Challenges in implementing the acquiscommunautaire
IFRS for Non-publicly Accountable Entities
A German Perspective
World Bank REPARIS conferenceVienna 25-26 March 2009
WP/StB Dr. Sven Morich
Assurance Accounting Services
Slide 2IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Agenda
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 3IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Part 1
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 4IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
1. European and German SME accounting legislation
Initial position: IFRS in Germany and Europe
• Compared to rest of Europe: narrow transition of IAS regulation
Germany Consolidate financial statements Separate financial statements
capital market orientated IFRS-obligation (IAS-Reg)
not capital market orientated IFRS-option
Europe
GCC-obligation (IFRS only for information)
capital market orientated IFRS-obligation (IAS-Reg)IFRS-option (10 MS) / IFRS-
obligation(11 MS, mostly financial services)
not capital market orientatedIFRS-option
(all MS, moreover for financial services partlyIFRS-obligation)
IFRS-option(16 MS, moreover for financial services
partly IFRS-obligation)
Slide 5IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
1. European and German SME accounting legislation
Scenarios and questions for SME accounting in Europe and Germany
Future of SME Accounting
Adopting IFRS Redrafting local GAAP
Stand AloneApproachfor SMEs
Using full IFRS
Reduce adminis-trative burden “State of the art”
and/or
Basis for tax accounts?
Capital maintenance and profit contribution?
Slide 6IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Part 2
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 7IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
2. The IFRS for NPAEs project
Project History
• IASB deliberations began in July 2003
• Preliminary Views as DP in June 2004
• Discussions at numerous round table, working group and IASB meetings
• Exposure Draft (ED) „IFRS for SMEs“ published 15th February 2007
• Field studies- National Standard Setters (see next chapter)- IASB (results presented in April 2008)
• Process of redeliberating the ED from May 2008 until February 2009
• March 2009 IASB decision: No re-exposure!
• Final standard expected in Q3 2009
Slide 8IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
2. The IFRS for NPAEs project
Concept
• Final title: Still not 100% clear! (IFRS for PEs, NPAES, SMEs)
• Scope- General purpose financial statements of non public accountable
entities (i.e. no banks, or when holding assets in fiduciary capacity)- Decisions on scope rest with national regulatory authorities- No size criteria but size reference 50 employees
• Supposed users are investors, banks, suppliers but not owner managers
• Top-Down-Approach- Pervasive Principles based on full IFRS framework
• Two-Tier-Approach- No separate (third) simple set for micro entities
Slide 9IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
2. The IFRS for NPAEs project
Contents and hierarchy
• Contents:- Preface plus 38 sections plus glossary (about 250 pages)- Basis for Conclusion and Implementation Guidance (about 150 pages)
• Stand-alone Standard?- 3 Types of cross-references in the ED:
1. Rare transactions2. Alternative options3. De facto when using the hierarchy
• No mandatory fallback to full IFRS
• Several simplifications regarding recognition and measurement principles
• Reduced disclosure requirements
Most topics omited in final standard
Options deleted in final standard
Slide 10IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
2. The IFRS for NPAEs project
Accounting atmosphere in Germany
• Conservative accounting environment- Long accounting history German Commercial Code (GCC)- Reservations about IFRS
• The German “Mittelstand”:- Well organised middle market organisations- Strong political power
• The German “paradoxon“:- On the one hand strong voices against implementing an IFRS for
NPAEs at all- On the other hand heavy involvement of German constituents in the
IASB‘s due process and public debates
Slide 11IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
2. The IFRS for NPAEs project
Field Tests overview
• IASB Field Test of the ED- 116 entities from 20 countries participated- submitted recent annual financial statements and restated those
financial statements in accordance with the ED - responded to questions designed to identify specific problems
encountered in applying the ED
• ASCG‘s research agenda1. SME survey: 410 German SMEs were interviewed regarding their
evaluation of the proposed rules of the ED-IFRS for SMEs2. SME field test: 15 German SMEs preparing trial financial statements in
accordance with the ED-IFRS for SMEs3. SME bank study
Slide 12IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Part 3
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 13IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
SME survey (overview)
• Parties involved:- Initiator and major actor: German Accounting Standards Committee
(GASC) - Cooperation partners: Federation of German Industries (BDI) and the
Association of German Chambers of Industry and Commerce (DIHK)
• Survey of enterprises with questionnaires - Addressee: director in charge of the annual accounts - Sample size: 4,000 enterprises
• 3 Main Objectives/Parts:- SMEs and International Accounting: Experience, knowledge and
need?- Frequency or relevance of particular issues in an SME environment- Assessment of accounting methods of the ED: Assessment of costs
and (external and internal) benefit for users of financial statements
Slide 14IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
Level of knowledge of IFRS
• How would you describe your own level of knowledge about IFRS?
28%
7% 6%
37%
36% 33%
29%
36% 35%
6%
22% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
8-32 m EUR (n=108) 33-50 m EUR (n=76) >50 m EUR (n=220)
no knowledge little knowledge moderate knowledge good up to very good knowledge
Slide 15IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
Objectives of separate financial statements
• How relevant to your entity are the following objectives of preparing separate financial statements?
5%
9%
12%
18%
23%
74%
77%
77%
81%
8%
14%
26%
19%
14%
19%
17%
16%
8%
86%
78%
63%
63%
63%
7%
6%
6%
11%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
basis for taxation (n=402)
information for owners (n=398)
information for company`s management(n=395)
information for banks (n=402)
basis for profit distribution (n=396)
information for suppliers (n=393)
information for employees (n=392)
information for customers (n=398)
information for potential investors (n=385)
no up to low relevance moderate relevance high up to very high relevance
Main advantages of the adoption of international accounting rules
• (International) comparability of financial statements (for business partners, within the group etc.)
• Request of the parent company/need for consolidated financial staments/simplification of consolidated financial statements
• (International) comparability with competitors and within the same industry
• Advantages in the raise of capital: credit terms/better assessment of solvency/better rating/Basel II
• Higher transparency (e.g. for foreign business partners)• More realistic information on the economic condition• Accounting policy• Meet requirements of banks and loan providersD
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of n
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n3. Empirical studies on NPAEs accounting in Germany
Slide 16IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Slide 17IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
What do we learn from the SME survey?
• Main addressees of accounting: tax authority, management, owners, and banks
• German SME view: Main advantages of IFRS do not fit to the objectives of financial statements
• Relevant issues: - construction contracts, defined benefit plans, research and
development projects, m&a-activities, investments in non-publicly traded entities with an interest of more than 50 % as well as hedging of foreign currency risks occur regularly.
• Less relevant issues: - Lease with the SME as the lessor, share-based payments, investment
properties and discontinuing operations
Slide 18IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
SME field test (overview)
• Parties involved:- Initiator and major actor: German Accounting Standards Committee
(GASC) - Cooperation partners: Federation of German Industries (BDI) and
PricewaterhouseCoopers (PwC)
• Module approach- Preparing (parts of) financial statements under the ED IFRS for SMEs- Additional questionnaire- 15 SMEs participating with the help of their auditors
• Main Objectives:- Evaluate the understandability of the IFRS principles- Frequency or relevance of particular issues in an SME environment- Report experiences when applying the ED IFRS for SMEs
Slide 19IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
Measurement the conception of ED IFRS for SMEs
© DRSC e.V.
Two key problem areas
Problems of internal organisation Problems of application
• Approach of a new accountingconcept (IT-System adaption )
• Determination of key assumptions(e.g. useful life or discount rates)
• professional terminology
• unsettled concept
• abstract definitions
• extensive disclosures
• subsequent measurement of goodwill
• impairment tests
• deferred tax
Slide 20IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
What do we learn from the SME field test?
• Companies were hardly able to independently prepare financial statements, due to:- Lack of knowledge of IFRS- Time and resource constraints with regard to the field test- Complexity of IFRS for SMEs accounting requirements- Number of note disclosures
• Companies evaluation: - Support for general structure of ED IFRS for SMEs- Need for stand-alone document- Divided on accounting options (larger companies: yes; smaller
companies: no)- Simpler language needed
Slide 21IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
SME bank study (overview)
• Parties involved:- Initiator and major actor: German Accounting Standards Committee
(GASC)
• Research Design:- Semi-structured personal interviews (predefined + open questions)- 32 banks included in the study, reflecting the current banking market in
Germany- Sample also based on internal organisational units (front office, back
office, rating department) involved; leading to a total of 52 interviews
• Banks are one of the major user groups of financial statements of PEs, currently not much knowledge and evidence regarding what information is used by banks and how it is processed
Slide 22IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
3. Empirical studies on NPAEs accounting in Germany
What do we learn from the SME bank study?
• Importance of financial statements for granting credits- 84% rated the share of financial statement data within the total amount
of information needed for credit decisions at over 50%
• Need to provide internationally comparable financial information- 50% saw a (very) high or at least partial need, 41% saw a little need
and 5% saw no need
• Opinion about a special IFRS for NPAEs- 24% assessed a special IFRS as an advantage, 24% were indifferent
and 41% assessed it as a disadvantage
• Frequency of IFRS compliant f/s received by banks - 46% received less than 5% IFRS compliant f/s, each 20% received
them between 5% and 10% or 10% and 20% respectively, 9% between 20 % and 50% and only 3% received more than 50% IFRS compliant f/s
Slide 23IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Agenda
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 24IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
4. Proposal for a modernised German GAAP
The „Bilanzrechtsmodernisierungsgesetz“ (BilMoG)
• Reasons for mandatory changes:- Adoption of changes to the EU Directives (4th, 7th, 8th Directive)- Simplification Program of the German Government
• Voluntary changes:- Improve decision usefulness of statutory financial statements by
adopting some IFRS elements- Implement a long term alternative to IFRS - IFRS for SMEs as „competitive“ accounting standards product- Dealing with the financial crisis
• But: Still no relief option to use IFRS instead!
Slide 25IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
4. Proposal for a modernised German GAAP
Recent developments
• First draft published in November 2007
• Near final draft discussed by the committee of legal affairs on 18 March2009
• Final BilMoG expected in the next weeks
• Major changes and main topics in the public debate: - First-time adoption and transition from current local GAAP- Capitalisation of development costs- Accounting for financial instruments- Measurement of Provisions (including Employee Benefits)- Deferred Taxes- Consolidation and Special Purpose Entities
Slide 26IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
Agenda
1. European and German SME accounting legislation2. The IFRS for NPAEs project3. Empirical studies on NPAEs accounting in Germany4. Proposal for a modernised German GAAP5. Conclusion and Summary
Slide 27IFRS for Non-publicly Accountable Entities: A German PerspectivePricewaterhouseCoopers
26. March 2009
5. Conclusion and Summary
Final Thoughts
• IFRS is already the leading global accounting standard on capitalmarkets.
• At least for some industries there will be a constructive obligation forSMEs to prepare IFRS financial statements.
• It is unclear if and in which legal form the IFRS for NPAEs will be adoptedin Europe.
• Germany has found a (short term) solution with the „BilMoG“.
• What will happen to SME accounting in the long term?
EU Scenarios: 27 local GAAPs or IFRS with solvency test?
Thank you for your attention
Contact Person
Dr. Sven MorichPricewaterhouseCoopers AG WPGAssurance Accounting ServicesLise-Meitner-Str. 110589 BerlinGermany
Tel: +49 30 2636-4281E-Mail: [email protected]
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