows discounted to present value by using a pre-tax, market-determined rate that reflects the current assessment of the time value of money and the risks speci fic to the asset for which the cash flow estimates have not been adjusted.

The use of entity-specific discounted cash flows is required in the first step of the value in use analysis. Changes in market interest rates can potentially trigger impair ment and hence are impair ment indicators.

Impairment losses are re ver sed, except for goodwill, when there has been a change in economic condi tions or in the expected use of the asset.

For non-current, non-financial assets (excluding investment properties) carried at revalued amounts instead of deprecia ted cost, impairment losses related to the revaluation are recorded directly in equity to the extent of prior upward revaluations.

When the reasons for an impair ment/write-down no longer apply, a lower carrying value resulting from a pre vious impairment/write-down may not be retained – the impair ment has to be rever sed. The reversal of goodwill impair ment is prohibited.



Lease arrangements – Leases – classification – IAS 17

IFRS German GAAP

The guidance focuses on the overall substance of the trans action. Leases are classified as an operating lease or a finance lease. Classification in finance and operating lease depends on whether the lease transfers substantially all of the risks and rewards of ownership to the lessee. Examples of situ ations that would normally lead to a lease being classified as a finance lease:• transfer of ownership at the end of the

lease term• bargain purchase option• lease term is for the major part of the

economic life of the leased asset• present value of the mini mum lease

payments amounts to at least substan tially all of the fair value of the leased asset

• leased assets are of a specialised nature• if the lessee can cancel the lease, the

lessor´s losses associated with the cancellation are borne by the lessee

• gains or losses from the fluctuation in the fair value of the residual accrue to the lessee

• the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

Minimum lease payments are the payments over the lease term that the lessee is or can be required to make, exclu ding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:

a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or

b) for a lessor, any residual value guaranteed to the lessor by:

– the lessee; – a party related to the lessee; or – a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.

According to German GAAP the attribution of rental assets depends on the beneficial ownership. Beneficial owner of the leased assets is who bears the majority of the chances and risks born by the leased assets. However, lease accounting follows the treatment for tax-purposes which is treaten in certain decrees of the Federal Ministry of Finance. Accor ding to these the lessee is regarded as the beneficial owner of the leased asset (= finance lease) if:• under a full-payout lease of moveable

property and buildings: – the lease term is less than 40% or more than 90% of the economic life of the asset;

– the lease term is between 40% and 90% of the ex pected useful life of the asset and

– the lessee has a bargain purchase option and the carrying amount or the lower market value exceeds the purchase price or

– the lessee has the ability to continue the lease beyond the original lease term for a rent which is lower than market rent (for buildings: 75% or lower than market rent) or

– the leased asset is of a specialised nature that only the lessee can use it without major modification.

However, if the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum pay ments payable over the lease term to the expected date of exercise of this pur chase option and the pay ment required to exercise it.



IFRS German GAAP

The interest rate implicit in the lease would, under IFRS, generally be used to calculate the present value of minimum lease payments. If not pra ctic able, the lessor’s incre mental borrowing rate can be used. In a lease of land and building, the land and building elements must be considered separately for lease classifi cation, unless the land ele ment is not material.

Under IFRS, transactions that are not in the legal form of a lease may in substance be or include a so-called “em bed ded” lease agreement. Where the fulfilment of an arrange ment depends on the use of a specific asset and the arrange ment conveys the right to use the asset , the identified embedded lease is accounted for according to IAS 17.

• under a full-payout lease of property: – only if there is a purchase option and the lessee is beneficial owner of the related building (see above).

• under a partial-payout lease of moveable property: – the lease term is more than 90% of the expected useful life of the asset

– otherwise the attribution of the beneficial owner ship depends on the distribution of chances and risks of the recovery of the leased asset (for example if the lessee alone bears the risk of a decrease in value of the asset without being able to benefit from an increase in value, more than 75% of the gain on disposal of the leased property is transferred to the lessee or the lease contract includes a bargain purchase option or the ability to continue the lease beyond the original lease term for a rent which is substantially lower than market rent).

• under a partial-payout lease of buildings and property (the attribution of property depends on the attribution of the building): – the lease term is more than 90% of the expec ted useful life of the asset;

– the lease contract includes a bargain purchase option or the ability to continue the lease beyond the original lease term for a rent and if the purchase price is lower than the carrying amount or if the subsequent rent is lower than 75% of the rent for comparable property or

– the lessee takes over certain typical risks of an owner (in that case, the lessor is precluded from being the beneficial owner).

• under a partial-payout lease of land: – if the lease contract includes a bargain purchase option or the ability to continue the lease beyond the original lease term for a rent and if the purchase price is lower than the carrying amount or if the subsequent rent is lower than 75% of the rent for comparable property or

– if the lessee takes over certain risks (in that case, the lessor is precluded from being the beneficial owner).



Lease arrangements – Lessor accounting – finance leases – IAS 17

IFRS German GAAP

Amounts due under finance leases are recorded as a receivable.

Gross earnings are allocated to give a constant rate of return based on (pre-tax) net investment method.

IFRS requires the amount due from a lessee under a finance lease to be recognised as a receivable at the amount of the net investment in the lease (total of the future mini mum lease payments less gross earnings allocated to future periods).

The gross earnings are allo cated between receipt of the capital amount and receipt of finance income on a basis so as to provide a constant rate of return. Initial direct costs should be amor tised over the lease term except for manu facturer or dealer lessors.

German GAAP requires the amount due from a lessee to be recognised as a receivable at the amount of the net invest-ment in the lease. The receivable to be recognised consists only of those rentals that the lessee is required to pay to the lessor plus any guaranteed and unguaran-teed residual value.

Lease payments are to be allocated to principle and interest payments.

Lease arrangements – Lessor accounting – operating leases – IAS 17

IFRS German GAAP

IFRS requires an asset leased under an operating lease to be recognised by a lessor and depreciated/amortised over its useful life. Rental income is generally recognised on a straight-line basis over the lease term.

German GAAP requires an asset leased under an opera ting lease to be recog nised by a lessor as PPE and depre ciated over its useful life. Rental income is generally recognised on a straight-line basis over the lease term.

Lease arrangements – Lessee accounting – finance leases – IAS 17

IFRS German GAAP

IFRS requires recognition of an asset held under a finance lease with a corresponding obligation for future rentals, at an amount equal to the lower of the fair value of the asset and the present value of the future minimum lease pay ments (MLPs) at the inception of the lease. The asset is depre-ciated over its useful life or the lease term if shorter. The interest rate impli cit in the lease is nor mally used to cal cu late the present value of the MLPs. The lessee’s incre mental borrowing rate is used if the implicit rate is not prac ticable to determine.

When attributed to the lessee, finance leases are recorded as an asset with a corresponding obligation for future rentals (present value). The asset is depreciated over its useful life. Rental payments are apportioned into principle and interest payments.



Lease arrangements – Lessee accounting – operating leases – IAS 17

IFRS German GAAP

Under IAS 17 the rental expense under an operating lease must generally be recognised on a straight-line basis over the lease term.

Rental expense is recognised on a straight-line basis over the lease term.

Lease arrangements – Sale and leaseback transactions – IAS 17

IFRS German GAAP

Recognition of profit or loss from a sale and leaseback transaction depends on whether the leaseback is a finance or an operating lease and whether the sale is at or below/above fair value.

In a sale and leaseback trans action, the seller-lessee sells an asset to the buyer-lessor and leases the asset back. There are certain differences in the rules on dealing with profit and losses arising on sale and leaseback trans action which are related to the beneficial ownership as decisive factor (see following sections).

Lease arrangements – Finance leaseback – IAS 17

IFRS German GAAP

Any profit or loss on sale is deferred and amortised over the term of the leaseback agreement.

If the beneficial ownership remains by the seller-lessee, a realisation of profits from the sale is not allowed.

The lease object stays capi talised in the seller-lessee’s financial statement. For the amount received from the buyer-lessor a corres pond ing liability has to be recognised and amortised over the contractual lease term.

Lease arrangements – Operating leaseback – sale at fair value – IAS 17

IFRS German GAAP

Any profit or loss is recog ni sed immediately except for off-market transactions.

Any profit or loss on sale is recognised immediately.

Lease arrangements – Operating leaseback – sale at a price lower than fair value – IAS 17

IFRS German GAAP

Immediate recognition of any profit or loss, unless the loss is compensated by future rentals. In such cases, the loss is deferred over the period over which the asset is expected to be used.

Immediate recognition of any profit or loss, unless the loss is compensated by lower future rentals. In such cases, the difference is deferred over the period over which the asset is expected to be used.



Lease arrangements – Operating leaseback – sale at a price higher than fair value – IAS 17

IFRS German GAAP

Excess of the sales price over the fair value of the asset sold is deferred over the period for which the asset is expected to be used.

Excess of the sale price over the fair value is deemed to be a borrowing and must there-fore be deferred and amor ti sed over the con trac tual lease term.

Lease arrangements – Leases – general – IFRS 16

IFRS German GAAP

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accor dingly, a lessor conti nu es to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

According to German GAAP the attribution of rental assets depends on the beneficial ownership. Beneficial owner of the leased assets is who bears the majority of the chances and risks born by the leased assets. However, lease accounting follows the treat ment for tax-purposes which is treaten in certain decrees of the Federal Ministry of Finance. Accor ding to these the lessee is regarded as the beneficial owner of the leased asset (= finance lease) if:

• under a full-payout lease of moveable property and buildings: – the lease term is less than 40% or more than 90% of the economic life of the asset;

– the lease term is between 40% and 90% of the ex pec ted useful life of the asset and

– the lessee has a bargain purchase option and the carrying amount or the lower market value exceeds the purchase price or

– the lessee has the ability to continue the lease beyond the original lease term for a rent which is lower than market rent (for buildings: 75% or lower than market rent) or

– the leased asset is of a specialised nature that only the lessee can use it without major modification.

• under a full-payout lease of property: – only if there is a purchase option and the lessee is beneficial owner of the related building (see above).



IFRS German GAAP

• under a partial-payout lease of moveable property: – the lease term is more than 90% of the ex pec ted useful life of the asset

– otherwise the attribution of the beneficial owner ship depends on the distri bution of chances and risks of the recovery of the leased asset (for example if the lessee alone bears the risk of a decrease in value of the asset without being able to benefit from an increase in value, more than 75% of the gain on disposal of the leased property is transferred to the lessee or the lease contract includes a bar gain purchase option or the ability to continue the lease beyond the original lease term for a rent which is substantially lower than market rent).

• under a partial-payout lease of buildings and pro perty (the attribution of property depends on the attribution of the building): – the lease term is more than 90% of the expec ted useful life of the asset;

– the lease contract in cludes a bargain pur chase option or the ability to continue the lease beyond the original lease term for a rent and if the purchase price is lower than the carrying amount or if the subsequent rent is lower than 75% of the rent for comparable property or

– the lessee takes over certain typical risks of an owner (in that case, the lessor is precluded from being the beneficial owner).



Lease arrangements – Identifying a lease – IFRS 16

IFRS German GAAP

A lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset (the un der lying asset) for a period of time in exchange for con si-deration. (All leases are in the scope of IFRS 16, except for certain issues in IFRS 16.3.)

1. Identified asset: An asset is typically identi fied by being explicitly specified in a contract. How ever, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer. There is no identified asset if the supplier has the substantive right to substitute the asset throughout the period of use. The right to substitute the asset is substantive, if the supplier has the practical ability to substitute alter native assets and would benefit economically from the exercise of its right to substitute the asset. When it cannot be readily determined whether the right is substantive, there is the presumption that the right is not substantive.

According to German GAAP the attribution of rental assets depends on the beneficial ownership.

See prior chapter.

2. Control of use: To control the use of an identified asset, a customer is re quired to have the right to obtain substantially all of the economic benefits and to direct the use throughout the period of use.

For a contract that is, or con tains, a lease, an entity shall account for each lease component within the con tract as a lease separately from non-lease components of the contract, unless a lessee applies the following practical expedient: A lessee may elect, by class of under lying asset, not to sepa rate non-lease compo nents from lease compo nents, and in stead account for each lease component and any asso ciated non-lease compo nents as a single lease com po nent. A lessee shall not apply this practical expedient to em bed ded derivatives that meet the criteria in paragraph 4.3.3 of IFRS 9 Financial Instru ments.



IFRS German GAAP

For a contract that contains a lease compo nent and one or more addi tional lease or non-lease components,

– a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

– a lessor shall allocate the consideration in the contract applying paragraphs 73–90 of IFRS 15.

An entity shall combine two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counter party), and account for the contracts as a single contract if certain criteria are met.

Lease arrangements – Lease term – IFRS 16

IFRS German GAAP

An entity shall determine the lease term as the non-can cell able period of a lease, together with both:

a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and

b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

A lease is no longer enforce able when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty.

If only a lessee has the right to termi nate a lease, that right is considered to be an option to terminate the lease available to the lessee that an entity considers when determining the lease term. If only a lessor has the right to terminate a lease, the non-cancellable period of the lease includes the period covered by the option to terminate the lease.

An entity shall determine the lease term as the non-cancell able period of a lease.



IFRS German GAAP

After the commencement date, a lessee reassesses the lease term upon the occur rence of a significant event or a significant change in cir cum stances that is within the control of the lessee and affects whether the lessee is reasonably certain to exercise an option not previously in clu ded in its determination of the lease term, or not to exer cise an option previously included in its determination of the lease term.

Lease arrangements – Lessee – recognition – IFRS 16

IFRS German GAAP

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases. Therefore, at the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.

Recognition exemp tion: A lessee may elect not to apply the requirements in IFRS 16 for:

a) short-term leases (≤ 12 months); and

b) leases for which the underlying asset is of low value (approximately not more than 5.000 $, however certain types of assets do not qualify).

IFRS 16 specifies the accoun ting for an individual lease. However, as a practical expedient, an entity may apply this Standard to a port folio of leases with similar characteristics if the entity reasonably expects that the effects on the financial state ments of applying this Stan-dard to the portfolio would not differ materially from applying this Standard to the individual leases within that portfolio. If accounting for a portfolio, an entity shall use estimates and assump tions that reflect the size and com position of the portfolio.


When attributed to the lessee, finance leases are recorded as an asset with a corresponding obligation for future rentals (present value). The asset is depreciated over its useful life. Rental payments are apportioned into principle and interest payments.

When the asset is attribute to the lessor (= operating lease), rental expense is recognised on a straight-line basis over the lease term.



Lease arrangements – Lessee – presentation – IFRS 16

IFRS German GAAP

A lessee shall either present in the statement of financial position, or disclose in the notes:

a) right-of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the statement of financial position, the lessee shall:

– include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned; and

– disclose which line items in the statement of finan cial position include those right-of-use assets.

b) lease liabilities separately from other liabilities. If the lessee does not present lease liabilities separately in the state-ment of financial position, the lessee shall disclose which line items in the statement of financial position include those liabilities.

See chapter “Lessee – recognition”.

Lease arrangements – Lessee – measurement – IFRS 16

IFRS German GAAP

Initial measurement of the right-of-use asset: At the commencement date, a lessee shall measure the right-of-use asset at cost. The cost of the right-of-use asset shall comprise:

a) the amount of the initial measurement of the lease liability;

b) any lease payments made at or before the commencement date, less any lease incentives received;

c) any initial direct costs incurred by the lessee; and

d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the under lying asset during a particular period.

See chapter “Lessee - recognition”.



IFRS German GAAP

Initial measurement of the lease liability:At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily deter mined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

a) fixed payments (including in-substance fixed pay ments), less any lease incentives receivable;

b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

c) amounts expected to be payable by the lessee under residual value guarantees;

d) the exercise price of a purchase option if the lessee is reasonably cer tain to exercise that option; and

e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

Subsequent measurement of the right-of-use asset: B8After the commencement date, a lessee shall measure the right-of-use asset apply ing a cost model, unless it applies either the fair value model to right-of-use assets that meet the definition of investment property in IAS 40 or the revaluation model in IAS 16. A lessee shall apply the depreciation requirements in IAS 16 Property, Plant and Equipment in depreciating the right-of-use asset.

Subsequent measurement of the lease liability:After the commencement date, a lessee shall measure the lease liability by:

a) increasing the carrying amount to reflect interest on the lease liability;

b) reducing the carrying amount to reflect the lease payments made; and

c) remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.



Lease arrangements – Lessee – lease modifications – IFRS 16

IFRS German GAAP

A lessee shall account for a lease modification as a separate lease if both:

a) the modification in crea ses the scope of the lease by adding the right to use one or more underlying assets; and

b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appro priate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

For a lease modification that is not accounted for as a separate lease, at the effec tive date of the lease modi fi cation a lessee shall:

a) allocate the consideration in the modified contract;

b) determine the lease term of the modified lease and

c) remeasure the lease lia bility by discounting the revised lease pay ments using a revised discount rate.

German GAAP does not define or include specific accounting guidance for lease modifications.

For a lease modification that is not accounted for as a se pa rate lease, the lessee shall account for the re mea sure ment of the lease liability by:

a) decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease for lease modifications that de crease the scope of the lease. The lessee shall recognise in profit or loss any gain or loss relating to the partial or full termi nation of the lease.

b) making a corresponding adjustment to the right-of-use asset for all other lease modifications.



Lease arrangements – Lessor – classification – IFRS 16

IFRS German GAAP

A lessor shall classify each of its leases as either an oper ating lease or a finance lease.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to owner ship of an underlying asset. A lease is classified as an oper ating lease if it does not trans fer substantially all the risks and rewards incidental to ownership of an underlying asset.

Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are:

a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;

b) the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised;

c) the lease term is for the major part of the economic life of the underlying asset even if title is not transferred;

d) at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and

e) the underlying asset is of such a specialised nature that only the lessee can use it without major modifications.


See chapter “Leases – General – IFRS 16”.

Indicators of situations that individually or in combination could also lead to alease being classified as a finance lease are:

a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee;

b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee; and

c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.



Lease arrangements – Lessor – operating leases – IFRS 16

IFRS German GAAP

A lessor shall recognise lease payments from operating leases as income on either a straight-line basis or another systematic basis. The lessor shall apply another syste matic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. A lessor shall recognise costs, in clu ding depreciation, in curred in earning the lease income as an expense.

The depreciation policy for depre ciable underlying assets subject to operating leases shall be consistent with the lessor’s normal depreciation policy for similar assets. A lessor shall calculate depre ciation in accordance with IAS 16 and IAS 38.

A lessor shall apply IAS 36 to deter mine whether an underlying asset subject to an operating lease is impaired and to account for any impairment loss identified.

German GAAP requires an asset leased under an operating lease to be recog nised by a lessor as PPE and depreciated over its useful life. Rental income is gener a lly recognised on a straight-line basis over the lease term.

Lease arrangements – Lessor – finance leases – IFRS 16

IFRS German GAAP

At the commencement date, a lessor shall recognise assets held under a finance lease in its statement of fin an cial position and present them as a receivable at an amount equal to the net investment in the lease.

German GAAP requires the amount due from a lessee to be recognised as a receivable at the amount of the net invest-ment in the lease. The receivable to be recognised consists only of those rentals that the lessee is required to pay to the lessor plus any guaranteed and unguar an-teed residual value.

Lease payments are to be allocated to principle and interest payments.



IFRS German GAAP

Initial measurement:At the commencement date, the lease payments included in the measurement of the net investment in the lease com prise the following pay ments for the right to use the under lying asset during the lease term that are not re ceiv ed at the commen ce ment date:

a) fixed payments (including in-substance fixed pay ments), less any lease incentives payable;

b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

c) any residual value guaran tees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee;

d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and

e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.

The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease.

Subsequent measurement:A lessor shall recognise fin an ce income over the lease term, based on a pattern re flecting a constant periodic rate of return on the lessor’s net investment in the lease.

A lessor aims to allocate fin an ce income over the lease term on a systematic and rational basis. A lessor shall apply the lease payments relating to the period against the gross investment in the lease to reduce both the princi pal and the unearned finance income.

A lessor shall apply the de re cog nition and impairment requirements in IFRS 9 to the net investment in the lease. A lessor shall review regularly estimated unguaranteed resi dual values used in com-puting the gross investment in the lease. If there has been a reduction in the estimated un guaranteed residual value, the lessor shall revise the income allocation over the lease term and recognise immediately any reduction in respect of amounts accrued.



Lease arrangements – Lessor – lease modifications – IFRS 16

IFRS German GAAP

Finance Lease:A lessor shall account for a modification to a finance lease as a separate lease if both:

a) the modification in crea ses the scope of the lease by adding the right to use one or more underlying assets; and

b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appro priate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

For a modification to a fin ance lease that is not accoun ted for as a separate lease, a lessor shall account for the modification as follows:

a) if the lease would have been classified as an operating lease had the modification been in effect at the inception date, the lessor shall:

– account for the lease modification as a new lease from the effective date of the modification; and

– measure the carrying amount of the underlying asset as the net invest-ment in the lease imme dia tely before the effec tive date of the lease modi-fication.

b) otherwise, the lessor shall apply the require ments of IFRS 9.

German GAAP does not define or include specific accounting guidance for lease modifications.

Operating Lease:A lessor shall account for a modification to an operating lease as a new lease from the effective date of the modi fi cation, considering any pre paid or accrued lease pay ments relating to the original lease as part of the lease payments for the new lease.



Lease arrangements – Sub-leases – IFRS 16

IFRS German GAAP

Sub-lease: A transaction for which an underlying asset is re-leased by a lessee (‘inter mediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect.

In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows:

a) if the head lease is a short-term lease the sublease shall be classi fied as an operating lease.

b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset (for exam ple, the item of pro perty, plant or equip ment that is the subject of the lease).

The sublease shall be classi fied by reference to the underlying asset.

See chapter „Leases – General – IFRS 16“.



Lease arrangements – Sale and leaseback transactions – IFRS 16

IFRS German GAAP

A sale and leaseback trans action occurs if an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor.

If the transfer of an asset by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale of the asset:

a) the seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.

b) the buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease apply ing the lessor accounting requirements in IFRS 16.

If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, an entity shall make the following adjustments to measure the sale proceeds at fair value:• any below-market terms shall be

accounted for as a prepayment of lease payments; and

• any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-lessee.

In a sale and leaseback trans action, the seller-lessee sells an asset to the buyer-lessor and leases the asset back. There are certain differences in the rules on dealing with profit and losses arising on sale and leaseback transaction which are related to the beneficial ownership as decisive factor.

Finance-Leaseback: If the beneficial ownership remains by the seller-lessee, a realisation of profits from the sale is not allowed. The lease object stays capitalised in the seller-lessee’s financial statement.

For the amount received from the buyer-lessor a corresponding liability has to be recognised and amortised over the contractual lease term.

Operating-Leaseback: Sale at fair value: Any profit or loss on sale is recognised immediately. Sale lower than fair value: Immediate recogni tion of any profit or loss, unless the loss is compen-sated by lower future rentals. In such cases, the difference is deferred over the period over which the asset is expected to be used.

Sale higher than fair value: Excess of the sale price over the fair value is deemed to be a borrow ing and must there fore be deferred and amor ti sed over the contrac tual lease term.

If the transfer of an asset by the seller-lessee does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset:

a) the seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability equal to the trans fer proceeds. It shall account for the financial liability applying IFRS 9.

b) the buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to the transfer proceeds. It shall account for the financial asset applying IFRS 9.


Financial assets

H Financial assets

Definition

IFRS German GAAP

Financial assets include:• cash• a contractual right to receive cash or

another financial asset from another entity or to exchange financial instruments with another entity under conditions that are potentially favourable

• an equity instrument of another entity• a contract that will or may be settled in

the entity’s own equity instruments and is a) a non-derivative for which the entity is

or may be obliged to receive a variable number of the entity’s own equity instruments or

b) a derivative (see “Derivatives and hedging”) that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

Financial assets include non-current financial assets:• shares in affiliated enterprises• loans to affiliated enterprises• enterprises in which investments are held• loans to enterprises in which investments

are held• securities kept as non-current assets• other loans and current financial assets:• trade receivables• receivables from affiliated enterprises• receivables from enterprises in which

investments are held • other assets (for example derivatives)• shares in affiliated enterprises• other securities• cash on hand and cash deposited with

the German central bank, bank deposits and cheques.

See “Derivatives and hedging” for the accounting of derivatives.

Recognition

IFRS German GAAP

IFRS requires an entity to recognise a financial asset when, and only when, the entity becomes party to the contractual provisions of the financial instrument.

In principle, all legal claims arising from financial assets that still exist are to be recognised as long as the recognition does not infringe the prudence principle.

Categories

IFRS German GAAP

An entity shall classify financial assets as subsequently measured at• amortised cost• fair value through other comprehensive

income or• fair value through profit or loss

Accounting treatment of financial assets depends on whether the asset is current or non-current. Distinction between current and non-current is determined by the intention to serve the busi ness operation in the long term.


Financial assets

Financial assets measured at amortised costs

IFRS German GAAP

A financial asset shall be measured at amortised cost if both of the following conditions are met: 1. the financial asset is held within a

business model whose objective is to hold financial assets in order to collect contractual cash flows and

2. the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

In principle, all financial assets must be valued at amortized cost.

Financial assets measured at fair value through other comprehensive income

IFRS German GAAP

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met 1. the financial asset is held within a

business model whose objective is achie-ved by both collecting contrac tual cash flows and selling financial assets and

2. the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

The new standard requires that all equity investments be measured at fair value. IFRS 9 removes the cost exemption for unquoted equities and derivatives on unquoted equities but provides gui dan ce on when cost may be an appropriate estimate of fair value. Fair value changes of equity investments are recog nized in profit and loss unless management has elec ted the option to present in OCI unrealized and realized fair value gains and losses. How-ever, this option does not apply to equity investments that are held for trading, put-table instruments, or contin gent consideration. Such designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable. There is no subsequent recycling of fair value gains and losses to profit or loss; however, ordinary dividends from such investments will continue to be recognized in profit or loss.

Not applicable.


Financial assets

Financial assets at fair value through profit or loss (incl. held-for-trading financial assets)

IFRS German GAAP

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income in accordance. However an entity may make an irre voc able election at initial recog nition for particular invest ments in equity instruments that would other wise be measured at fair value through profit or loss to present subsequent changes in fair value in other compre hensive income.

An entity may, at initial recog nition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a mea sure ment or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would other-wise arise from measuring assets or liabilities or recog nising the gains and losses on them on different bases.

Only assets which other cre ditors can not access and which are used solely for the purpose of fulfilling debt aris ing from retirement obli gations or comparable obli-gations with a long-term ma turi ty are to be measured at fair value through profit or loss.

Initial measurement

IFRS German GAAP

Except for trade receivables, at initial recognition, an entity shall measure a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

An entity shall measure trade receivables that do not have a significant financing compo nent (determined in accor dance with IFRS 15) at their transaction price (as defined in IFRS 15).

Under German GAAP the general recognition and measurement criteria for assets apply. The initial measurement of financial assets is at cost including incidental acquisition expenses.

One exemption applies to assets which are deprived of all other creditors’ access and are used exclusively to cover pension obligations or comparable long-term lia-bilities. They have to be mea sured at fair value.


Financial assets

Subsequent measurement

IFRS German GAAP

Depends on the category. After initial recognition, an entity shall measure a finan cial asset at:1. amortised cost;2. fair value through other comprehensive

income; or3. fair value through profit or loss.

Amortised costs:Interest revenue shall be calcu lated by using the effective interest method. This shall be calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for purchased or originated credit-impaired financial assets or financial assets that are not purchased or originated credit-impaired financial assets but sub sequent ly have become credit-impaired financial assets.

Current financial assets:For current investments the lower of cost or quoted/market price applies. They must be impaired if the fair value is less than their carry ing amount. An impair ment shall be reversed if the rea sons for the write-down no longer apply.

Non-current financial assets:Non-current assets are carried at amortised cost. One exemption applies to assets which are deprived of all other creditors’ access and are used exclusively to cover pension obligations or comparable long-term liabilities. They have to be reported at fair value. An impairment loss must be recorded if the decrease in value is not temporary; if the decrease in value is tempor ary, impairment is optional. An impairment shall be rever sed if the reasons for the write-down no longer apply (except for impairments on goodwill, which are never reversed).

An entity shall apply the impairment requirements (expected loss model) to financial assets that are measured at amortised cost and to financial assets that are measured at fair value through other comprehensive income (see Impairment Model).

Impairment model – Financial assets

IFRS German GAAP

IFRS 9, Financial instruments, includes the expected credit loss impairment model that replaces the former incurred loss model. The “expected credit losses” model, has the following key elements.

No comparable explicit impair ment model.

For non-current financial assets an impairment loss must be recorded if the de crease in value is not temporary; if the decrease in value is temporary, impair ment is optional. An impair ment shall be reversed if the reasons for the write-down no longer apply.


Financial assets

IFRS German GAAP

General model:Under the general model, an entity will recognize an im pair ment loss at an amount equal to the 12-month expec ted credit loss (stage 1). If the credit risk on the financial instrument has increased significantly since initial recog nition (even without objec tive evidence of impair ment), it should recog nize an impairment loss at an amount equal to the lifetime expected credit loss (stage 2). Interest income is calculated using the effective interest method on the gross carrying amount of the asset. When there is objective evi dence of impairment (for example significant financial difficulty of the issuer/borrower, a breach of contract; ref. IFRS 9.A credit-impaired financial asset for further criteria, lifetime expected credit losses are recognized and interest is calculated on the net carrying amount after impairment (stage 3).

The 12-month expected credit loss measurement represents all cash flows not expected to be received (“cash shortfalls”) over the life of the financial instrument that result from those default events that are possible within 12 months after the reporting date. Lifetime expected credit loss represents cash shortfalls that result from all possible default events over the life of the financial instrument.

The (lower) fair value of equity investments shall be deter mined by an income app roach or DCF-model. The stock market price should be included as the case may be for assessing plausibility (IDW S. 1 i.d.F. 2008).

The (lower) fair value of loans shall be determined by the market price. An impairment shall be reversed where the reasons for the write-down no longer apply.

Trade receivables will be impaired by a specific valuation allowance if there are indicators that the cash inflow may be doubtful. Further more a general valuation allowance with regard to the general credit risk is recognised for all other trade receivables which are not individually impaired.

Scope:The guidance of IFRS 9 applies to:

a) debt instruments mea sured at amortized cost;

b) debt instruments measured at fair value through other compre hensive income;

c) all issued loan commit ments not measured at fair value through profit or loss (FVPL);

d) financial guarantee con tracts within the scope of IFRS 9 that are not accounted for at FVPL; and

e) lease receivables within the scope of IAS 17, Leases, and contract assets resulting from IFRS 15, Revenue from Contracts with Customers.


Financial assets

IFRS German GAAP

Calculation of the impair ment:Expected credit losses are determined using an unbia sed and probability-weighted approach and should reflect the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current condi tions and forecasts of future economic conditions. The calculation is not a best-case or worst-case estimate. Rather, it should incorporate at least the probability that a credit loss occurs and the probability that no credit loss occurs.

Assessment of credit deterioration:When determining whether lifetime expected losses should be recognized, an entity should consider the best information available, including actual and expected changes in external market indicators, internal factors, and borrower-specific infor-mation. Where more forward-looking information is not available, delinquency data can be used as a basis for the assess ment.

Under the general model in IFRS 9, there is a rebuttable presumption that lifetime expected losses should be provided for if contractual cash flows are 30 days past due. An entity has an option to recognize 12-month expec ted credit losses (i. e., not to apply the general model) for financial instruments that are equi valent to “investment grade.

Purchased or originated credit impaired assets Impair ment is determined based on full lifetime expec ted credit losses for assets where there is objective evidence of impairment on initial recognition. Lifetime expected credit losses are included in the estimated cash flows when calculating the asset’s effective interest rate (“credit-adjusted effec tive interest rate”), rather than being recognized in profit or loss. Any later changes in lifetime expected credit losses will be recognize immediately in profit or loss.


Financial assets

IFRS German GAAP

Trade and lease receivables:For trade receivables or con tract assets which contain a significant financing com ponent in accordance with IFRS 15 and lease receivables, an entity has an accounting policy choice: either it can apply the simplified approach (that is, to measure the loss allowance at an amount equal to lifetime expected credit loss at initial recognition and throughout its life), or it can apply the general model. The use of a provision matrix is allowed, if appropriately adjusted to reflect current events and forecast future conditions.

If the trade receivables or contract assets do not contain a significant financing component, lifetime expected credit losses shall be recognized.

Disclosures:Extensive disclosures are required, including recon ciliations of opening to closing amounts and dis clo sure of assumptions and inputs.

Derecognition of financial assets

IFRS German GAAP

In consolidated financial statements, the requirements in IFRS 9 are applied at a consolidated level. Hence, an entity first consolidates all subsidiaries in accordance with IFRS 10 and then applies those paragraphs to the resulting group.

Before evaluating whether, and to what extent, derecognition is appropriate an entity deter mines whether those para graphs should be applied to a part of a financial asset (or a part of a group of similar finan cial assets) or a financial asset (or a group of similar financial assets).

German GAAP adopts a risk-oriented approach to determine whether dere-cognition of a financial asset is appropriate. It is focused on whether substantially all risks and rewards of an asset are permanently retained by or transferred to an entity. For receivables the credit risk is one of the substantial risks. Other financial assets may have other risks and rewards (for example a participation right or the right to transfer a financial asset).

An entity shall derecognise a financial asset when, and only when1. the contractual rights to the cash flows

from the financial asset expire, or2. it transfers the financial asset and the

transfer qualifies for derecognition (see below).


Financial assets

IFRS German GAAP

An entity transfers a financial asset if, and only if, it either1. transfers the contractual rights to receive

the cash flows of the financial asset, or2. retains the contractual rights to receive

the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the following conditions:a) The entity has no obli gation to pay

amounts to the eventual recipients unless it collects equi valent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition.

b) The entity is prohibited by the terms of the trans fer contract from selling or pledging the original asset other than as securi ty to the eventual recipients for the obli gation to pay them cash flows.

c) The entity has an obli gation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents (as defined in IAS 7 Statement of Cash Flows) during the short settlement period from the collection date to the date of required remittance to the even tual recipients, and interest earned on such investments is passed to the eventual recipients.


Financial assets

IFRS German GAAP

When there is a transfer as described above, the entity has to evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:1. if the entity transfers substantially all

the risks and rewards of ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

2. if the entity retains substan tially all the risks and re wards of ownership of the financial asset, the entity shall continue to recognise the financial asset.

3. if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall deter mine whether it has retained control of the financial asset a) if the entity has not retained control, it

shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

b) if the entity has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset.


Liabilities

I Liabilities

Contingent liabilities

IFRS German GAAP

A contingent liability is de fined as a possible obli gation whose outcome will be con firmed only by the occur rence or non-occur rence of one or more un certain future events outside the entity’s control. A contin gent liability can also be a present obligation that is not recognised because it is not probable that there will be an outflow of economic bene fits, or the amount of the outflow cannot be reliably measured. Contingent lia bilities are disclosed unless the probability of outflows is remote.

Guidance for contingent liabilities pursuant to German GAAP is similar to IFRS; contingent liabilities may result from issuing and transferring bills of exchange, from guarantees, including bills and cheque guarantees, from warranties and from granting security for third party liabilities.

Due to the importance of the prudence principle more items are recognised as provisions rather than being only disclosed as contin gencies.

General provisions – Recognition

IFRS German GAAP

A provision is recorded when three criteria are met:• that a present obligation from a past

event exists;• that it is probable that an outflow of

resources will be required to settle the obligation; and

• that a reliable estimate can be made.

The term “probable” is used for describing a situation in which the outcome is more likely than not to occur. Generally, the phrase more likely than not denotes any chance greater than 50%.

Recognition criteria for pro visions are similar to IFRS. Provisions must be recog-nised for uncertain liabilities, expected losses from exe cutory contracts, deferred repair and maintenance expen ses incurred within the first three months from the end of the preceding financial year, expenses for deferred removal of earth and demo lished buildings incurred within the following year and guarantee expenses incurred without any legal or con trac tual obligation. For other purposes than the afore mentioned the recognition of a provision is prohibited. The required probability of an outflow of resources to recognise a provision is generally lower than according to IFRS.


Liabilities

General provisions – Measurement

IFRS German GAAP

The amount recognised should be the best estimate of the expenditure required (the amount an entity would rationally pay to settle the obligation at the balance sheet date). The entity must discount the anticipated cash flows using a pre-tax dis-count rate (or rates) that re flect(s) current market assess ments of the time value of money and those risks spe cific to the liability (for which the cash flow estimates have not been adjusted) if the effect is material.

Similar, but not the same as IFRS. Provisions must be measured at the amount required to settle the obligation based on sound business judgement in accordance with the pru dence principle. Provisions (other than provisions for pension obligations) with a residual term of more than one year are discounted using the appropriate (based on the residual term) seven year aver age market rate provided by the German Federal Bank. Long-term provisions for pension obligations are dis-counted using the res pective ten year average market rate.

Restructuring provisions

IFRS German GAAP

A provision for restructuring costs is recognised when, among other things, an entity has a present obligation. A present obligation exists when, among other condi tions, the company is “de mon strably committed” to the restructuring. A company is usually demonstrably com mitted when there is legal obligation or when the entity has a detailed formal plan for the restructuring.

To record a liability, the com pany must be unable to with draw the plan, because either it has started to imple ment the plan or it has announced the plan’s main features to those affec ted (constructive obligation). A current provision is unlikely to be justified if there will be a delay before the restructuring begins or if the restructuring will take an unreasonably long time to complete. Liabilities related to offers for voluntary terminations are measured based on the number of employees expected to accept the offer.

The general recognition and measurement rules apply. No specific guidance under German GAAP.


Financial liabilities

J Financial liabilities

Definition

IFRS German GAAP

IFRS defines a financial liability as a contractual obligation:• to deliver cash or a financial asset to

another entity;• to exchange financial instru ments with

another entity under conditions that are potentially un favour able;

• as a contract that will or may be settled in the entity’s own equity instrument and is a non derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or

• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

German GAAP does not define or contain specific accounting guidance for financial liabilities.

Under German GAAP a financial instrument is a contract that gives rise to receive or deliver cash or other financial instruments.

Derivatives are also financial instruments. See “Derivatives and hedging” for the accoun ting of derivatives.“

Classification

IFRS German GAAP

The issuer of a financial instru ment shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the sub-stance of the contractual arrangement and the defini tions of financial instru ments.

When there is a contractual obligation (either explicit or indirectly through its terms and conditions) on the issuer of an instrument to deliver either cash or another finan cial asset to the holder; or to exchange financial assets or financial liabilities with an other entity under condi-tions that are potentially unfavour able to the issuer, that instru ment meets the defini tion of a financial liability regardless of the manner in which the con trac tual obli gation may be settled.

Financial instruments with a contractual obligation to de li ver cash or other financial instruments are classified as financial liabilities or equity instruments. The following three criteria should not be fulfilled simultaneously for a financial instrument to be classified as a financial liability:• subordination• profit-related compensation and loss

participation up to the principal amount• long-term lending



IFRS German GAAP

To classify a financial instru ment on initial recog nition as a financial liability/asset or an equity instrument, see details in IAS 32.15–32.26.

A financial instrument that gives the holder the right to put it back to the issuer for cash or another financial asset (a ‘puttable instrument’, for example partnerships with a right to redeem their interests in the issuer at any time for cash) is a financial liability, except for those instruments classified as equity instru ments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. Please also refer to ‘Equity instruments – Recognition and classification’.

Recognition

IFRS German GAAP

The financial liability shall be recognised when the entity becomes party to the con-trac tual provisions of the instrument.

Similar to IFRS.

Categories

IFRS German GAAP

Guidance under IFRS requires that financial liabilities be classified in one of the two categories:• financial liabilities at fair value through

profit or loss (incl. held-for-trading financial liabilities)

• financial liabilities at amortised cost

Financial liabilities relating to financial guarantee contracts or commitments to provide a loan at a below-market interest rate are subject to specific measurement guidelines (IFRS 9.4.2.1).

German GAAP does not define individual categories of financial liabilities for pur-poses of recognition or measurement.

A distinction is made between short-term and long-term liabilities for the disclosures in the notes (for example in the ageing analysis for liabilities).



Financial liabilities at fair value through profit or loss (incl. held-for-trading financial liabilities)

IFRS German GAAP

A financial liability at fair value through profit or loss is a financial liability that meets either of the following conditions:

• It is classified as held for trading. A financial liability is classified as held for trading if it is: – acquired or incurred principally for the pur pose of selling or repur chasing it in the near term;

– part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

– a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

• Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may use this designation only when doing so results in more relevant information, because either: – it eliminates or signifi cantly reduces a measure ment or recog nition inconsistency (sometimes referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases;

Not applicable.

– it eliminates or signifi cantly reduces a mea sure ment or recog nition inconsistency (some times referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases;

– a group of financial lia bilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or invest ment strategy, and information about the group is provided internally on that basis to the entity’s key mana ge ment personnel for example the entity’s board of directors and chief executive officer; or

– if a contract contains one or more embedded derivatives, an entity may designate the entire hybrid (combined) contract as a financial lia bility at fair value through profit or loss unless:



IFRS German GAAP

– the embedded deri va tive(s) does not signifi cantly modify the cash flows that otherwise would be required by the contract; or

– it is clear with little or no analysis when a simi lar hybrid (com bined) instrument is first consi dered that separa tion of the em bedded deriva-tive(s) is prohibited, such as a prepayment option em bedded in a loan that permits the holder to pre pay the loan for approxi mately its amortised cost.

• all or part of the financial instrument is designated either upon initial recog nition or subsequently as at fair value through profit or loss because – the entity uses a credit derivative that is mea sured at fair value through profit or loss to manage the credit risk of all, or a part of, a financial instrument (credit ex-posure). The entity may designate that financial instrument to the extent that it is so managed (ie all or a proportion of it) as measured at fair value through profit or loss if:

– the name of the credit exposure (for example, the borrower, or the holder of a loan commit ment) matches the re-fer ence entity of the cre dit derivative (‘name matching’); and

– the seniority of the finan cial instrument matches that of the instru ments that can be delivered in accordance with the credit derivative.

Other liabilities

IFRS German GAAP

An entity shall measure all other financial liabilities at amortised cost using the effective interest method.

Financial liabilities relating to financial guarantee contracts or commitments to provide a loan at a below-market inter est rate are subject to specific measurement guide lines (IFRS 9.4.2.1).

Not applicable.



Initial measurement

IFRS German GAAP

A financial liability is recog nised initially at its fair value minus, in the case of a finan cial liability that is not recog nised as at fair value through profit or loss, trans action costs that are directly attri butable to the acquisition or issue of that liability.

Financial liabilities must initially be measured at their settlement amount. If the settlement amount is higher than its value on issuance, then the financial liability may either be measured at its settlement amount or at its value on issuance.

Trans action costs must be recog nized in profit or loss unless the criteria for prepaid expenses are met.

Subsequent measurement

IFRS German GAAP

After initial recognition, an entity shall measure all finan cial liabilities at amor tised cost using the effective interest method, except for financial liabilities at fair value through profit or loss. For financial liabilities at fair value through profit or loss, the following applies: • Subsequent measurement at fair value.• Distribution of discount/premium is

implied in the fair value.• Changes in fair value have to be

recognised in the income statement.

For financial liabilities desig nated at fair value through profit or loss due to an accoun ting mismatch, the management of that instru ment within a group of finan cial instruments eva lu ated on fair value basis or due to embedded derivative(s) (see section Financial Liabilities-Categories above), credit risk of the issuer is to be reflected in other com pre hensive income.

Financial liabilities shall continuously be measured at their settlement amount.

If the settlement amount is higher than its value on issuance and the financial liability is initially measured at its settlement amount, the difference to its value on issuance may be included in prepaid expenses on the assets side of the balance sheet and shall be amortised by systematic annual charges that may be allocated over the full term of the liability. Alternatively such a difference may be recognised as an expense immediately.

If such a financial liability is initially measured at its value on issu ance, interest accrues subsequently using the effec tive interest method and increa sing the book value of the financial liability respec tively.

Financial liabilities relating to financial guarantee contracts or commitments to provide a loan at a below-market inter est rate are subject to specific measurement guide lines (IFRS 9.4.2.1).



Derecognition of financial liabilities

IFRS German GAAP

A financial liability is dere cog nised when the obligation speci fied in the contract is discharged, cancelled or ex pires, or when the debtor is legally released from the primary responsi bility for the liability

A liability is also considered extinguished if there is a substantial modification in the terms of the instrument.

The difference between the carry ing amount of a liability (or a portion thereof) extingu ished or transferred and the amount paid for it should be recognised in profit or loss for the period.

Derecognition principles under German GAAP are similar to IFRS.

Convertible debt

IFRS German GAAP

For convertible instruments with a conversion feature characterised by exchanging a fixed amount of cash for a fixed number of shares, IFRS requires bifurcation and split accounting between the subs tantive liability and equity components of the instrument in question. The liability component is recognised at fair value calculated by discounting the cash flows associated with the liability component – at a market rate for nonconvertible debt – and the equity conversion rights are measured as the residual amount and recognised in equity with no subsequent measurement.

Equity con version features within liability host instruments that fail the fixed-for-fixed re quire ment are considered to be embed ded derivatives. Such embed ded derivatives are bifurcated from the host debt contract and measured at fair value, with changes in fair value recognised in profit or loss.

Split accounting is applied to convertible debt where appro priate. For the debt component a liability has to be recognised that may either be measured at its settlement amount or at its value on issuance.


Equity instruments

K Equity instruments

Recognition and classification

IFRS German GAAP

An equity instrument is defined as any contract that evidences a residual interest in an entity’s assets after deducting all of its liabilities. An instrument is classified as equity when it does not con tain an obligation to trans fer economic resources to another entity. Preference shares that are not redeem able, or that are redeemable solely at the option of the issuer, and for which distri butions are at the issuer’s discretion, are classified as equity.

Only derivative con tracts that result in the delivery of a fixed amount of cash, or other financial asset for a fixed number of an entity’s own equity instru ments, are classified as equity instru ments. For this purpose the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments.

All other derivatives on the entity’s own equity are trea ted as derivatives. Special guidance was introduced regar ding the classification of puttable financial instruments and instruments that impose an obligation to deliver a pro rata share of the net assets to another party upon liquidation.

For the classification of finan cial instruments as equity, the following three criteria must be fulfilled simultaneously:• subordination• profit-related compensation and loss

participation up to the principal amount• long-term lending (only applicable

for corporations, not for commercial partner ships)

Shareholder’s equity is classified as:• subscribed capital, which is the capital

in respect of which the liability of the shareholders for the liabilities of the company to creditors is limited;

• capital reserves, which contain, for example, the amount (premium) received on the issuance of shares;

• revenue reserves (including the legal reserve (for stock corporations), the reserves provided for under the articles of association and other revenue reserves);

• retained profits/accu mulated losses brought forward; and

• net income/net loss for the year


Equity instruments

IFRS German GAAP

Such instruments are classi fied as equity if all of the follow ing criteria are met:• It entitles the holder to a pro rata share

of the entity’s net assets in the event of the entity’s liquidation.

• The instrument is in the class of instruments that is subordinate to all other classes of instruments.

• All financial instruments in that class have identical features.

• Apart from the contractual obligation for the issuer, the instrument does not include any contractual obligation to deliver cash or another financial asset.

• The total expected cash flows attributable to the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecog nised net assets of the entity.

• The issuer must have no other financial instrument or contract that has: – total cash flows based substantially on the profit or loss, the change in the recognised net assets or in the fair value of the recog nised/unrecognised net assets of the entity; and

– the effect of substantially restricting or fixing the residual return to the put table instrument holders.

For the classification of financial instruments as equity, the following three criteria must be fulfilled simultaneously:• subordination• profit-related compensation and loss

participation up to the principal amount• long-term lending (only appli cable

for corporations, not for commercial partner ships)

Shareholder’s equity is classi fied as:• subscribed capital, which is the capital

in respect of which the liability of the shareholders for the liabilities of the company to creditors is limited;

• capital reserves, which con tain, for example, the amount (premium) received on the issuance of shares;

• revenue reserves (including the legal reserve (for stock corporations), the reserves provided for under the artic les of association and other revenue reserves);

• retained profits/accu mu lated losses brought forward; and

• net income/net loss for the year.

Transaction costs related to the issuance of equity instru ments must be recog nised in profit or loss and cannot be deducted from equity.

Uncalled outstanding contributions to subscribed capital are to be deducted from subscribed capital on the liabilities side of the balance sheet.

Purchase of own shares

IFRS German GAAP

When an entity’s own shares are repurchased, they are shown as a deduction from shareholders’ equity at cost.

Repurchased own shares are to be deducted from sub scrib ed capital at par value. Any difference between pur chase cost and par value is to be offset with reserves available for distribution. Incidental expenses of the acquisition are to be recog nised in profit or loss for the period.


Derivatives and hedging

Derivatives non-hedging – Definition

IFRS German GAAP

A derivative is a financial instru ment that creates rights and obligations having the effect of transferring between the parties to the instrument one or more of the financial risks inherent in an underlying primary instrument. It gives one party a contractual right to exchange financial assets or financial liabilities with another party under condi tions that are potentially favourable, or a contractual obligation to exchange finan cial assets or financial liabilities with another party under conditions that are potentially unfavourable. A derivative is a financial instrument:• whose value changes in response to

the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”);

• that requires initially no or little net investment; and

• that is settled at a future date.

Same definition as under IFRS. Forward transactions to purchase or sell goods (non-financial items, especi ally commodities) are also considered as derivatives for hedge accounting.

Derivatives non-hedging – Recognition

IFRS German GAAP

All derivatives are recognised on the balance sheet as either financial assets or liabilities when the legal transaction is concluded. See “Financial assets” for recognition of financial assets and “Financial liabilities” for recognition of financial liabilities.

German GAAP requires an entity to recognise a deri va tive when and only when the criteria of a (financial) asset or a (financial) liability is fulfilled.

L Derivatives and hedging



Derivatives non-hedging – Initial measurement

IFRS German GAAP

Derivatives are initially measured at fair value on the date of initial recognition. Transaction costs are recog nised in profit or loss. The consideration paid or re cei ved for an option (option pre mium) represents the fair value at initial recognition. On the balance sheet the option premium is recognised as a financial asset for the buyer of the option and as a financial liability for the writer of the option. Contracts of deri va tives which are not in line with market require upfront pay ments. An upfront pay ment is a single payment which is paid at conclusion of the legal transaction.

Usually at initial recognition all derivatives deriving from contracts in line with current market conditions have no fair value.

There are two exceptions:• purchased and written options; and• derivatives with upfront payments.

Upfront payments are recog nised on the balance sheet as other assets or lia bilities. Those derivatives which have no fair value at initial recognition are not recognised on the balance sheet.

The initial margin paid for a future is recognised on the balance sheet as other assets.

The consideration paid or received for an option (option premium) is recog nised on the balance sheet as other assets or liabilities.

Derivatives non-hedging – Subsequent measurement

IFRS German GAAP

For derivatives the subse quent measurement is at fair value. Changes in a deriva tive’s value are recognised in profit or loss as they arise, unless they satisfy the criteria for hedge accounting outlined below.

Derivatives (except options):• For unrealised losses of derivatives a

provision is recognised.• Unrealised gains must not be recognised.

Options:• For the buyer of an option unrealised

losses are recognised as an impair ment of the option premium.

• For the writer/seller of an option, a provision for unrealised losses is recognised to the extent that it exceeds the option premium recognised as a liability.



Hedge accounting requirements – Overview

IFRS German GAAP

Hedge accounting is a technique that modifies the normal basis for recognising gains and losses on associated hedging instruments and hedged items so that both are recognised in profit or loss in the same accounting period. An accounting mismatch occurs when:• a hedged item and the corresponding

hedging instrument are measured on different measurement bases (for example hedged item at amortised cost, hedging instrument at fair value through profit or loss);

• gains and losses on the hedged item and the hedging instrument are not recognised consistently (for example hedged item is an available-for-sale financial asset and the hedging instrument is a derivative); or

German GAAP defines the combination of an underlying transaction (hedged item) and the hedging instrument as a “valuation unit”.

• the hedged item is an unrecognised firm commitment or forecast transaction, whereas the hedging instrument is already recognised.

Financial statements provide more relevant information if hedge accounting is applied. In a hedge relationship hedge accounting is applied to the hedged item and the hedging instrument.

Hedge accoun ting is per mitted provided that an entity meets stringent qualifying criteria:• The hedging relationship consists only of

eligible hedging instruments and eligible hedged items;

• There is formal designation and documentation of the hedging relationship and risk management objective and strategy at inception of the hedge;

• The hedge relationship meets the hedge effective ness requirements.

Hedge accounting is per mitted provided that an entity meets qualifying criteria in relation to:• qualifying hedged item;• qualifying hedging instrument;• offsetting changes in value or cash flows

form the occurrence of comparable risks; • prospective hedge effectiveness;• intention (and ability) to hedge; and• formal documentation and designation

(similar to IFRS).

Formal documentation and designation must be in place at inception of the hedge relationship. Documentation should identify:• the risk management objective and

strategy;• the hedged item;• the hedging instrument;• the nature of risk being hedged; and • how management will assess hedge

effective ness, incl. giving a des cription of sources of ex pected ineffectiveness and how the hedge ratio was determined.



Hedge accounting requirements – Hedged item

IFRS German GAAP

Hedged items can be recog nised assets, recognised liabilities, firm commitments, forecast transactions that involve an external party (and that should be highly probable to qualify as hedged item), or net investments in a foreign operation. The hedged item can be a single item or a group of items as well as a component of such an item or group of items. The hedged item must be reliably measurable.

Groups of items that consti tute a net position can also be designated as a hedged item as well as aggregated exposures (combination of an exposure that is an eligible hedged item and a derivative). As an exception to the princi ple that only trans actions with an external party are eligible hedged items, the foreign currency risk of an intragroup monetary item may qualify as a hedged item if it results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation.

As stated above, an entity can either designate an item in its entirety or a component of such item as a hedged item. According to IFRS 9 risk components of financial as well as non-financial items can be designated as hedged item as long as they are separately identifiable and reliably measurable.

Hedged items may be assets, liabilities, firm commitments or highly probable forecast transactions that involve an external party.

Derivatives qualify as hedged items irrespective of whether the derivative is embedded or not.

Portfolio hedges (i. e. hedging the risk of a group of similar items) and macro hedges (i. e. hedging the net risk of a group of opposing items) are permitted, provided that an efficient risk management system related to these hedges exists.

Designation of the following is admitted:• a proportion of nominal amount of the

hedged item;• a portion of a risk; and• a portion of its term, pro vided the

effectiveness can be measured.

There is no distinction between financial and non-financial assets or liabilities as hedged item.

An entire item comprises all changes in the cash flows or fair value of an item. A component comprises less than the entire fair value change or cash flow variability of an item. In that case, an entity may designate only the following types of compo nents (including combi nations) as hedged items: • only changes in the cash flows or fair

value of an item attributable to a specific risk or risks (risk component);

• one or more selected contractual cash flows;

• components of a nominal amount, i.e. a specified part of the amount of an item.

Similar to IFRS.



IFRS German GAAP

Items that do not qualify as hedged item comprise:• own equity instruments• entity method investment, such as an

associate or joint arrangement• A derivative instrument can only

be designated as a hedged item as part of an aggregate exposure with an non-derivative item.

• A firm commitment to acquire a business cannot be a hedged item, except for foreign exchange risk, because the other risks that are hedged cannot be specifically identified and measured.

All assets, liabilities and deri vatives (i. e. firm commitments) may qualify as hedged items, provided that the risk to be hedged can be speci fically identified and mea sured.

Hedge accounting requirements – Hedging instrument

IFRS German GAAP

The main qualifying hedging instruments are:• derivative financial instrument

(incl. separate embedded derivatives in financial liabilities or non-financial contracts);

• non-derivative financial instruments measured at fair value through P&L (except for financial liabilities designated at FVTPL where changes in fair value as a result of credit risk are presented in OCI);

• the foreign currency component of non-derivative financial instruments (except for equity instruments for which changes in fair value are presented in OCI).

Any combination of derivatives and non-derivatives can be jointly designated as a hedging instrument. Derivatives do not have to be similar to be combined either together or with non-derivative instruments.

Only financial instruments can qualify as hedging instruments. Forward transactions to purchase or sell goods (non-financial items, especially commodities) are also classified as financial instruments for hedge accounting.

Embedded derivatives may only qualify as hedging instruments when they are separately accounted for.

Only instruments that involve a party external to the reporting entity can be designated as hedging instruments.

A written option cannot be designated as a hedging instrument unless it is combined with a purchase option and a net premium is paid or a purchased option is hedged. The purchased option may be embedded in another instrument.

Similar to IFRS.

A written option can generally not be designated as a hedging instrument.

Normally a qualifying instrument must be designated in its entirety as a hedging instrument.

Similar to IFRS. A financial instrument may also be designated as a hedging instrument for a portion of time of its term



IFRS German GAAP

Three exceptions exist:• Designating as the hedging instrument

only the change in intrinsic value of an option and excluding change in its time value.

• Separating the forward element of a forward contract and designating only the change in the value of the spot element of a forward contract and not the forward element. Similarly, the foreign currency basis spread may be separated and excluded from the designation of a financial instrument;

• Designation of a proportion of the notional amount of the hedging instrument (for example 50% of the notional amount). However, a hedging instrument may not be designated for a part of its change in fair value that results from only a portion of the time period during which the hedging instrument remains outstanding.

A single hedging instrument can hedge more than one risk in two or more hedged items under certain circumstances.

In a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities, the portion hedged may be designated in terms of an amount of a currency rather than as indi vidual assets (or liabilities).

Similar to IFRS.

No specific regulations/restrictions for portfolio or macro hedges except for the necessity of an efficient risk management system related to these hedges.

Although the portfolio may, for risk management pur poses, include assets and liabilities, the amount desig nated is an amount of assets or an amount of liabilities. The overall net position cannot be hedged. The entity may hedge a portion of the interest rate risk associated with this designated amount.13

13 Only for fair value hedge of the interest rate exposure of a portfolio of financial assets or liabilities IFRS 9, IFRS 9 permits entities to apply the hedge accounting requirements in IAS 39 instead of IFRS 9. In that case the entity must also apply the specific requirments for the fair value hedge accounting for a portfolio hedge of interest rate risk and designate as the hedged item a portion that is a currency amount.



Hedge accounting requirements – Hedge effectiveness

IFRS German GAAP

A hedge qualifies for hedge accounting under IFRS if an entity’s designation of the hedging relationship is based on the economic relationship between the hedged item and the hedging instrument, which meets the hedge effectiveness requirements. Hedge effectiveness is the extent to which changes in the fair value or cash flows of the hedging instrument offset changes in the fair value or cash flows of the hedged item. IFRS 9 comprises three requirements: • existence of an economic relationship

between the hedged item and hedging instrument;

• no domination of the effect of credit risk of the value changes that result from the economic relationship; and

• the hedge ratio is the same as that resulting from the quantity of the heged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

Under German GAAP pros pective and retrospective testing of hedge effectiveness is required.

There are no explicit limits for the determination whether a hedge is sufficiently effective.

IFRS requires that hedges are assessed for effectiveness on an ongoing basis and that effectiveness is measured, at a minimum, at the time an entity prepares its annual or interim financial reports and on any significant change in circumstances affecting the hedge. Hedge ineffectiveness is required to be measured and accounted for in earn ings. Therefore, if an entity is required to produce only annual financial statements, IFRS requires that effective ness is tested only once a year.

An entity may, of course, choose to test effectiveness more frequently.

IFRS does not specify a single method for assessing hedge effectiveness.

Similar to IFRS.

Under German GAAP every economically reasonable method is accepted.



Hedge accounting requirements – Hedge relationships

IFRS German GAAP

Fair value hedge: The risk of a change in the fair value of a recognised asset or liability or an unrecognised firm commit ment or portions thereof is hedged.

Cash flow hedge: The risk of potential volatility in future cash flows is hedged.

Hedge of a net investment in a foreign operation: A hed ging instrument is used to hedge the currency risk (trans lation risk) of a net investment in a foreign entity.

Under German GAAP there is no distinction in the ac coun ting treatment between fair value hedges, cash flow hedges or hedges of net investments in foreign operations.

Hedge accounting requirements – Hedge accounting – accounting treatment

IFRS German GAAP

Application of hedge accoun ting is optional if the require ments are fulfilled.

Fair value hedges: Hedging instruments are measured at fair value. Gains and losses on the hedging instrument shall be recognised in profit or loss (P&L) except for hed ging instruments hedging an equity instrument accoun ted for at fair value in other comprehensive income (FVOCI). Gains and losses of equity instruments are not recycled to P&L; changes in the fair value of the hedging instrument are recorded in other comprehensive income without recycling to P&L. The hedged item is adjusted for changes in its fair value but only due to the risks being hedged. Gains and losses on the hedged item attributable to the hedged risk are recog nised in the income statement (P&L), except for those attributable to equity instru ments accounted for at FVOCI, in which case they are recog nised in OCI.

Similar to IFRS.

Under German GAAP there is no distinction in the accoun ting treatment between fair value hedges, cash flow hedges or hedges of net investments in foreign opera tions. The valuation unit/hedge is regarded as a new measurement object. To the extent and for the period the opposing changes of the fair values or cash flows of the hedged item and the hedging instrument are offsetting (effective part) the measurement principles of realisation, imparity and item-by-item valuation are not applied. Generally, this can be implemented in two ways: • “Freeze in method”:

The offsetting changes in the fair values/cash flows of the hedged item and hedging instrument due to the risk hedged is recognised neither in balance sheet nor in the income statement (effective part).



Hedge accounting requirements – Disclosure requirements

IFRS German GAAP

Extensive disclosure require ments exist under IFRS 7.

An entity shall explain its risk management strategy for each risk category of risk exposures that it decides to hedge and for which hedge accounting is applied. This enables to evaluate:• how each risk arises.• how the entity manages each risk; this

includes whether the entity hedges an item in its entirety for all risks or hedges a risk component (or com po nents) of an item and why.

• the extent of risk exposures that the entity manages.

This information should in clu de (but is not limited to) a description of:• the hedging instruments that are used

(and how they are used) to hedge risk exposures;

Concerning valuation units/hedges German GAAP requires disclosure about:• the amount at which each of assets,

liabilities, firm commitments and highly probable forecast transactions are included in the valuation unit/hedge;

• type of hedged risks;• type/nature of recognised valuation unit

(micro-, port folio- or macro-hedge);• amount of hedged risks;• for each of the risks hed ged: why, to

which extent and the period for which the offsetting changes in the fair values or cash flows of the hedged item and the hedging instrument are expected to be compen sated in the future;

• method used to determine the hedge effectiveness; and

• for forecast transactions a description of the trans action and the reason why the occurrence of the transaction will be highly probable.

IFRS German GAAP

Cash flow hedges: Hedging instruments are measured at fair value, with gains and losses on the hedging instru ment to the extent they are effective being initially defer red in equity (OCI) and subsequently released to the income statement concurrent with the earnings recognition pattern of the hedged item. Gains and losses on financial instru ments used to hedge forecast assets and liability acquisitions must be included in the cost of the non-financial asset or liability – a “basis adjustment”. This is not permitted for financial assets or liabilities.

• “Through posting method”: The offsetting changes in the fair values/cash flows of the hedged item and the hedging instrument due to the risk hedged will be recognised in the financial statement (effective part).

For changes in the fair values/cash flows of hedged item and hedging instrument due to the risk hedged that are not offset the principles of realisation, imparity and item-by-item valuation have to apply (ineffective part).

Hedges of net investments in foreign operations: Similar treat ment to cash flow hed ges. The hedging instru ment is measured at fair value with gains/losses deferred in equity, to the extent that the hedge is effective, together with exchange differences arising from the entity’s investment in the foreign operation. These gains/losses are transferred to the income statement on disposal or partial disposal of the foreign operation.

For changes in the fair values/cash flows of hedged item and hedging instrument due to risks not being hedged the principles of realisation, imparity and item-by-item valuation have to apply (part/risk not being hedged).



IFRS German GAAP

• how the entity determines the economic relationship between the hedged item and the hedging instrument for the purpose of assessing hedge effective ness; and

• how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are.

The disclosure requirements concern the notes, except if they have been disclosed in the management report.

When an entity designates a specific risk component as a hedged item it shall provide qualitative or quantitative information about:• how the entity determined the risk

component that is designated as the hedged item (including a des crip tion of the nature of the relationship between the risk component and the item as a whole); and

• how the risk component relates to the item in its entirety (for example, the designated risk component historically covered on average 80 per cent of the changes in fair value of the item as a whole).

An entity shall disclose by risk category quantitative infor mation to allow users of its financial statements to evaluate the terms and condi tions of hedging instru ments and how they affect the amount, timing and uncertainty of future cash flows of the entity.

To meet these requirement, an entity shall provide a break down that discloses:• a profile of the timing of the nominal

amount of the hedging instrument; and• if applicable, the average price or rate of

the hedging instrument.

In situations in which an entity frequently resets (dis con tin ues and restarts) hedging relationships because both the hedging instrument and the hedged item frequently change the entity:• is exempt from providing the disclosures

required by paragraphs 23A and 23B.



IFRS German GAAP

• shall disclose: – information about what the ultimate risk management strategy is in relation to those hedging relationships;

– a description of how it reflects its risk manage ment strategy by using hedge accounting and designating those parti cular hedging relation ships; and

– an indication of how fre quently the hedging relationships are dis con tinued and restarted as part of the entity’s process in relation to those hedging relationships.

An entity shall disclose by risk category a description of the sources of hedge ineffective ness that are expected to affect the hedging relation ship during its term.

If other sources of hedge ineffectiveness emerge in a hedging relationship, an entity shall disclose those sources by risk category and explain the resulting hedge ineffec tive ness.

For cash flow hedges, an entity shall disclose a des crip tion of any forecast trans action for which hedge accounting had been used in the previous period, but which is no longer expected to occur.

An entity shall disclose, in a tabular format: a) the following amounts related to items

designated as hedging instruments separately by risk category for each type of hedge (fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation):

• the carrying amount of the hedging instruments;

• the line item in the state ment of financial position that includes the hedging instrument;

• the change in fair value of the hedging instrument used as the basis for recognising hedge in effec tive ness for the period; and

• the nominal amounts (in cluding quantities such as tons or cubic metres) of the hedging instruments.



IFRS German GAAP

b) the following amounts related to hedged items separately by risk category for the types of hedges as follows:

• for fair value hedges: – the carrying amount of the hedged item recog nised in the statement of financial position;

– the accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item recognised in the statement of financial position;

– the line item in the state ment of financial position that includes the hedged item;

– the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period; and

– the accumulated amount of fair value hedge ad just ments remaining in the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses.

• for cash flow hedges and hedges of a net investment in a foreign operation: – the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period;

– the balances in the cash flow hedge reserve and the foreign currency translation reserve for continuing hedges; and

– the balances remaining in the cash flow hedge reserve and the foreign currency translation re ser ve from any hedging relationships for which hedge accounting is no longer applied.

c) the following amounts se para tely by risk category for the types of hedges as follows:

• for fair value hedges: – hedge ineffectiveness recognised in profit or loss (or other com pre-hensive income for hedges of an equity instrument for which an entity has elected to present changes in fair value in other com pre hensive income; and

– the line item in the statement of compre hen sive income that includes the recognised hedge ineffectiveness.



IFRS German GAAP

• for cash flow hedges and hedges of a net investment in a foreign operation: – hedging gains or losses of the reporting period that were recognised in other comprehensive income;

– hedge ineffectiveness recognised in profit or loss;

– the line item in the state ment of comprehensive income that includes the recognised hedge ineffectiveness;

– the amount reclassified from the cash flow hedge reserve or the foreign currency translation reserve into profit or loss as a reclassification adjustment;

– the line item in the state ment of comprehensive income that includes the re classification adjust ment; and

– for hedges of net posi tions, the hedging gains or losses recognised in a separate line item in the statement of comprehensive income.

When the volume of hedging relationships that the entity frequently resets is unrepresentative of normal volumes during the period an entity shall disclose that fact and the reason it believes the volumes are unrepresentative.

An entity shall provide a reconciliation of each com ponent of equity and an analy sis of other com pre hensive income in accordance with IAS 1 that, taken together:• differentiates, at a mini mum, between the

amounts that relate to the disclosures in paragraph 24C(b)(i) and (b)(iv) of IFRS 7 as well as the amounts accounted for in accordance with paragraph 6.5.11(d)(i) and (d)(iii) of IFRS 9;

• differentiates between the amounts associated with the time value of options that hedge transaction related hedged items and the amounts associated with the time value of options that hedge time-period related hedged items when an entity accounts for the time value of an option in accordance with paragraph 6.5.15 of IFRS 9; and



IFRS German GAAP

• differentiates between the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction related hedged items, and the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time-period related hedged items when an entity accounts for those amounts in accordance with paragraph 6.5.16 of IFRS 9.

An entity shall disclose this information separately by risk category. This disaggregation by risk may be provided in the notes to the financial state ments.

Option to designate a credit exposure as measured at fair value through profit or loss.

If an entity designated a finan cial instrument, or a proportion of it, as measured at fair value through profit or loss because it uses a credit derivative to manage the credit risk of that financial instrument it shall disclose:• for credit derivatives that have been used

to man age the credit risk of finan cial instruments designated as measured at fair value through profit or loss in accordance with paragraph 6.7.1 of IFRS 9, a reconciliation of each of the nominal amount and the fair value at the beginning and at the end of the period;

• the gain or loss recognised in profit or loss on de sig na tion of a financial instrument, or a proportion of it, as measured at fair value through profit or loss in accordance with paragraph 6.7.1 of IFRS 9; and

• on discontinuation of measuring a financial instrument, or a proportion of it, at fair value through profit or loss, that financial instrument’s fair value that has become the new carrying amount in accordance with paragraph 6.7.4(b) of IFRS 9 and the related nominal or principal amount.

The disclosures are presented in the notes.


Deferred taxes

Concept of deferred taxes

IFRS German GAAP

Temporary concept Temporary concept

Please note: Certain com pa nies (small companies, non-limited liability companies) are not obliged to apply the tem porary concept. For these companies, accounting for deferred taxes is to a great extent based on the timing concept.

Basis for deferred tax assets and liabilities

IFRS German GAAP

Temporary differences – i. e. the difference between carrying amount and tax base of assets and liabilities

Temporary differences – i. e. the difference between carrying amount and tax base of assets and liabilities

Quasi-permanent differences (for example temporary differences within measurement of property)

IFRS German GAAP

Recognition of deferred taxes due to the temporary concept.

Recognition of deferred taxes due to the temporary concept.

M Deferred taxes


Deferred taxes

Recognition of deferred tax assets

IFRS German GAAP

A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the initial recognition exception applies, see details under “initial recognition differences”.

Deferred tax assets may be recognised for deductible temporary differences, tax loss carryforwards, interest carried forward and tax cre dits. Deferred tax assets shall be recognised in com pliance with the prudence principle.

Under German GAAP a re cog nition option for the excess of deferred tax assets over deferred tax liabilities (expected aggregate tax bene fit) is enacted. However, partial recognition of the expected aggregate tax benefit is prohibited. Deducti ble temporary differences resulting from consolidation adjustments shall be recog nised in all cases.

Tax loss carryforwards shall only be considered if the tax benefit can be realized within the next five years. Further tax loss carryforwards may be considered in case of an excess of taxable temporary differences.

Tax rate

IFRS German GAAP

Tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enac ted by the balance sheet date.

Deferred taxes shall be measured with the tax rate that is expected to apply at the time the temporary differences are expected to reverse. However, changes in tax law (including tax rates) shall only be applied when they have been substantively enacted, i.e. the Federal Council (Bundesrat) has approved the change in law before or on the balance sheet date.

Presentation and maturity

IFRS German GAAP

Deferred tax assets (liabilities) are treated as non-current assets (liabilities). Additional statements for different components of deferred taxes must be made (ex pec ted realisation of deferred taxes within 12 months after the balance sheet date and beyond 12 months after the balance sheet date).

Deferred taxes have to be disclosed as separate balance sheet items: “Deferred tax assets” (sec. 266 subsec. 2 D HGB) and “Deferred tax liabilities” (sec. 266 subsec. 3 E HGB).

Presentation does not in cor porate the maturity of de ferred taxes. Disclosure on maturity is not required.


Deferred taxes

Set off

IFRS German GAAP

Setting off if the entity has a legally enforceable right to set off current tax assets against liabilities and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Deferred tax assets and liabilities may be presented net. There are no specific requirements for setting off deferred tax assets and deferred tax liabilities.

Distribution restrictions

IFRS German GAAP

No distribution measurement function. Only the excess of deferred tax assets over deferred tax liabilities is restricted for distribution. Deferred tax liabilities that have been recognised in connection with intangible assets or plan assets at fair value, shall not be considered for this cal cu lation, because these de fer red tax liabilities have to be considered for distribution restrictions connected with intangible assets or plan assets at fair value.

Discounting

IFRS German GAAP

Prohibited Prohibited

Disclosures

IFRS German GAAP

Various disclosures are re quired (IAS 12.79–12.88), for example major components of tax expense (income), the aggre gate current and de ferred tax relating to items that are charged or credited to equity, an explanation of the relationship between tax expense (income) and accounting profit.

The differences or tax loss carryforwards on which deferred taxes are based have to be disclosed as well as the tax rates at which deferred taxes have been measured. This disclosure shall also be made for deferred taxes that have been netted; it is not necessary for a net amount of deferred tax assets that has not been recognized in accordance with the recognition option.

If deferred tax liabilities have been recognized and are presented on the balance sheet, the amount of deferred tax assets and liabilities and their changes during the fiscal year shall be disclosed.


Deferred taxes

Tax non-deductible goodwill

IFRS German GAAP

No recognition of deferred taxes. No recognition of deferred taxes.

Tax rate reconciliation

IFRS German GAAP

Explanation of the relation between tax expenses and accounting profit (or loss) by reconciling the tax expenses recognised and the expected tax expenses or the effective tax rate and the applicable tax rate. The basis on which the applicable tax rate is computed should be dis closed.

No statutory obligation for the disclosure of a tax rate re con ciliation.

Tax groups

IFRS German GAAP

For the recognition of de fer red taxes on tax groups no rules exist. In practice there are two different approaches. The “formal approach” states that de ferred taxes are shown in the financial statements of the controlling company. The “stand-alone approach” states that deferred taxes are recognised on the level of the subsidiary company.

In tax groups, deferred taxes are accounted by the “formal approach”: deferred taxes for temporary differences of the subsidiary company are con sidered on the level of the controlling company; the subsidiary company does not recognise any deferred taxes (exception: existing of a contract for the distribution of the tax burden).

In case of an (expected) ter mi nation of a tax group, the deferred taxes for temporary differences that reverse after the termination of the tax group shall be recognized at the level of the subsidiary company.

Initial recognition differences

IFRS German GAAP

Deferred taxes which are based on temporary differen ces resulting from initial recog nition of goodwill (only in cases of taxable temporary differences) or of an asset or liability in a transaction that is not a business combination and at the time of the trans action neither affects accoun ting profit nor taxable profit (tax loss) shall not be recog nised.

According to German GAAP there is no exception for the recognition of deferred taxes on initial differences.


Deferred taxes

Outside basis differences

IFRS German GAAP

Deferred tax liabilities for outside basis differences should be recognised, except to the extent that the parent, investor or venture is able to control the timing of the rever sal of the temporary differences and it is probable that the temporary difference will not reverse in the fore seeable future. Deferred tax assets for outside basis differences should be recog nised to the extent that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

Deferred taxes for outside basis differences shall not be recognised.

Consolidation of intermediate results

IFRS German GAAP

Deferred taxes arising from temporary differences from the consolidation of inter medi ate results should be recognised at the level of the recipient of the intercompany transaction. In this case the tax rate of the recipient is applicable.

Similar to IFRS.

Risks resulting from audits by the fiscal authorities

IFRS German GAAP

No specific rules exist. How ever effects depending on audits of the fiscal authori ties have to be recog nised for de ferred tax pur poses if pro bable.

Effects resulting from audits of the fiscal authorities have to be recognised for deferred tax purposes to the extent that they lead to temporary differences.


Share-based payments

Classification

IFRS German GAAP

IFRS 2 encompasses all arrange ments where an entity purchases goods or services in exchange for the issue of equity instruments (including shares or share options), or cash payments based on the price (or value) of the equity instruments of the entity or another group entity. Goods or services received in a share-based payment trans action are recognised when they are received. Share-based payment transactions include:• equity-settled share-based payment

transactions (entity receives goods or services, either as consi deration for its own equity instruments or the entity has no obligation to settle the transaction);

• cash-settled share-based payment transactions (entity acquires goods or services by incurring a liability, but the amount is based on the price (or value) of the equity instruments of the entity or another group entity); and

• transactions with a choice of settlement, where arrange ments provide either the entity or the counterparty with a choice of settlement in cash or equity.

No specific guidance. The general recognition and measurement criteria apply.

There is no specific guidance in the accounting legislation. Several accounting treat ments may be acceptable.

Share-based payment transactions areclassified as:• equity-settled share-based payment

transactions;• cash-settled share-based payment

transactions; or• share-based payment transactions with a

choice of settlement.

Allocation to the individual classes may differ for indi vidual transactions between IFRS and German GAAP.

N Share-based payments


Share-based payments

Recognition and measurement

IFRS German GAAP

Equity-settled share-based payment transactions are measured at the fair value of the goods or services re cei ved, with a corres ponding increase in equity. If the entity cannot estimate reliably the fair value, which is deemed always to be the case for transactions with employees, the goods or services are measured at the fair value of the equity instruments gran ted, ignoring any service or non-market vesting condi tions or reload features.

In cash-settled share-based payment transactions, goods or services received aremea sured at their fair value, with a corresponding liabilityincur red at fair value. Until the liability is settled, the fair value of the liability is remea sured at each reporting date and at the date of final settle ment, with any changes in fair value recognised in profit or loss.

For equity-settled trans actions an accounting treatment similar to IFRS is recommended. Alternatively, in some cases an equity-settled transaction may not be recognised in the financial statements.

For cash-settled transactions an accounting treatment similar to IFRS is recom mended. Alternatively, in some cases an entity may recognise the intrinsic value (and not the fair value) of the plan at the balance sheet date. Off-balance treatment of a cash settled transaction is not possible, as the entity has incurred an obligation.

Awards that offer the counter party the choice of settlement in equity instruments or settle ment in cash should be bifurcated and treated as a compound instrument. If the entity has the choice to settle in cash or by the issue of equity instruments, the entity has a present obligation (legal or constructive) to settle in cash. The entity has a present obligation if the choice of settlement has no commercial substance or if the entity has a past practice or stated policy of settling in cash. If no such obligation exists, the entity shall account the trans action as equity-settled share-based payment transaction.

If the entity pays any taxes due on share-based payment transactions on behalf of its employees, these shall be accounted for as cash-settled share-based payments.

Transactions with choice of settlement (either counter party or entity) should be measured either as equity-settled or as cash-settled, whatever is more probable. Before settlement the amount should always be shown as a liability and not as an increase in equity.


Foreign currency translation

O Foreign currency translation

Functional currency

IFRS German GAAP

Functional currency is defined as the currency of the primary economic environment in which an entity operates.

IFRS provides a list of primary and secondary indicators to consider when determining functional currency. If the indicators are mixed and the functional currency is not obvious, management should use its judgement to deter mine the functional currency that most faithfully represents the economic results of the entity’s operations by focusing on the currency of the economy that determines the pricing of transactions (which may not be the currency in which trans actions are denominated) and the currency that mainly influences labour, material and other costs of providing goods and services.

According to Germen GAAP there is no concept of a functional currency and the determination thereof. Consolidated financial statements have to be prepared in Euro (sec. 2998 subsec. 1 in conjunction with sec. 244 HGB).

Additional evidence (secon dary in priority) may be provi ded from the currency in which funds from financing activities are generated, or receipts from operating activities are usually retained, as well as the nature of activities and extent of transactions between the foreign operation and the reporting entity.



Separate financial statements

IFRS German GAAP

A foreign currency transaction is a transaction that is de no minated or requires settle ment in a foreign cur rency. A foreign currency transaction should be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

Separate financial statements have to be prepared in Euro (sec. 244 HGB).

For initial recognition of foreign currency transactions no special rules are enacted. Thus, general principles on recognition and valuation have to be applied. At initial recognition, for translation of the foreign currency trans action the exchange rate at date of transaction has to be applied.

For subsequent measure ment, the mean spot rate has to be applied (sec. 256a sentence. 1 HGB). For assets and liabilities with a remaining term of one year or less, the realisation principle (sec. 252 subsec. 1 No. 4 HGB) and the cost method (historical cost principle; sec. 253 subsec. 1 HGB ) shall not be applied (sec. 256a sentence 2 HGB).

Gains or losses from trans lation of foreign currency are recognised in profit or loss and are presented separately as a part of “other operating income”/“other operating expenses” (sec. 277 subsec. 5 HGB).

At the end of each reporting period, the following trans lation requirements should be followed:• Monetary assets/liabilities denominated

in a foreign currency – translate at the closing (year-end) rate.

• Non-monetary foreign currency assets/liabilities – translate at the appropriate historical rate (exchange rate at the date of the trans action).

• Non-monetary items deno minated in a foreign currency and carried at fair value – reported using the exchange rate that existed when the fair value was determined.

• The date of a transaction is the date on which the transaction first qualifies for recognition. For practical reasons, an average rate for a week or a month may be used for all transactions in each foreign currency during that period (provided that exchange rates do not fluctuate significantly).



IFRS German GAAP

Exchange differences arising on the settlement of monetary items or on translating mone tary items at rates different from those at which they were translated of initial recognition during the period or in pre vious financial statements shall be recognised in profit or loss in the period in which they arise.

When a gain or loss on a non-monetary item is re cog nised in other compre hensive income (OCI), any exchange component of that gain or loss should be recog nised in OCI. Con vers ely, when a gain or loss on a non-monetary item is recog nised in profit or loss, any exchange com po nent of that gain or loss should be recognised in profit or loss.


IFRS German GAAP

The results and financial position of an entity whose functional currency is not the currency of a hyperinfla tion ary economy shall be trans lated into a different presentation currency using the following procedures:

a) assets and liabilities for each statement of financial position presented shall be trans lated at the closing rate at the date of that statement of financial position;

b) income and expenses for each statement pre senting profit or loss and other comprehensive income shall be trans lated at exchange rates at the dates of the trans actions; and

c) all resulting exchange differences shall be recog nised in other comprehensive income and accumulated in a separate component of equity.

For practical reasons, a rate that approximates the ex change rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

In consolidated financial statements, the “modified closing rate method” is used for the translation of financial statements in foreign curren cies (sec. 308a HGB). The following translation require ments are prescribed by German GAAP:• Balance sheet items are translated using

the mean spot rate on the balance sheet date. Exception: shareholder’s equity shall be translated at historical rates.

• Items of profit and loss shall be translated using average exchange rates.

Translation differences arising from the modified spot rate method shall be recognized directly in equity in a separate balance sheet item “equity difference due to currency translation” which has to be shown after reserves. On partly or whole withdrawal of a foreign subsidiary from the basis of consolidation (for example: disposal, liquidation), the translation difference is released into profit or loss, partly or in full, respectively.



IFRS German GAAP

IFRS does not specify how to translate equity items. Mana ge ment has a policy choice to use either the historical rate or the closing rate. The chosen policy should be applied consistently.

Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation (i. e. a receivable from or payable to a foreign operation (for example long-term receivables or loans but no trade receivables or loans) for which settlement is neither planned nor likely to occur in the foreseeable future) shall be recognised in profit or loss in the separate financial state ments of the reporting entity or the individual financial state ments of the foreign operation, as appropriate. A foreign operation is a subsidiary, associate, joint arrangement or branch of the reporting entity, the activities of which are based or con ducted in a country or currency other than those of the reporting entity. In consolidated financial statements that include the foreign operation and the reporting entity, such exchange differen ces shall be recog nised in other comprehensive income and reclassified from equity to profit or loss on disposal of the net invest ment.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation and trans lated at the closing rate.



IFRS German GAAP

The cumulative amount of exchange differences recognised in other comprehensive income is carried forward as a separate com ponent of equity until there is a disposal of the foreign operation. On the foreign operation’s disposal, the full cumulative amount of the exchange differences are recognised in profit or loss (reclassification), when the gain or loss on disposal is recognised. This principle of full reclassification of accu mulated exchange differences also applies to the loss of joint control or significant influence over a jointy con trolled entity or an associate. In case of only a partial disposal of a subsidary that includes a foreign operation (i. e. a disposal that does not involve loss of control of the subsidary ), the entity reattributes the pro por tio nate share of the accu mu la ted exchange differences to the non-controlling interests in that foreign operation. On a partial disposal of an interest in a jointly controlled entity or an associate, where joint control or significant influence are not lost, a proportionate amount of the accumulated exchange differences is reclassified to profit or loss.


Related parties

Definition of a related party

IFRS German GAAP

A related party is a person or entity that is related to the entity that is preparing its financial statements.

a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint con trol of the reporting entity;

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the re por ting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an asso ciate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

Determination of “related party relationships” in German GAAP is based on the definition according to IFRS (reference to IAS 24).

P Related parties


Related parties

IFRS German GAAP

(vi) The entity is controlled or jointly controlled by a person identified in a).

(vii) A person identified in a) (1) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

(viii) The entity, or any member of a group of which it is a part, provides key manage ment personnel services to the reporting entity or to the parent of the reporting entity.

Disclosures and exemptions

IFRS German GAAP

The nature and extent of any transactions with all related parties and the nature of the relationship is disclosed, together with the amounts involved.

There is a requirement to dis close the amounts involved in a transaction, the amount, terms and nature of the out-standing balances, any doubtful amounts related to those outstanding balances and balances for each major category of related parties.

The compensation of key management personnel is disclosed in total and by category of compensation.

(Amendments of IAS 24 include a revision of the definition of related parties and the exclusion of state controlled entities from related parties.)

German GAAP requires, as a minimum requirement, the disclosure of all material transactions with related parties which are not at arm’s length. German GAAP offers a policy choice whether to include all material trans actions with related parties or just those that are not at arm’s length. Disclosures that have to be made for these transactions include:• the nature of the related party

relationship;• the nature of the trans action;• the value of the transaction; and• any additional information necessary for

an under standing of the financial position.

Transactions with and be tween indirectly and directly wholly owned com panies included in a set of consolidated financial state ments are excluded from the disclosure requirements.

Transactions may be grouped into types of transactions, provided a separate disclosure is not necessary in order to understand the financial position of the reporting entity.


Other issues

Q Other issues

Segment reporting

IFRS German GAAP

Compulsory for publicly traded entities. Voluntary in consolidated financial statements.

Earnings per share

IFRS German GAAP

Entities whose ordinary shares or potential ordinary shares are traded in a public market (a domestic or foreign stock exchange or an over-the-counter- market, including local and regional market) or entities that file, or are in the process of filing, financial statements with a securities commission or other regulatory organisation for the purpose of issuing ordinary shares in the public market shall calculate and disclose basic and diluted earnings per share. When an entity presents both con soli dated financial state ments and se parate financial statements, respec tively, the disclosures required need be presented only on the basis of the consoli dated information.

No requirement to report EPS.

IFRS German GAAP

Basic and diluted EPS for profit or loss from continuing operations attributable to the ordi nary equity holders of the parent entity and for profit or loss attri butable to the ordinary equity holders of the parent entity for the period for each class of ordinary shares that has a different right to share in profit for the period shall be presented in the state ment of com pre hensive income. An entity that reports a discontinued operation shall disclose the basis and diluted amounts per share for the dis continued operation either in the statement of comprehensive in come or the notes. If an entity presents items of profit or loss in a separate statement, it presents basic and diluted EPS in that separate statement (or for discontinued opera tions optionally in the notes).


Other issues

Discontinued operations

IFRS German GAAP

In the statement of comprehensive income the profit/loss after tax of the discontinued operation shall be presented separately with a further break down in the statement of comprehensive income or in the disclosure notes.

No specific regulations.

Interim financial reporting

IFRS German GAAP

IAS 34 does not man date which entities should be required to publish interim financial reports. The standard applies if an entity is required (for example accor ding to national securi ties regulators rules) or elects to publish an interim report in accordance with IFRS.

According to the German Securities Trading Act (WpHG) interim financial state ments and interim management reports are required for certain issuers of shares and debt securities.

Condensed financial statements and condensed manage ment report.

Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period.

Interim financial state ments are pre pared vie the discrete-period approach, wherein the interim period is viewed as a separate and dis tinct accounting period, rather than as part of an annual cycle. Therefore, the sprea ding of costs that affect the full year is not appropriate.

The interim tax pro vision is determined by applying an estimated average annual effective tax rate to interim period pretax income. To the extent practi cable, a separate estimated average annual effective tax rate is determined for each material tax jurisdiction and applied to individually to the interim period pretax income of each jurisdiction.

Recognition of exchange differences

IFRS German GAAP

Under full IFRS, ex change differences that form part of an entity’s net investment in a foreign entity (subject to strict criteria of what qualifies as net invest ment) are recog nized initially in other com prehensive income and are re cycled from equi ty to profit or loss on dis posal of the foreign operation.

Similar to IFRS.


Contacts

Contacts

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similarities and differences: ifrs and german gaap

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