Modernization of accounting rules in Germany Bilanzrechtsmodernisierungsgesetz, BilMoG

1. Modernization of accounting rules in Germany(Bilanzrechtsmodernisierungsgesetz, BilMoG) Task Force On Accounting and Statistics10 April 2008 Luxembourg Dominik ElggDeutsche Bundesbank

2. 10 April 2008 Modernization of accounting rules in Germany 2 Contents Objectives of modernization approach Reducing the reporting burden Modernization of accounting rules Time line and preliminary assessment

3. 10 April 2008 Modernization of accounting rules in Germany 3 Objectives of modernization approach Improving the “information function” of financial statements by maintaining the function to “determine distributable profits” many changes to make German GAAP more comprehensible and “attractive” individual accounts still serve for capital maintenance and as basis for determining taxes Reducing the reporting burden Implementing/adapting some “accepted” rules from IFRS development costs measurement of provisions, in particular pension provisions fair value for financial instruments acquired for trading purposes

4. 10 April 2008 Modernization of accounting rules in Germany 4 Objectives of modernization approach (cont’d) Avoiding IFRS as well as IFRS for SMEs for German entities for individual accounts for companies not listed reason: IFRS and IFRS for SMEs are considered as too complicated and too costly in contrast to German GAAP (especially for SMEs) Heaviest impact on accounting law since the adoption of the EU Directives in German law in 1985

5. 10 April 2008 Modernization of accounting rules in Germany 5 Overview of German companies and their obligation to prepare financial statements

6. 10 April 2008 Modernization of accounting rules in Germany 6 Overview of German companies:The concept of being a „merchant“ Being a "merchant" means that certain rights and obligations must be followed among obligation of bookkeeping and to set up financial statements A merchant is incorporated in the trade register but this incorporation does not mean limited liability By definition entities with limited liability as well as partnerships are “merchants” Larger sole proprietorships are also “merchants” depends on several non specified conditions, eg turnover > around EUR 250.000 (depending on sector of activity)

7. 10 April 2008 Modernization of accounting rules in Germany 7 Reducing the reporting burden:Exemption for micro merchants Sole proprietorships and partnerships, being micro and with unlimited liability, are no longer obliged to comply with HGB bookkeeping and accounting requirements. exemption for those companies with turnover less than EUR 500.000 AND net profit less than EUR 50.000 in two consecutive years thresholds follow tax rules, which is closely related to accounting rules [exemption does not apply for listed companies]

8. 10 April 2008 Modernization of accounting rules in Germany 8 Reducing the reporting burden:Increase of thresholds for entities with limited liability Thresholds on turnover and balance sheet total for determining small, medium-sized and large companies with limited liability are increased by 20% turnover: EUR 9.860.000 and EUR 38.500.000; balance sheet total: EUR 4.840.000 and EUR 19.250.000 Following the change in the EU Directives (Directive 2006/46/EC of the European Parliament and of the Council of 14 June 2006) turnover: EUR 8.800.000 and EUR 35.000.000; balance sheet total: EUR 4.400.000 and EUR 17.500.000) Germany has always used the member state option to increase the thresholds by 10% (Article 12, paragraph 2)

9. 10 April 2008 Modernization of accounting rules in Germany 9 Modernization of accounting rules:Elimination of German peculiarity The “reverse authoritativeness principle” is eliminated The “authoritativeness principle” states that financial statements are the basis for the tax accounts The “reverse authoritativeness principle” states that certain options from tax rules must also be followed in the financial statements The influence of German tax rules on financial statements is reduced

10. 10 April 2008 Modernization of accounting rules in Germany 10 Modernization of accounting rules:Elimination of options Many options are eliminated, among: Several options to make use of extraordinary impairments Option to account for certain, non-specified provisions Several options for presenting balance sheet and income statement Option to capitalize start-up costs and expenses for extending the business (option in the 4th EU Directive). Options for goodwill accounting (however, goodwill will still be amortized) Option not to account for deferred tax assets (small corporations are exempted)

11. 10 April 2008 Modernization of accounting rules in Germany 11 Modernization of accounting rules:Implementing certain issues from IFRS Recognition of development costs costs incurred in conjunction with development activities are recognized however: implicit option like in IFRS distributions to the owners are prohibited to the extent those development costs are recognized as an asset Measurement of provisions will be more in line with IFRS rules including components of future increases for prices and costs (eg salary increases in pensions) all provisions will be discounted at market rates Possibility of netting assets and liabilities in particular for pension liabilities and respective assets Financial instruments acquired for trading purposes shall be accounted for at fair market value

12. 10 April 2008 Modernization of accounting rules in Germany 12 Option to set up individual accounts based on IFRS Companies with limited liability can choose to set up individual accounts based on IFRS However, in the IFRS notes the balance sheet and income statement according to German GAAP needs to be published in order to establish a legal basis for dividend distributions. ie exemption only for German GAAP notes Only few companies (if any at all) are expected to use this option

13. 10 April 2008 Modernization of accounting rules in Germany 13 Task for Deutsche Bundesbank Determining interest rates for discounting provisions This task would result in comparable information re provisions, in particular pensions. Interest rates should be based on market rates Provisions above 5 years shall be discounted with an average rate of the last 5 years in order to prevent significant (but not relevant) yearly fluctuations Bundesbank suggested to increase this approach to a seven year average

14. 10 April 2008 Modernization of accounting rules in Germany 14 Time Line Public draft was published in November 2007 by Ministry of Justice Hearing was held at the Ministry of Justice 8 January 2008 Draft for the government is planned before the summer Parliament vote is expected in 2008 New accounting rules should be effective for fiscal years beginning after December 31, 2008 Early application only for increased thresholds for determining SMEs with limited liability as well as for micro entities with unlimited liability

15. 10 April 2008 Modernization of accounting rules in Germany 15 Preliminary assessment BilMoG is a huge step in the right direction. Deletion of several options will make German financial statements more comparable among themselves and with other European accounts Maintaining German GAAP by not allowing IFRS for the individual accounts is the right approach for German SMEs because of lesser costs for German CBSO (Deutsche Bundesbank) as comparability is safeguarded IFRS will not be relevant for most important statistics in Germany for the next years The exemption for micro sole proprietors and partnerships “hurts”