Similarities and Differences: IFRS and German GAAP

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Similarities and Differences: IFRS and German GAAP

May 2018

Similarities and Differences: IFRS and German GAAP

May 2018 Similarities and Differences: IFRS and German GAAP

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 saved and 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. 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 we generally consider to be the most significant or most common. When applying the individual accounting frameworks, companies should consult all of the relevant accounting standards and, where applicable, national law.

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

Prof. Dr. Rüdiger Loitz Guido Fladt Leader Capital Markets & Leader National Office Accounting Advisory Services

Similarities and Differences: IFRS and German GAAP 5 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

6 Similarities and Differences: IFRS and German GAAP Accounting framework

A Accounting framework

Historical cost or fair value

IFRS German GAAP Historical cost is the primary basis of Historical cost is the main accounting accounting for non-financial assets. convention. No revaluations are allowed. However, IFRS permits the revaluation An exception applies to banks/financial to fair value of some intangible assets, institutions, where all financial instru­ments property, plant and equip­ment, investment held for trading are to be measured at fair property and inventories in certain value (see Financial assets). A second industries (for example commodity broker/ exemption applies to assets which are dealer). IFRS also requires that biological deprived of all other creditors access and assets be reported at fair value less costs exclusively relate to the coverage of pension to sell. The measure­ment of financial assets obligations or comparable long-term depends on their classifi­cation (generally liabilities. They also have to be measured fair value). at fair value (before being offset against such liabilities).

Fair presentation over-ride

IFRS German GAAP Entities may depart from a standard Departure from the German under IFRS (extremely rare in practice), Commercial Code is not allowed. If if management of that entity concludes specific circum­stances result in the that compliance with the standard or financial statements not showing a true and inter­pretation would render financials to fair view, additional disclosures are required be misleading. The reasons for such a in the notes (extremely rare in practice). conclusion and departure along with the financial impact need to be disclosed.

First-time adoption of accounting frameworks

IFRS German GAAP Full retrospective application of all IFRS A merchant has to prepare financial effective at the reporting date for an entity’s statements for the first time according to first IFRS financial state­ments, with some German GAAP when commencing business optional exemptions and limited mandatory (opening balance sheet). A corporation exceptions. Comparative information is (parent) with registered office in Germany prepared and presented on the basis of has to prepare a consoli­dated financial IFRS. Almost all adjustments arising from statement (either according to German the first time application of IFRS are GAAP or, in certain circum­stances adjusted against opening retained earnings according to IFRS), if it can exercise a for the first period presented on an IFRS controlling influence over another enterprise basis. Some adjustments are made against (subsidiary). goodwill or other classes of equity.

Similarities and Differences: IFRS and German GAAP 7 Financial statements

B Financial statements

Components of financial statements

IFRS German GAAP A complete set of financial statements Similar to IFRS for consoli­dated financial comprises: statements, as well as for single-entity • statement of financial position as at the financial statements of publicly traded end of the period; companies.1 • statement of profit or loss and other comprehensive income for the period; For single-entity financial statements, • statement of changes in equity for the statement of cash flows and statement of period; changes in equity are not required.2 • statement of cash flows for the period; and It is optional for companies that have to • notes, comprising significant accounting prepare consoli­dated financial statements policies and other explanatory to include segment reporting. Publicly information; traded companies that do not have to • comparative information in respect of the prepare consolidated financial state­ments preceding period. can add segment reporting to their individual financial statements. An entity may present either a single statement of profit or loss and other Additional to financial state­ments a compre­hen­sive income or two separate, manage­ment report has to be prepared but consecutive state­ments of profit or (see “Management report”). loss and of com­prehensive 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.

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 manage­ment 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.

8 Similarities and Differences: IFRS and German GAAP  Financial statements

Statement of financial position (balance sheet)

IFRS German GAAP There are certain minimum line items which Items on the face of the balance sheet are should be presented separately in the presented in increasing order of liquidity. state­ment of financial position. Entities with specific legal forms (for The presentation of a classified­ balance example corporations) are required to sheet (current/non-current distinction) is use a particular balance sheet format. required, except when a liquidity presen­ Additional requirements exist for financial tation provides infor­mation that is reliable services institutions and insurance and more relevant. companies.

Current assets/liabilities include items due Separate presentation of fixed assets and or expected to be realised within 12 months current assets is required. Current assets are after the reporting period. Deferred taxes those not intended for long-term use in the are classified as non-current in the state­ business. ment of financial position with a current/ non-current break up discussed in the notes.

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

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

Income statement/statement of comprehensive income

IFRS German GAAP Expenses may be presented either by In general similar to IFRS. Under function or by nature, whichever provides German GAAP there is no “statement information that is reliable and more of com­prehensive income”. relevant depending on historical and industry factors and the nature of the Income statement may be presented using entity. Additional disclosure of expenses the total cost (nature of expense) or the by nature, including depreciation and cost of sales (function of expense) method. amortization expense and employee For both methods a minimum structure is benefit expense, is required in the notes required. to the financial statements if functional presentation is used on the face of the For certain legal forms, especially income statement. corporations, the income statement is required to follow a detailed structure. 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.

Similarities and Differences: IFRS and German GAAP 9 Financial statements

IFRS German GAAP

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

The term “exceptional items” is not used In each case, the amount and nature of or defined. However, the separate the individual income and expenses of disclosure is required (either on the face exceptional magnitude or of exceptional of the com­prehen­sive/separate income importance have to be disclosed insofar as statement or in the notes) of items of the amounts are not of minor importance. 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.

“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.

10 Similarities and Differences: IFRS and German GAAP Financial statements

Statement of changes in equity (SoCIE)

IFRS German GAAP All owner changes in equity will be A statement of changes in equity is only presented in a statement of changes in required for consolidated financial shareholder’s equity. statements as well as for publicly traded companies which do not have an obligation This statement will present: to prepare consolidated financial • total comprehensive income for the statements. period, showing separately the total amounts attributable to owners of the German Accounting Standard 22 (GAS 22)3 parent and to non-controlling interests; requires the group statement of changes in • for each component of equity, the equity to include the changes in the effects of retrospective application or following components of group equity: retrospective restatement in accordance • subscribed capital of the parent entity with IAS 8; (incl. ordinary shares and preference • amounts of transactions with owners in shares) their capacity as owners; and • treasury shares • for each component of equity, a • uncalled unpaid capital reconciliation between the carrying • capital reserves amount at the beginning and the end of • revenue reserves the period, separately disclosing changes • currency translation differences resulting from • retained profit/accu­mulated losses a) profit or loss, brought forward b) other comprehensive income, and • consolidated net income/net loss for the c) transactions with owners in their financial year attributable to parent entity capacity as owners, showing separately • equity attributable to non-controlling contributions by and distributions to interests owners and changes in ownership • accumulated other gains and losses interests in subsidiaries that do not recognised directly in equity and relating result in a loss of control. to minority share­holders (incl. translations differences and other items).

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

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).

Similarities and Differences: IFRS and German GAAP 11 Financial statements

Statement of cash flows – format and method

IFRS German GAAP Standard headings, but limited flexibility of Under HGB a statement of cash flows is contents. only required for consolidated financial statements as well as for publicly traded The statement of cash flows should report companies which do not have an obli­gation cash flows during the period classified by to prepare consoli­dated financial operating, investing and financing activities. statements.

The statement of cash flows may be According to GAS 21 the state­ment of cash prepared using the direct method flows shall report cash flows classified by (cash flows derived from aggregating cash operating (presented either using the direct receipts and payments associated with or indirect method), investing and financing operating activities) or the indirect method activities (presented using the direct (cash flows derived from adjusting method). net income for non-cash transactions – for example depreciation). The indirect Special regulations apply to statements of method is more common in practice. cash flows of financial services institutions (GAS 21 App. 2) and insur­ance enterprises Non-cash financing and investing (GAS 21 App. 3). transactions are to be disclosed.

Statement of cash flows – definition of cash and cash equivalents

IFRS German GAAP Cash includes cash on hand and demand Cash funds (defined as highly liquid funds) deposits. Cash equi­valents are short-term, only include cash and cash equivalents. highly liquid investments that are readily convertible to known amounts of cash and Investments classified as cash equivalents are subject to an insignificant risk of must be readily convertible to cash without changes in value. significant losses in value and may be subject to only minor changes in value. An investment normally qualifies as a cash equivalent when it has a maturity of three Cash equivalents therefore gener­ally have months or less from acquisition date. maturities of not more than three months, measured from the date of acquisition. Cash and cash-equivalents may also include bank overdrafts repayable on Liabilities to credit institutions that are demand that form an integral part of an repay­able on demand and other short-term entity’s cash management. Short-term borrow­ings that are used for an entity’s bank borrowings (these are not included cash management are required to be in cash or cash equivalents and are included in cash funds. consider­ed to be financing cash flows).

12 Similarities and Differences: IFRS and German GAAP Financial statements

Accounting polices, errors, estimates – changes in accounting policy

IFRS German GAAP Changes in accounting policies are Changes in accounting policies are accounted for retrospectively. generally accounted for prospectively.

Comparative information is restated and The resulting effect of a change is the amount of adjustment relating to prior recognised in the current year income periods is adjusted against retained state­ment if not determined otherwise earnings of the earliest period presented (for example by transition provisions (except when it is impractic­able to change of specific GASs). comparative information). The effect of retrospective adjustments on each item of Changes in accounting policies have to equity is presented separately in the SoCIE. be dis­closed. Adjustment of the opening balance or restate­ment of the previous year Accounting policy changes resulting from is not required. To ensure comparability the adoption of a new accounting standard with previos years figures in these cases, are accounted for in accor­dance with the additional information has to be disclosed. transition provisions of that standard.

A third statement of financial position as at the beginning of the preceding period shall be presented if an accoun­ting policy is applied retro­spec­tively and this has a material effect on the infor­mation in the statement of financial position at the beginning of the preceding period.

Accounting polices, errors, estimates – correction of errors

IFRS German GAAP Material prior period errors shall be The effect of errors in previous reporting corrected by retro­spective restate­ment periods shall be strictly included in the (except to the extent that it is impractic­able determination of net profit or loss in the to deter­mine either the period-specific current period. effects or the cumulative effects of the error). Compara­tives are restated and, if Additional disclosures, for example nature the error occurred before the earliest prior of the error, amount of the correction, are period presented, the opening balances of to be provided in the notes if necessary to assets, liabilities and equity for the earliest ensure com­para­bility with compara­tives. prior period presented are restated and the Restatement is re­quired only in excep­tional opening statement of financial position circumstances. should be presented.

Similarities and Differences: IFRS and German GAAP 13 Financial statements

Accounting polices, errors, estimates – changes in accounting estimates

IFRS German GAAP The effect of a change in an accounting The effect of a change in an accounting estimate shall be recognised prospectively estimate shall be included in the income by including it in profit or loss in the period state­­ment for the period in which the of change, if the change affects that period change is made (similar to IFRS). 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 recog­nised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

14 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

C Consolidated financial statements

Investments in subsidiaries – definition of subsidiary

IFRS German GAAP Under IFRS parent-subsidiary relationships Under HGB the existence of a parent- are determined by the “control concept”.4 subsidiary relationship is based solely on the possibility of controlling influence by the parent company.

Control exists if the investor (parent) has: Controlling interest exists when the parent • power over the investee (subsidiary), (directly or indirectly through subsi­diaries): • exposure to variable returns from its • holds the majority of voting rights; involvement with the investee, and • enjoys the right to appoint or dismiss • has the ability to use its power over the the majority of the members of the investee to affect its returns. administrative, management or supervisory body governing financial and Paragraph B3 of Appendix B to IFRS 10 operating policies, and is at the same identifies the factors an investor should time a shareholder; consider during its assessment of control • enjoys the right to exercise a controlling over an investee. These are: influence on financial and operating • the investee’s purpose and design; policies (based on a control agreement/ • what the relevant activities are; articles of association); or • how decisions about those relevant • in substance obtains the majority of activities are made; the risks and rewards of an entity that • whether the rights of the investor give it has a narrow, well-defined purpose the current ability to direct the relevant (see “Special purpose entity”). 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.

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.

Similarities and Differences: IFRS and German GAAP 15 Consolidated financial statements

IFRS German GAAP Sometimes it is clear that an investee is controlled by means of equity instruments that give the holder propor­tionate voting rights, such as an ordinary share in an inves­tee. Where this is the case, and there are no other arrangements in place (for example other parties holding potential voting rights, or other contractual arrange­ments 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 According to HGB the possibility of not significantly impact an investee’s controlling influence is conclusively returns. The investee may be on ‘auto-pilot’ presumed to exist when the parent holds such that relevant activities are pre- the majority of voting rights (50% + 1), but determined or directed via contractual has no de facto control. An example for arrangements. Assessment of the purpose this case is the lack of the parent’s actual and design of an investee may, therefore, controlling influence because another help determine who has control. shareholder holds participating rights.

In such a case, the following should be In this case, HGB offers an inclusion considered in assessing an entity’s purpose option for the relevant subsidiary. When and design: all inclusion options for subsi­diaries have • Downside risks and upside potential that been duly exer­cised and accordingly no the investee was designed to create. subsidiary is subject to con­solidation, the • Downside risks and upside potential that obligation to prepare consolidated financial the investee was designed to pass on to statements is not applicable. other parties in the transaction. • Whether the investor is exposed to those Under HGB potential voting rights that risks and upside potential. could be exercised at the present time are not taken into consideration.

16 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

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 instru­ments 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 subs­tance, 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 assess­ment of substance is based on the terms rather than on the specific holder’s inten­tions or financial ability.

IFRS 10 applies to all entities with the No comparable regulation with regard to following exception. If the entity meets the investment entities. 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.

Similarities and Differences: IFRS and German GAAP 17 Consolidated financial statements

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

IFRS German GAAP This section deals with inves­tees that are Regarding SPEs control is considered consi­dered to be structured entities. to exist if from a substance-over-form SIC 12 used the term ‘special purpose pers­­pective the parent entity assumes the entities’ (SPEs) to mean those entities that majority of the risks and rewards associated are created to accomplish a narrow and with an entity, which serves to achieve a well-defined objective. Appendix A to strictly limited and precisely defined IFRS 12 defines a structured entity as pur­pose for the parent entity. “an entity that has been designed so that voting or similar rights are not the dominant Differences exist with regard to the control factor in deciding who controls the entity, concept in general. See “Definition of such as when any voting rights relate to subsidiary”. administrative tasks only and the relevant activi­ties are directed by means of By implementing this regu­lation the contractual arrangements.”5 legislators seeks to prevent entities from eliminating significant assets and liabilities This question of control is not decided solely from their consolidated financial statements by legal ownership. Under IFRS 10, the key by means of certain legal formalities. to determining whether an investor should consolidate a structured entity is whether The classification of an entity as SPE is the investor controls that structured entity. not limited to cer­tain entity forms. How­ever, The difference with structured entities is special funds are excluded from the that often the normal substantive powers definition of a spe­cial purpose entity. (such as voting rights) are not the means These are: by which the investee is controlled. Rather • special investment funds relevant activities are directed by means (sec. 2 subsec. 3 InvG), of contracts. If those contracts are tightly • comparable foreign investment funds, drawn, it may initially appear that none of • open-ended domestic special AIFs the parties has power. As a result, additional with fixed fund rules within the meaning analysis is required to ascertain which party of section 284 KAGB that have been controls the structured entity. established as investment funds under German law, Please note the extensive disclosure • comparable EU investment funds; requirements under IFRS 12, even for • or foreign investment funds that are un­consolidated structured entities. 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.

18 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

Investments in subsidiaries – Non-consolidation of subsidiaries

IFRS German GAAP All subsidiaries that are controlled by the A subsidiary may be excluded from the parent (see “Definition of a subsidiary”) consolidated financial statement if: are consolidated, except for subsidiaries • there are significant long-term restrictions excluded from consolidation for materiality on parent’s rights in respect of assets or reasons. Further an invest­ment entity shall management of that subsidiary; not consoli­date its subsi­diaries or apply • the information required cannot be IFRS 3 when it obtains control of another obtained with­out disproportionate entity.6 expense or undue delay; • the shares of the subsi­diary are held A subsidiary that meets, on acquisition, exclusively for resale in the near future; the criteria to be classified as held for • the subsidiary is not significant in relation sale in accordance with IFRS 5 applies to the requirement to present a true the presentation for assets held for sale and fair view of the group (if several (for example separate presentation of subsidiaries fulfill this requirement, the assets and liabilities to be disposed of), entities shall be consolidated if they are rather than normal line-by-line consoli­dation collectively not insignificant). presentation. 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 accor­ding­ly no subsidiary is sub­ject to consoli­dation, the parent company is not obliged to prepare a consolidated financial statement.

Investments in subsidiaries – uniform accounting policies

IFRS German GAAP Consolidated financial state­ments are Uniform accounting policies are required. prepared by using uniform accounting Special industry accounting princi­ples for policies for like transactions and events in banks and insurance companies applied by similar circum­stances for all of the entities a subsidiary shall be retained (unless the in a group. special industry rules require different). If special industry accounting principles are applied, disclosures are required.

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.

Similarities and Differences: IFRS and German GAAP 19 Consolidated financial statements

Investments in joint arrangements – definition and types

IFRS German GAAP A joint arrangement is an arrangement of German GAAP does not distinguish which two or more parties have joint between different types of joint ventures. control. The term “joint venture” under German GAAP refers to “joint arrangements” under A joint arrangement has the following IFRS. A joint venture is defined as an entity characteristics: that is controlled jointly by one of the entities a) The parties are bound by a contractual included in the consolidated financial arrangement. statements and by one or several other b) The contractual arrange­ment gives two enterprises which do not belong to the or more of those parties joint control of group. Joint control of an enterprise exists the arrangement. when strategic decisions relating to the business, capital expenditures and financing A joint arrangement is either a joint activities of the enterprise require the operation or a joint venture. consent of all the venturers. Joint control must be actually exercised; the sole ability A joint operation is a joint arrangement for joint control is not sufficient. For the whereby the parties that have joint control accounting treatment of joint ventures see (see control concept) of the arrangement “Jointly controlled entities”. have rights to the assets, and obligations for the liabilities, relating to the arrangement. Note: tenancy in common (so called Those parties are called joint operators. “Bruchteils­gemeinschaft”)­ is not considered as joint venture. The accounting of a tenancy A joint venture is a joint arrangement in common is similar to the accounting of whereby the parties that have joint control a Joint operation under IFRS. However, of the arrangement have rights to the net the distinction between joint ventures and assets of the arrangement. Those parties tenancy in common is already important are called joint venturers. for the separate financial statement of the investor.

20 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

Investments in joint arrangements – Presentation of jointly controlled entities

IFRS German GAAP A joint operator shall recognise in relation to Under HGB a joint venture is accounted by its interest in a joint operation: using either the proportionate consolidation 1. its assets, including its share of any method or the equity method. 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; and 5. its expenses, including its share of any expenses incurred jointly.

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.

Similarities and Differences: IFRS and German GAAP 21 Consolidated financial statements

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

IFRS German GAAP A venturer that contributes non-monetary A contribution to a jointly controlled entity assets, such as shares, property, plant and in exchange for an equity interest is equipment or intangible assets, to a jointly recognised in the same way as an exchange controlled entity in exchange for an equity of assets. interest in the jointly controlled entity recognises in its consolidated income Cost of the acquired equity interest can be statement the portion of the gain or either: loss attributable to the equity interests • carrying amount of the consideration of the other venturers, except when the given; contribution lacks commercial substance, • fair value of the consideration given; or as that term is described in IAS 16 Property, • the carrying amount of the consideration Plant and Equipment. If such a contribution given plus any amount necessary to lacks commercial substance, the gain or compensate for the income tax resulting loss is regarded as unrealised and is not from the exchange. recognised unless IAS 28.31 also applies. Such unrealised gains and losses shall If the consideration comprises the exchange be eliminated against the investment of shares issued through an increase of accounted for using the equity method capital, in the financial statements of the and shall not be presented as deferred joint venture, any value within the range of gains or losses in the entity’s consolidated par value of these shares and the fair value statement of financial position or in the of the consideration received could be the entity’s statement of financial position in cost of the contribution. which investments are accounted for using the equity method. Intra-group profits and losses must be eliminated. Only the portion of gain or loss When an entity acquires an interest in a joint attributable to the equity interests of the operation in which the activity of the joint other venturers is recognised. 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

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.

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.

22 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

Investments in associates – Definition of associate

IFRS German GAAP An associate is an entity over which the An associate is an entity in which the group investor has significant influence. Significant has significant influence and which is influence is the power to participate in the neither a subsidiary nor a joint venture of financial and operating policy decisions of one of the group’s entities. Signifi­cant the investee but is not control or joint influence is defined as participation in the control of those policies. financial and operating policy decisions of an investee without the ability to control Significant influence is presumed if the the investee (directly or indirectly). investor holds 20% or more of the voting power of the investee. Significant influence Significant influence is rebuttably presumed is usually also evidenced in one or more if an investor holds, directly or indirectly, of the following ways: 20% or more of the voting rights of an • representation on the board of directors investee. or equivalent governing body of the investee; Indicators for the existence of a significant • participation in policy-making processes, influence are: inclu­ding participation in decisions about • representation on the management board dividends or other distributions; or equivalent governing body of the • material transactions between the entity investee; and its investee; • participation in financial and operating • interchange of managerial personnel; or policy making processes of the investee; • provision of essential technical • interchange of managerial personnel; information. • material business relation­ships with the investee; In assessing whether potential voting rights • provision of essential know-how by the contribute to significant influence, the shareholder. entity examines all facts and circumstances (including the terms of exercise of the The qualification as “associate” requires potential voting rights and any other the actual exercise of significant influence. contractual arrangements whether The sole possibility of exercising significant considered individually­ or in combination) that influence is not sufficient. affect potential rights, except the intention of management and the financial ability to exercise or convert those potential rights.

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

IFRS German GAAP When separate financial statements are Investments in associates are included prepared, investments in associates shall under investments in separate financial be accounted for either: statements and are measured at cost less • at cost; or impairment losses. See “Financial assets – • in accordance with IAS 39/IFRS 9; or Subse­quent measurement”. • 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.

Similarities and Differences: IFRS and German GAAP 23 Consolidated financial statements

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

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

If an equity method invest­ment meets the held for sale or distribution criteria in accordance with IFRS 5, an investor records the invest­ment 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.

Investments in associates – Equity method

IFRS German GAAP The investor presents its share of the On acquisition of the invest­ment, the investee’s (that is the associate’s or joint investor accounts for the difference venture’s) profits and losses in the income between the acquisition costs and the statement. This is shown at a post-tax level. investor’s share of fair value of the net The investor recognises in equity its share of identifiable assets as goodwill or as changes in the investee’s equity that have negative consolidation difference in an not been recognised in the investee’s profit separate computation. or loss. The investor’s investment in the investee Under the equity method, on initial is stated at cost, plus its share of post- recognition the inves­tor’s investment in the acquisition profits or losses, plus or less its investee is recognised at cost, and the share of post-acquisition movements in carrying amount is increased or decreased reserves, less dividends received. Goodwill to recognise the investor’s share of post- shall be amortised over its estimated useful acquisition profits or losses of the investee life in a separate computation. As a general less dividends received. Adjust­ments to the principle, goodwill shall be amortised using carrying amount may also be necessary for the straight-line method. changes in the investor’s proportionate interest in the investee arising from changes in the investee’s other com­pehensive income (for example from revaluation of property, plant and equipment and from foreign exchange translation differences).

24 Similarities and Differences: IFRS and German GAAP Consolidated financial statements

IFRS German GAAP If an entity’s share of losses of an associate A negative equity value for an associate or a joint venture equals or exceeds its is not recognised in consolidated financial interest in the associate or joint venture, state­ments. The negative equity value the entity discontinues recognising its share shall be rolled forward in the separate of further losses. The interest is the carrying computation. The investment shall be amount of the investment in the associate recognised as an asset as soon as the or joint venture determined using the equity accumulated negative amounts are method together with any long-term compensated by profits or shareholder interests that, in substance, form part of contributions. 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 trade receivables, trade payables or any long-term receivables for which ade­quate 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 asso­ciate 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 The equity-method carrying amount has is necessary to recog­nise any additional to be reviewed at each group reporting impairment loss with respect to the investor’s date. If the equity-method carrying amount net invest­ment in the associate or joint exceeds the fair value of the investment in venture and with the respect to the investor’s the asso­ciate, an impairment loss shall be interest in the associate or joint venture that recognised. does not constitute part of the net investment and the amount of that Impairment losses initially reduce the impairment loss. Because goodwill that goodwill which is being rolled forward in forms part of the carrying amount of an the separate computation. Once goodwill investment in an associate or joint venture has been written down in full, the remaining is not separately recognised, it is not tested equity value is reduced. The reversal of for impairment separately. Instead, the entire an impairment on the equity value is only carrying amount of the invest­ment is tested allowed as far as it is not based on goodwill. for impair­ment as a single asset, by comparing its recoverable amount with its carrying amount. An impairment loss recognised in those circum­stances 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.

Similarities and Differences: IFRS and German GAAP 25 Business Combinations

D Business Combinations

Types of business combinations

IFRS German GAAP Business combinations within the scope of A business combination under German IFRS 3 are accounted for as acquisitions. GAAP is the acquisition of an entity. A business combination is a transaction According to GAS 19/GAS 23 entities or other event in which an acquirer obtains pursue commercial or economic interests control of one or more businesses. The indepen­dently of their legal form by means acquisition method applies. IFRS 3 excludes of an organisation that is apparent to third from its scope business combinations parties. 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.

Acquisition date

IFRS German GAAP The acquisition date is the date on which A subsidiary shall be included in the the acquirer obtains control of the acquiree. consolidated financial statement as from The date on which the acquirer obtains the date on which a parent-subsidiary control of the acquiree is generally the relationship arose, i. e. the date the acquirer date on which the acquirer legally transfers (parent) obtains control over the acquiree the consideration, acquires the assets and (subsidiary). Pre­condition for the existence assumes the liabili­ties of the acquiree – of a parent-subsidiary relation­ship usually the closing date. However, the acquirer is that the acquirer is the beneficial owner might obtain control on a date that is either of the shares. Thus, the date of initial earlier or later than the closing date. For consoli­dation is generally the date on which example, the acquisition date precedes the beneficial ownership of the shares passes closing date if a written agreement provides to the acquirer. This can differ from the date that the acquirer obtains control of the on which the shares are transferred in rem. acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identi­fying the acquisition date.

26 Similarities and Differences: IFRS and German GAAP  Business Combinations

IFRS German GAAP If a parent entity is required to prepare consolidated financial statements for the first time (for example: disconti­nuation 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 state­ment 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).

Share-based consideration

IFRS German GAAP Shares issued as considera­tion are Similar to IFRS (carefully estimated fair recorded at their fair value at the acquisition value). date. The published price of a share at the acquisition date is the best evidence of fair value in an active market.

Contingent consideration

IFRS German GAAP If part of the purchase consideration is If part of the purchase consideration is contingent on a future event, IFRS requires contingent on a future event, such as the recognition of the contingent achieving certain profit levels (“earn-out consideration at the acquisition-date fair clause”), future payments of the acquirer value as part of the consideration. An shall be recognised as a provision and obligation to pay contin­gent consideration as an increase in the acquisition costs to shall be classified as a liability or as equity. the extent that the future payment can be reliably measured and it is probable that Financial liabilities are remeasured to fair the earn-out conditions will be met. value at each reporting date. Any resulting gain or loss is recognised in the income Changes in the value or probability of the state­ment. Equity-classified contingent contingent consideration reflect adjust­ consideration is not remeasured at each ments to the initial acqui­sition. Usually, (the reporting date. Settlement is accounted for present value of) the change in contingent within equity. consideration (present value of acquisition date) has to be recorded against goodwill, all other changes shall be recorded in profit and loss.

Similarities and Differences: IFRS and German GAAP 27 Business Combinations

Contingent consideration arrangements requiring continued employment

IFRS German GAAP Certain contingent consideration Not specified. 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 considera­tion should be recognised as compensation expenses or as part of the consideration transferred. The terms of continuing employ­ment 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 pay­ments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.

Transaction costs

IFRS German GAAP Transaction costs are expensed in the Transaction costs are expenditures in periods in which the costs are incurred, addition to the purchase price that serve with one exception. The costs to issue to acquire the shares (sec. 255 (1) HGB). debt or equity securities shall be recognised Only such expenditures that are directly in accordance with other IFRSs. attributable and that arise following the fundamental purchase decision shall be recognised as transaction costs.

28 Similarities and Differences: IFRS and German GAAP  Business Combinations

Acquired assets and liabilities – General

IFRS German GAAP The identifiable assets acquired and Similar to IFRS. All assets, liabilities, liabilities assumed (including contin­gent prepaid expenses and deferred income, and liabilities) that existed at the acquisition date special reserve shall be recognised in full in are recog­nised by the acquirer separately the revaluation balance sheet. All items from goodwill. These assets and liabilities (with exception of provisions and deferred are measured at their acquisition-date fair taxes) shall be measured with their fair value values. on the acquisition date. Provisions shall be measured with the settlement amount An exception to the recogni­tion and (prudent business judgement); defer­red measurement principle applies to deferred taxes for temporary differences between taxes, employee benefits and the (fair) value and the tax base of an asset, indemnification assets. Further­more an liability, item of prepaid expense or deferred exception to the measurement principle income, or a special reserve shall be applies to reacquired rights, share-based measured at the entity-specific tax rate of payments and assets held for sale. These the relevant subsidiary. items are accounted for in accordance with the require­ments of particular standards or However, an asset or liability shall not be other rules in IFRS 3. recognised separately if it cannot be measured reliably; in this case it merges into purchased goodwill.

Acquired assets and liabilities – Restructuring provisions

IFRS German GAAP The acquirer may recognise restructuring Provisions for restructuring shall only be provisions as part of the acquired liabilities recorded in the revaluation balance sheet if only if the acquiree has at the acquisition the acquired subsidiary has already entered date an existing liability for restructuring into an obli­gation to another party in this recognised in accordance with the guidance respect at the initial consolidation date. 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.

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

IFRS German GAAP An intangible asset is recognised separately All intangible assets that fulfill the general from goodwill if it arises from contractual or recognition criteria shall be recognised. other legal rights or is capable of being separated or divided and sold, transferred, Also intangible assets that have not been licensed, rented or exchanged. recognised in the single financial statement of the subsidiary due to the exercise of the Acquired in-process research and recognition option for intangible assets development is recog­ni­sed as a separate (sec. 248 (2) sentence 1 HGB) or for which intangible asset if it meets the definition of there was a recognition prohibition an intangible asset. (sec. 248 (2) sentence 2 HGB) shall be recognised separately in the revaluation balance sheet.

Similarities and Differences: IFRS and German GAAP 29 Business Combinations

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

Acquired assets and liabilities – Contingencies

IFRS German GAAP A contingent liability is recog­ni­sed at the Contingent liabilities of an acquired entity acquisition date if it meets the definition of a shall only be recorded when they meet the liability and if its fair value can be measured definition of a liability according to German reliably. G A AP.

The contingent liability is measured Generally, contingent assets are not subsequently at the higher of the amount recognised. However, according to GAS 23 that would be recognised in accor­dance with (contin­gent) claims of the subsi­diary against IAS 37 or the amount initially recognised external third parties shall be recog­ni­sed less, if appropriate, cumu­lative amortisation if they are recoverable and if the expenses recognised in accordance with IAS 18. or losses to which the compensation obligation of the obligor relate have already Contingent assets are not recognised. been recognised within provisions in the revaluation balance sheet. Indemnification assets are recognised as assets of the acquirer at the same time and on the same basis as indemni­fied items are recog­ni­sed as liabilities of the acquiree.

Acquired assets and liabilities – Subsequent adjustments

IFRS German GAAP Fair values determined on a provisional If at that date where the parent entity basis can be adjus­ted against goodwill obtained control over the subsidiary a within 12 months of the acquisi­tion date. purchase­ price allocation cannot be Subsequent adjustments are recorded in definitely determined, the values shall be the income statement unless they are to adjusted within a period of 12 months correct an error. subsequent to the date when control was obtained. Adjust­ments to acquisition accounting shall be recogni­sed directly in equity.

30 Similarities and Differences: IFRS and German GAAP  Business Combinations

Minority interests/non-controlling interests

IFRS German GAAP In cases where an acquirer acquires less Similar to IFRS, however the full goodwill than 100% of an acquiree, there is a choice method may not be applied.8 on a transaction-by-trans­action basis. Non-controlling interests can be measured “Non-controlling interests” have to be at either fair value (full goodwill method) or presented in a separate balance sheet item the non-con­trol­ling interest’s proportio­nate within equity (sec. 307 (1) HGB). share of the acquiree’s net identifiable assets.

Goodwill – Initial recognition and measurement

IFRS German GAAP Goodwill is an asset and separately Goodwill arises as the difference between recognised. Goodwill is measured at the the cost of the acquisition and the acquisition date as the excess of a) over b): acquirer’s share of the fair value of the identifiable assets and liabilities acquired a) the aggregate of: (full goodwill method shall not be applied). • consideration transferred Goodwill may be allocated to different lines • amount of any non-controlling interests of business of an acquired subsidiary. in the acquiree Goodwill is recogni­sed as an intangible • acquisition-date fair value of the asset with a finite useful life. acquirer’s previously held equity interest in the acquiree For all subsidiaries where goodwill has been charged to group equity in accordance b) acquisition-date amount of the with the prior choice for the treatment of identifiable net assets acquired goodwill (i. e. before BilMoG), this treat­ment 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.

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.

Similarities and Differences: IFRS and German GAAP 31 Business Combinations

Goodwill – Bargain purchases

IFRS German GAAP A bargain purchase is a busi­ness Generally, if a negative consolidation combination in which the amount of (b) difference (badwill) is caused by a bargain above (net assets acquired) exceeds the purchase it shall be recognised as income aggregate amounts of (a) above (aggregate on a systematic basis over the weighted of consi­dera­tion transferred, amount of average remaining useful life of the finite- non-controlling interest and fair value of lived assets that have been acquired. previously held interests). The acquirer reassesses the identification and However, badwill can be have different measurement of the assets acquired and reasons. Thus, it can have the liabilities assumed and the measure­ment characteristics of equity or debt or – the consideration trans­ferred, the non- in excep­tio­nal cases – it can also arise control­ling interests and prior held interests solely from consoli­dation procedures (if any). (so called technical negative consoli­dation difference). GAS 23 provides illustrative Any excess remaining after reassessment rules for the treatment of badwill depending is recognised in profit or loss on the on the reason of its inaccurance. acquisition date.

Goodwill – Assignment subsequent accounting

IFRS German GAAP Goodwill is not amortised but tested for German GAAP requires goodwill to impairment annually and – furthermore – be amortised over its economic life. if there is an indication that goodwill may Amorti­sation shall allocate the cost of be impaired. goodwill over the financial years in which is expected to be used. If goodwill is Goodwill is assigned to a cash generating allo­cated to several business lines of a unit (CGU) or group of CGUs. A CGU is the subsidiary then a separate amortisation smallest identifiable group of assets that shall be recorded for each busi­ness line. generates cash inflows that are largely GAS 23 names factors that may be relevant inde­pendent of the cash inflows from for estimating the expected useful life. other assets or groups of assets. Each If it is not possible to estimate the useful life unit or group of units which the goodwill in exceptional cases, purchased goodwill is allocated shall not be larger than an should be amortised over a period of ten operating segment in accordance with years. IFRS 8. German GAAP requires an explanation of the economic life for each purchased goodwill in the notes to the financial statements.

32 Similarities and Differences: IFRS and German GAAP  Business Combinations

Goodwill – Impairment testing and measurement

IFRS German GAAP The recoverable amount of the CGU or There is no explicit require­ment in German group of CGUs (i. e. the higher of its fair GAAP to perform an annual impairment test value less costs of disposal and its value in for goodwill. However, GAS 23 states that use) is compared with its carrying amount. the remaining useful life of goodwill should be reviewed at each reporting date. Any impairment loss is recog­nised in operating results as the excess of the Goodwill shall be written down it is carrying amount over the recoverable expected to be impaired permanently. amount. The impairment loss is allocated GAS 23 lists possible indications for a first to goodwill and then on a pro rata basis permanent goodwill impairment. If one or to the other assets of the CGU or group of more of these factors apply or if there is CGUs to the extent that the impairment other evidence of expected perma­nent loss exceeds the book value of goodwill. impairment, the recoverability of goodwill Impairment loss recognised for goodwill shall be tested. shall not be reversed in a subsequent period. Goodwill is impaired if its carrying amount exceeds its fair value. In contrast to other assets, impairment of pur­chased goodwill shall not be reversed.

Step acquisitions

IFRS German GAAP When an entity obtains control of an Not specified. According to prevailing acquiree in stages by successive share opinion, the acquiree’s identifiable assets purchases the business combination is and liabilities are remeasured to fair value accounted for using the acquisition method at the date when the entity finally became at the acquisition date. The previously a subsidiary. All assets and liabilities of held equity interests are fair valued at the acquiree should be recognised in the the acquisition date and a gain or loss is consolidated financial state­ments based on recognised in profit or loss. The fair value of their fair values at this date. The adjust­ment the previously held interest then forms one to any previously held interests of the of the components that is used to calculate acquirer is treated without an effect on goodwill. income.

Business combinations involving entities under common control

IFRS German GAAP IFRS does not specifically address such Not specified. 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 appli­cable guidance in IAS 8 (i. e., it provides more reliable and more relevant infor­mation).

Similarities and Differences: IFRS and German GAAP 33 Revenue Recognition

E Revenue Recognition

General (IFRS 15)

IFRS German GAAP Revenue is a subset of income that arises Sales revenues comprise the revenues from the sale of goods or rendering of from the sale of products and from services services as part of an entity’s ongoing major rendered, no matter whether the income or central activities (ordinary activities). is related to ordinary activities of the Transactions that do not arise in the course enterprise or not. of an entity’s ordinary activities do not result in revenue.

One primary standard (IFRS 15) provides a comprehen­ sive­ framework for recognising­ revenue from con­tracts 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.

The standard sets forth a five-step model Revenues may only be recognised if they for recog­nizing revenue from contracts with are realised at the balance sheet date customers: (realisation principle). Under specific 1. Identify the contract with a customer circumstances, dividends may be 2. Identify the performance obligations (PO) recognised earlier than under IFRS in in the contract single-entity financial statements. 3. Determine the transaction price 4. Allocate the transaction price to the German GAAP requires measure­ment performance obligations of revenues at the fair value of the 5. Recognise revenue when (or as) each consideration received or receivable performance obligation is satisfied. (usually cash or cash equival­ents).

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.

34 Similarities and Differences: IFRS and German GAAP Revenue Recognition

Step 1: Identify the contract with a customer

IFRS German GAAP In a first step, the standard requires the No comparable explicit regulation with entity to identify the contract with the regard to identifying a contract, but in custo­mer and whether it should combine, principle similar to IFRS. If several individual for accounting purposes, two or more contracts are considered as a uniform con­tracts (including contract modifications), transaction because of their close economic to properly reflect the economics of the connection, they might be considered as a underlying transaction. An entity will need multi element arrangement. A differentiation to conclude that it is “probable”9 at the is to be made with regard to the realization inception of the contract, that the entity will of its individual components. collect the conside­ration 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.

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 custo­mer) if one or more of the following criteria are met: • the contracts are nego­tiated with a single commercial objective, • the amount of consi­de­ration 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 addi­tio­nal performance obligation. The modification is otherwise accounted for as an adjust­ment to the original contract either through a cumulative catch-up adjustment to revenue or a prospective adjustment to revenue when future performance obli­ga­tions are satisfied, depending on whether the remaining goods and services are distinct. While aspects of this model are similar to existing literature, careful conside­ration will be needed to ensure the model is applied to the appropriate unit of account.

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.

Similarities and Differences: IFRS and German GAAP 35 Revenue Recognition

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

IFRS German GAAP An entity should assess goods or services No comparable explicit regulation with promised in a contract with a customer and regard to identifying performance should identify as a per­for­mance obligation obligations, but similar to IFRS, as long each promise to transfer a good or service as principal performance obligations are to the customer. These promises may not concerned. be limted to those explicitly in­cluded in written contracts. Different principal perfor­mance obligations may arise from multi element arrange­ments, An entity accounts for each promised good if several different services (amongst others or service as a separate performance for example financing trans­actions) are obli­gation if the good or ser­vice is capable regulated in a single contract or several of being distinct (i. e., the customer can individual contracts are considered as a benefit from the good or service either on uniform transaction because of their close its own or together with other resources economic connection. Despite the uniform readily available to the customer); and is con­si­de­ration of these transactions, distinct within the context of the contract a differentiation is to be made with regard to (i. e., the good or service is separately the realization of the individual components. identifiable from other promises in the contract).

Sales-type incentives such as free products or customer loyalty programs, for exam­ple, might be perfor­mance 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 3: Determine the transaction price

IFRS German GAAP The transaction price reflects the amount The general revenue recog­nition criteria of consideration that an entity expects apply. 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 prac­ti­cal expedient, an entity need not make this assess­ment when the period bet­ween 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.

36 Similarities and Differences: IFRS and German GAAP Revenue Recognition

Step 4: Allocate the transaction price to the performance obligations

IFRS German GAAP For contracts with multiple performance No specific guidance for multiple element obligations, the performance obligations arrange­ments. should be separately accoun­ted for to the extent that the pattern of transfer of goods The general revenue reco­gni­tion and services is different. Once an entity criteria apply. For this purpose, the total identifies and determines whether to remune­ration­ of the multi component sepa­rately ac­count for all the per­for­mance arrangement must be divided between the obli­gations in a con­tract, the trans­action individual compo­nents in the ratio of the fair price is allocated to these separate values of the individual components and perfor­mance obligations based on relative then a sepa­rate realization of each of these stand­alone selling prices. individual components must be examined.

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.

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

IFRS German GAAP An entity shall recognise revenue when An entity shall recognise revenue when the (or as) the entity satisfies a performance entity satisfies the principal perfor­mance obli­gation by transferring a promised good obligation (for example trans­fer of beneficial or service (i. e. an asset) to the custo­mer. owner­ship of an asset, similar to IFRS) and An asset is transferred when (or as) the (additionally) the entity has an indefeasible customer obtains control of the asset. right to the consideration agreed. For each performance obli­gation an entity shall deter­mine at contract incep­tion The realisation principle applies – revenue whether it satisfies the perfor­mance is only to be recognised when it has been obligation over time or at a point in time. realised at the balance sheet date.

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 in­clu­des the ability to prevent other entities from directing the use of and obtaining the benefits from, an asset. Deter­mining when control transfers will require a sign­ifi­cant amount of judge­ment.

Similarities and Differences: IFRS and German GAAP 37 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 perfor­mance obligation Service transactions are generally over time if one of the following criteria is accounted for using the completed contract met: method. 1. the customer simulta­neously receives and consumes the benefits provided by The completed contract method follows the the entity’s performance as the entity general measurement principles. performs; Accordingly revenue may only be 2. the entity’s performance creates or recognised if it has been realised at the enhances an asset (for example, work in balance sheet date. progress) that the customer controls as the asset is created or enhanced; or An exception applies when the entitlement 3. the entity’s performance does not create to compen­sation for partial performance is an asset with an alternative use to the certain. In such cases partial revenue may entity and the entity has an enforceable be recognised. right to payment for performance completed to date. Construction contracts are generally accounted for using the completed contract Entities need to apply to the specific facts method. The percentage of completion and circum­stances of individual perfor­ method is allowed only in exceptional mance obligations. circumstances.­ 11

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 custo­mer should be applied consistently throughout the contract and to similar con­tracts with customers. The notion of an earnings process is no longer appli­cable.

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

38 Similarities and Differences: IFRS and 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 indi­ca­ting that a The realisation principle applies – revenue performance obli­gation is satisfied over is only to be recognised when it has been time are met, the entity satisfies the realised at the balance sheet date. performance obligation at a point in time. Revenue from products (and services) may To determine the point in time at which a be realised, when: customer obtains control of a promised • products have been delivered and risk asset and the entity satisfies a perfor­mance and rewards have been transferred; and obligation, the entity shall consider the • the supplier is indefeasibly entitled to require­ments for control. In addition, IFRS 15 receive a consideration. provides the following indicators to con­sider 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 re­wards of ownership of the asset, and • the customer has accepted the asset.

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 perfor­mance No comparable regulation with regard to obligations and costs related to inefficiencies contract costs. 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 ful­filling 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.

Similarities and Differences: IFRS and German GAAP 39 Pensions and other long-term benefits

F Pensions and other long-term benefits

General considerations – Classification of pension schemes

IFRS German GAAP Post-employment benefits (e. g. pensions) The classification as DC plan or DB plans are classified either as defined contribution does not apply to German GAAP. Instead, plans (DC plans) or defined benefit plans depen­ding on whether a separate external (DB plans), depending on the economic fund is used to settle the pension substance of the individual plans. Under DC entitlements, the plan has to be treated plans the entity’s legal or constructive as an indirect pension plan or direct obligation is limited to the amount that it pension plan. In case of indirect pension agrees to contribute to the fund. There­fore plans the external fund meets the actuarial risks and investment risks remain employees’ claims, however, the entity with the employee. All other plans are DB remains liable for potential benefit plans. 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 Arrange­ments 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).

General considerations – Differences of the categories

IFRS German GAAP For DC plans only the contri­butions that It is possible to account for obligations are paid for each period for the rendered arising from indirect pension plans off- emplo­yee services are recog­nised as balance and to account for the contributions ongoing ex­penses. For DB plans a liability as an expense (underfunding then must be is recognised in the balance sheet and disclosed in the notes). Obligations arising an ex­pense is recognised for the accrual from direct pension promises basically lead of the liability in profit or loss. Actuarial to a provision which has to be recognised assumptions are required to measure the in the balance sheet and to an expense for obligation and the expense from DB plans the accrual of the provision which has to so that actuarial gains or losses (recognised be recognised in profit or loss. Obligations in OCI) may arise. Moreover, the obligation arising from “legacy” commitments may be is measured on a discounted basis. 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.

40 Similarities and Differences: IFRS and German GAAP  Pensions and other long-term benefits

General considerations – Other long-term employee benefits

IFRS German GAAP Other long-term employee benefits include Other long-term employee benefits are for example jubilee benefits, deferred long-term in nature, comprise a benefit compensation or bonuses that are not due characteristic and are subject to biotmetric to be settled within 12 months after the end risks (for example benefits relating to of the period in which the employees render part-time employment prior to retirement, the related service. Long-term employee benefits in the case of death or disability benefits are accounted for in the same way or jubilee benefits). They are largely treated as DB plans with the exception that in the same way as pension obligations. actuarial gains and losses and all past The most prominent difference between the service costs are recognised immediately accounting for pension obligations and through profit or loss. 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 No actuarial valuation method is specified. used to determine the present value of the Use of actuarial techniques shall result in an entity’s defined benefit obligation (DBO). economically reasonable amount (PUCM is a permis­sible actuarial valuation method).

Measurement of obligation – Use of realistic parameters

IFRS German GAAP Actuarial valuation techniques are used to The regulation to use realistic parameters make a reliable estimate of the atmount of for the calculation of pension and bene­fits that employees have earned in similar obli­gations­ is comparable to IFRS. return for their services. Based on the pension promise these techniques have to include realistic assumptions (for example salary and/or pension in­crea­ses, turnover rates and mortality probabilities) that will influence the cost of the benefits.

Similarities and Differences: IFRS and German GAAP 41 Pensions and other long-term benefits

Measurement of obligation – Discount rate

IFRS German GAAP The rate used to discount post-employment Determination of the discount rate is based benefit obligations is determined by on a specific law (RückAbzinsV). Every reference to market yields at the end of the month the German Federal Bank publishes reporting period on high quality corporate a yield curve based on the average market bonds. The cur­rency and term shall be yields for the past seven and ten years consistent with the currency and estimated respectively. Pension obligations are term of the DBO. discounted by the ten-year average market rate whereas other long-term employee benefits are dis­counted by the seven-year average market rate. Regar­ding pension obligations there has to be made an addi­tional 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 dis­closed in the notes. The discount rate shall basically be chosen consistent with the remaining term of the obli­gation, but in order to simplify the calculation, it is accept­able to assume a dura­tion of 15 years if no material over- or underesti­mation of the obli­gations results from doing so.

Plan assets – Criteria

IFRS German GAAP Plan assets comprise: In general the criteria for plan assets are • assets held by a long-term employee similar to IFRS, in particular the assets shall benefit fund; and be held solely for the purpose of paying or • qualifying insurance policies (issued by funding employee benefits and cannot be an insurer that is not a related party as used by the employer for any other purpose, defined in IAS 24). including settlement of liabilities on the employer’s liquidation. However German In both cases above, the assets shall be GAAP additionally requires plan assets to held solely for the purpose of paying or be non-operating assets whereas plan funding employee benefits and cannot be assets need not to be held by a separate used by the employer for any other pur­pose, legal entity. including settlement of liabilities on the employer’s liquidation. 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.

42 Similarities and Differences: IFRS and German GAAP  Pensions and other long-term benefits

Plan assets – Valuation units

IFRS German GAAP Plan assets should be measured at fair Plan assets should be measured at fair value. value. The fair value of insurance policies should be estimated using, for example, If benefits payable under a plan are a discounted cash flow model with a determined solely by reference to the discount rate that reflects the associated fair value of the underlying assets, the risk and the expected maturity date or obligation basically has to be measured at expected disposal date of the assets. the fair value of the assets (but not below the Qualifying insurance policies that exactly present value of guaranteed benefits). match the amount and timing of some or all of the benefits payable under the plan are The prevailing view is that this is also valid for measured at the present value of the related insured benefits to the extent the insurance obligations. 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 recog­nised 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 distr­ibu­tion- barrier. There has to be made an auxiliary calcu­lation to determine this differential amount which besides has to be disclosed in the notes.

Similarities and Differences: IFRS and German GAAP 43 Pensions and other long-term benefits

Recognition – Net defined benefit liability

IFRS German GAAP The net defined benefit lia­bility (asset) is the The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of net total of the present value of the pension limiting a net defined benefit asset to the obligation and the fair value of plan assets. asset ceiling. A deficit has to be recognised as “provision for pensions” whereas a surplus has to be The deficit or surplus is: recognised as “Excess of plan assets over 1. the present value of the defined benefit post-employment benefit liability”. obligation less 2. the fair value of plan assets (if any). Due to the fact that assets held by a separate legal entity only meet the criteria The asset ceiling is the present value of any of poten­tial plan assets if the employer eco­nomic benefits available in the form of qualifies as their beneficial owner (for refunds from the plan or reductions in future example based on trust agreements) there contributions to the plan. is no need for an asset ceiling regulation comparable to IFRS. 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.

Recognition – Actuarial gains/losses

IFRS German GAAP Actuarial gains and losses are recognised in Actuarial gains and losses are recognised other com­prehen­sive income. immediately in the income statement.

Actuarial gains and losses are changes in the present value of the defined benefit obli­gation 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.

Recognition – Treatment of surpluses

IFRS German GAAP If the fair value of plan assets exceeds the Each surplus (fair value of plan assets present value of DBO, this surplus has to be exceeds present value of pension tested for whether it can be recognised as obligation) shall be accounted for as an an asset or not (so-called asset ceiling test). asset. Such an asset is to be recognised as a separate line item (“Excess of plan assets over post-employment benefit liability”).

44 Similarities and Differences: IFRS and German GAAP  Pensions and other long-term benefits

Recognition – Net pension expense

IFRS German GAAP An entity shall recognise the components All gains and losses are recognised of defined benefit cost as follows: immediately in the income statement. 1. service cost in profit or loss; Thus actuarial gains and losses are 2. net interest on the net defined benefit not recognised separately in an liability (asset) in profit or loss; and “OCI statement”. 3. remeasurements of the net defined benefit liability (asset) in other Income and expenses from discounting comprehensive income. pension pro­visions shall be offset with interest on plan assets. Remeasurements of the net defined benefit liability (asset) comprise: 1. actuarial gains and losses; 2. the return on plan assets, excluding amounts in­clu­ded 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 obli­gation 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.

Presentation and disclosures – Presentation

IFRS German GAAP The entity may choose whether net interest Income and expenses from discounting components should be included as an pension pro­visions shall be offset with operating expense or as a component of interest on plan assets. The net amount has finance income. to be in­clu­ded in finance income.

The actual return on plan assets, excluding German GAAP provides a choice regarding amounts included in net interest on the net profit or loss derived from discount rate- defined benefit liability (asset) is recognised related fluctuations, profit or loss due to in other comprehensive income. changes in the fair value of plan assets and non-interest income from plan assets. All three com­ponents­ may consistently be recognised in operating or finance income/ expense.

Similarities and Differences: IFRS and German GAAP 45 Pensions and other long-term benefits

Presentation and disclosures – General disclosures

IFRS German GAAP An entity shall disclose information that: In particular, the following disclosures are 1. explains the characteristics of its defined required: benefit plans and risks associated with • actuarial method used them; • information regarding the valuation 2. identifies and explains the amounts in parameters (e. g. discount rate, assumed its financial statements arising from its salary trend) defined benefit plans; and • book value and fair value of plan assets 3. describes how its defined benefit plans • present value of obligations (if offset may affect the amount, timing and against plan assets) uncertainty of the entity’s future cash • components of the net interest expense/ flows. income • deficits arising from indirect pension See IAS 19.135 ff. for the extensive schemes disclosure requirements. • 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 pre­sented separately (within the income statement or in the notes)

46 Similarities and Differences: IFRS and German GAAP Non-financial assets

G Non-financial assets

Property, plant and equipment – Initial measurement

IFRS German GAAP An item or property, plant and equipment PPE is initially measured at its acquisition (PPE) that qualifies for recognition shall costs or pro­duc­tion costs. initially be measured at its cost (i. e. cost of acquisition (see section “Acquisition cost”) Acquisition costs comprise all expenses or cost of conversion (see section “Costs of that arise to acquire an asset and to bring it conversion”). 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 con­sumption of goods and the use of services to manu­facture, 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 According to German GAAP, subsequent the cost model (cost less accumulated measurement of PPE shall be based on the depreciation and impairment losses) or the cost model (cost less accu­mu­lated revaluation model (which must be adopted depreciation and impairment losses). The for an entire revaluation model is not permitted. class of PPE). For assets that are design­ated as plan If the revaluation model is used: assets see section “Plan assets”. • an increase on revaluation is credited directly to equity (“revaluation surplus”), Not applicable. unless it reverses a revalua­tion decrease for the same asset previously recognised in profit or loss and • a decrease on revaluation is charged directly against any related revaluation sur­plus for the same asset; any excess is recognised as an expense.

Similarities and Differences IFRS and German GAAP 47 Non-financial assets

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 Separate depreciation of significant­ parts in relation to the total cost of the item shall not specified under German GAAP is only be depreciated separately (component permitted under specific conditions but not approach). How­ever, parts that have the the required. same useful life and the same depreciation method may be grouped in deter­mining the depreciation charge.

Consistent with the com­po­nent approach, Similar to IFRS. Under German GAAP, replace­ment cost is recognised as PPE if impairment can only be applied to an asset the recognition criteria are met. The as a whole. carrying amount of the replaced parts is dere­cogni­sed.

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

Property, plant and equipment – Acquisition cost

IFRS German GAAP PPE comprises the cost directly attributable PPE comprises the cost individually to the asset. The following costs are attributable to the asset. The following included in the initial mea­sure­ment of costs are included in the initial measure­ purchased PPE under IFRS: ment of purchased PPE under German • purchase price (incl. import duties and GAAP: nonrefundable purchase taxes, less trade • purchase price (incl. import duties and discounts and rebates) nonrefundable purchase taxes, less trade • any costs directly attri­but­able to bringing discounts and rebates) the asset to the location and conditions • any costs directly attribut­able to bringing necessary for it to be capable of the asset to the location and conditions operating necessary for it to be capable of • the initial estimate of the costs of operating dismantling and removing the item and • costs of site preparation restoring the site on which it was located • initial delivery and handling costs Examples of directly attributable costs: • installation and assembly costs • initial delivery and handling costs • costs of testing the asset for proper • installation and assembly costs functionality • costs of employee benefits arising directly • professional fees (not advisory fees paid from the construction or acquisition of the in the context of inducing the acquisition item of PPE decision) • costs of testing whether the asset is functioning properly, after deducting The cost of dismantling and removing the the net proceeds from selling any items asset and restoring the site are not produced while bringing the asset to that included in the initial mea­sure­ment of the location and condition (such as samples asset. In case of a legal or contractual obli­ produced when testing equipment) gation, a provision has to be recognised • professional fees over the useful life of the asset on a straight • costs of site preparation line basis.

48 Similarities and Differences IFRS and German GAAP Non-financial assets

Costs of conversion

IFRS German GAAP Costs of conversion comprise the costs Costs of conversion comprise: directly attributable to the asset: • direct material cost • direct material costs • direct labour cost • direct labour costs • special cost of production • variable production over­heads such as • an appropriate share of indirect indirect materials and indirect labour material cost, indirect production costs, costs indirect labour costs and depreciation/ • fixed production overheads such as amortisation to the extent that they are depreciation and maintenance of factory attributable to the production process buildings and equip­ment, and the cost of fac­tory management and administration The consideration of appro­priate shares of allocated based on the normal capacity of general and administrative costs, expen­ses the production facilities for social amenities of the company and the costs of voluntary social benefits and Research costs, selling costs and general occupational pensions as part of the administrative overheads are explicitly conversion costs is optional. For the excluded from the cost of conversion. optional consideration of borrowing costs see section “Capitali­sation 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 Borrowing costs may only be capitalised if attributable to the acquisition, construction they are used to finance the production of or production of a qualifying asset (asset an asset and to the extent that they are that necessarily takes a substantial period directly attributable to the production of time to get ready for its inten­ded use or period. They may not be capitalised if they sale) are capitali­sed as part of the cost of relate to acquisition costs. the asset. The amount of borrowing costs that has For general purpose borrowings, borrowing been capitalised in the reporting period has costs are determined by applying the to be disclosed in the notes. 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

Similarities and Differences IFRS and German GAAP 49 Non-financial assets

Internally generated intangible assets – General

IFRS German GAAP An internally generated intangible asset is Internally generated non-current intangible recognised if it is probable that the asset may be recognised (option) if certain expected future economic benefits that are conditions are met (for example highly attributable to the asset will flow to the probable that planned intangible asset will entity, and the cost of the asset can be arise, development costs can be reliably measured reliable. attributed to the asset).

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

Expenditure incurred during the research Similar to IFRS. If research and phase is expensed when incurred. development phase cannot be separated Expenditure incurred during the reliably, capitalisation of development costs development phase is capitalised from the is not allowed. point when the recognition criteria of an intangible asset are met.

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

Internally generated intangible assets – Recognition

IFRS German GAAP To assess whether an inter­nally generated Non-current intangible items in the process intangible asset meets the criteria for of creation may be recognised if (GAS 24): recognition, an entity classi­fies the • the item is an asset under development generation of the asset into a research and • the item meets the general recognition a development phase. Expendi­tures arising criteria for assets from research (or from the research phase • it is highly probable that the planned of an intangible pro­ject) shall be recognised intangible asset will arise as an expense when incurred. Costs in the • development costs can be reliably development phase are capi­tal­ised if all of attributed to the intangible asset the following six criteria are demonstrated: • no explicit prohibition on recognition • technical feasibility of com­pleting the exists (for example internally generated intangible asset brands, mastheads, etc.) • intention to complete the intangible asset • ability to use or sell the intangible asset • how the intangible asset will generate future eco­nomic 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

50 Similarities and Differences IFRS and German GAAP Non-financial assets

IFRS German GAAP

If an entity cannot distinguish the research Distinction between research phase and phase from the development phase of an development phase is crucial: expenditures internal project to create an intangible from the research phase – in contrast to asset, the entity treats all expenditure as if it expenditures from the development were incurred in the research phase only. phase – shall not be recognised. Research is the original and planned investigation under­taken to gain new scientific of technical know­ledge or ex­perien­ces of general nature, about whose usa­bility and economic prospects­ no statements can be made.

Development is the appli­cation 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 Similar to IFRS. brands, mast­heads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. There­fore, such items are not recognised as intangible assets. Also, internally gene­rated goodwill shall not be recognised as an asset.

Development costs initially recognised as Similar to IFRS. Development expenditures expenses cannot be capitalised in a that already have been recognised as subsequent period. expense in financial state­ments (for example prior year) may not be included in the cost of the intangbile asset.

Note: when internally gen­er­ated intangible assets are recognised, profits may only be distributed if the reserves available for distri­bution (+/– 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).

Similarities and Differences IFRS and German GAAP 51 Non-financial assets

Internally generated intangible assets – Measurement and amortisation

IFRS German GAAP Initial recognition at cost, which comprises Acquired intangible assets are initially all expen­ditures that can be directly measured at acquistion costs. Subse­ attributed or allocated to creating, quently intangible assets are accounted for producing and preparing the asset from the using the cost model (= cost less accumu­ date when the recognition criteria are met lated depreciation and impair­ment losses). (see “Acqui­sition cost”). Use of the revaluation model is prohibited.

Sub­sequently intangible assets are Non-currrent intangible assets must be accoun­ted for using the cost model or the amortised over their expected entity- revaluation model (provided fair value can specific useful life. If, in exceptional cases, be determined with reference to an active the entity-specific useful life of an internally market). generated intangible asset cannot be estimated reliably, the asset shall be An entity should assess whether the useful amortised over a period of ten years. life is finite or indefinite. If finite, the useful Intangible assets that can be used life is the expected period available for use indefinitely are not amortised. If or the number of production or similar units maintenance measures are the reason why expected to be obtained from the asset. these intangible assets can be used • Intangibles with a finite useful life are indefinitly, these assets have a useful life amortised over their useful life. The and must be amortised. depreciable amount is allocated by a systematic method that reflects the pattern in which the asset’s future economic benefits are expected to be con­sumed. If the pattern cannot be determined reliably, the straight-line method should be used. The residual value is assum­ed 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. • 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 circum­stances, the asset should be changed to one with a finite life.

52 Similarities and Differences IFRS and German GAAP Non-financial assets

Inventories

IFRS German GAAP Carried at lower of cost and net realisable Inventories are initially measured at value. Reversal is required for subsequent acquisition/production cost. Subse­quently, increase in value of previous write-downs. inventories are measured at (strict) lower of Materials and other supplies held for use in cost or market value (re­place­ment costs or the production of inventories are not written net realisable value depending on circum­ down below cost if the finished products in stances). When the reasons for an which they will be incor­porated are impairment/write-down no longer apply, a expected to be sold at or above cost. lower carry­ing value resulting from a previous impairment/write-down may not FIFO or weighted average method is used to be retained (reversal of impair­ment). determine cost. LIFO is prohibited. Constant values can be used under certain FIFO, LIFO and weighted average may be conditions. used. Cons­tant values may be used under certain conditions. IAS 23 identifies limited cir­cum­stances where borrowing costs are included in the Advance payments are pre­sen­ted as cost of inventories. separate balance sheet item within inventories. Advance payments are presented in other assets.

Investment property

IFRS German GAAP Investment property is pro­perty (land and/ No specific guidance for investment or buil­dings) held in order to earn rentals property under German GAAP (similar to and/or for capital appreciation including treatment of PPE): pro­perty being con­structed or developed • initial measurement at acquisition/ for future use as invest­ment pro­perty. The production cost defi­nition does not include owner • cost model (revaluation model is occupied pro­perty or property held for sale prohibited) in the ordinary course of business. • write-down if permanently impaired (see “Impairment of long lived assets”) Investment property may be accounted for on a historical-cost basis or on a fair value For investment property that is designated basis. When fair value is applied, the gain or as plan asset see section “Plan Assets”. loss arising from a change in the fair value is recognised in the income statement and the carrying amount is not depre­ciated.

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 construc­tion or the date when fair value becomes reliably mea­sur­able, whichever is earlier.

Similarities and Differences IFRS and German GAAP 53 Non-financial assets

Impairment of long-lived assets held for use

IFRS German GAAP An entity should assess at each reporting Fixed assets must be written down to the date whether there are any indications that lower of cost or market value if it is an asset may be impaired. Irrespective of permanently lower than the carrying indication, an annual impairment test is also amount. Impairment is permanent if it lasts required for intangible assets with indefinite longer than half of the remaining useful life useful lives and not yet ready for use (as of the asset (maximum of 3–5 years). well as for goodwill).

IFRS uses a one-step impair­ment test. The carrying amount of an asset is com­pared with the recover­able 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 dis­posal 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.

Value in use represents the future cash When the reasons for an impair­ment/ flows discounted to present value by using write-down no longer apply, a lower carrying a pre-tax, market-determined rate that value resulting from a pre­vious impairment/ reflects the current assessment of the time write-down may not be retained – the value of money and the risks speci­fic to the impair­ment has to be rever­sed. The reversal asset for which the cash flow estimates of goodwill impair­ment is prohibited. 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 impair­ment and hence are impair­ment indicators.

Impairment losses are re­ver­sed, except for goodwill, when there has been a change in economic condi­tions or in the expected use of the asset.

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

54 Similarities and Differences IFRS and German GAAP Non-financial assets

Lease arrangements – Leases – classification – IAS 17

IFRS German GAAP The guidance focuses on the overall According to German GAAP the attribution substance of the trans­action. Leases are of rental assets depends on the beneficial classified as an operating lease or a finance ownership. Beneficial owner of the leased lease. Classification in finance and operating assets is who bears the majority of the lease depends on whether the lease chances and risks born by the leased transfers substantially all of the risks and assets. However, lease accounting follows rewards of ownership to the lessee. Examples the treatment for tax-purposes which is of situ­ations that would normally lead to a treaten in certain decrees of the Federal lease being classified as a finance lease: Ministry of Finance. Accor­ding to these the • transfer of ownership at the end of the lessee is regarded as the beneficial owner lease term of the leased asset (= finance lease) if: • bargain purchase option • under a full-payout lease of moveable • lease term is for the major part of the property and buildings: economic life of the leased asset –– the lease term is less than 40% or more • present value of the mini­mum lease than 90% of the economic life of the payments amounts to at least substan­tially asset; all of the fair value of the leased asset –– the lease term is between 40% and • leased assets are of a specialised nature 90% of the ex­pected useful life of the • if the lessee can cancel the lease, the asset and lessor´s losses associated with the –– the lessee has a bargain purchase cancellation are borne by the lessee option and the carrying amount or • gains or losses from the fluctuation in the the lower market value exceeds the fair value of the residual accrue to the purchase price or lessee –– the lessee has the ability to continue • the lessee has the ability to continue the the lease beyond the original lease term lease for a secondary period at a rent that for a rent which is lower than market is substantially lower than market rent. rent (for buildings: 75% or lower than market rent) or Minimum lease payments are the payments –– the leased asset is of a specialised over the lease term that the lessee is or can nature that only the lessee can use it be required to make, exclu­ding contingent without major modification. 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.

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 pay­ments payable over the lease term to the expected date of exercise of this pur­chase option and the pay­ment required to exercise it.

Similarities and Differences IFRS and German GAAP 55 Non-financial assets

IFRS German GAAP The interest rate implicit in the lease would, • under a full-payout lease of property: under IFRS, generally be used to calculate –– only if there is a purchase option and the present value of minimum lease the lessee is beneficial owner of the payments. If not pra­ctic­able, the lessor’s related building (see above). incre­mental borrowing rate can be used. In a lease of land and building, the land and • under a partial-payout lease of building elements must be considered moveable property: separately for lease classifi­cation, unless –– the lease term is more than 90% of the the land ele­ment is not material. expected useful life of the asset –– otherwise the attribution of the Under IFRS, transactions that are not in the beneficial owner­ship depends on the legal form of a lease may in substance be or distribution of chances and risks of include a so-called “em­bed­ded” lease the recovery of the leased asset (for agreement. Where the fulfilment of an example if the lessee alone bears the arrange­ment depends on the use of a risk of a decrease in value of the asset specific asset and the arrange­ment conveys without being able to benefit from an the right to use the asset , the identified increase in value, more than 75% of the embedded lease is accounted for according gain on disposal of the leased property to IAS 17. 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 expec­ted 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).

56 Similarities and Differences IFRS and German GAAP Non-financial assets

Lease arrangements – Lessor accounting – finance leases – IAS 17

IFRS German GAAP Amounts due under finance leases are German GAAP requires the amount due recorded as a receivable. from a lessee to be recognised as a receivable at the amount of the net invest­ Gross earnings are allocated to give a ment in the lease. The receivable to be constant rate of return based on (pre-tax) recognised consists only of those rentals net investment method. that the lessee is required to pay to the lessor plus any guaranteed and unguaran­ IFRS requires the amount due from a lessee teed residual value. under a finance lease to be recognised as a receivable at the amount of the net Lease payments are to be allocated to investment in the lease (total of the principle and interest payments. future mini­mum lease payments less gross earnings allocated to future periods).

The gross earnings are allo­cated 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 amor­tised over the lease term except for manu­facturer or dealer lessors.

Lease arrangements – Lessor accounting – operating leases – IAS 17

IFRS German GAAP IFRS requires an asset leased under an German GAAP requires an asset leased operating lease to be recognised by a lessor under an opera­ting lease to be recog­­nised and depreciated/amortised over its useful by a lessor as PPE and depre­ciated over its life. Rental income is generally recognised useful life. Rental income is generally on a straight-line basis over the lease term. 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 When attributed to the lessee, finance under a finance lease with a corresponding leases are recorded as an asset with a obligation for future rentals, at an amount corresponding obligation for future rentals equal to the lower of the fair value of the (present value). The asset is depreciated asset and the present value of the future over its useful life. Rental payments are minimum lease pay­ments (MLPs) at the apportioned into principle and interest inception of the lease. The asset is depre­ payments. ciated over its useful life or the lease term if shorter. The interest rate impli­cit in the lease is nor­mally used to cal­cu­late the present value of the MLPs. The lessee’s incre­mental borrowing rate is used if the implicit rate is not prac­ticable to determine.

Similarities and Differences IFRS and German GAAP 57 Non-financial assets

Lease arrangements – Lessee accounting – operating leases – IAS 17

IFRS German GAAP Under IAS 17 the rental expense under an Rental expense is recognised on a straight- operating lease must generally be line basis over the lease term. 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 In a sale and leaseback trans­action, the leaseback transaction depends on whether seller-lessee sells an asset to the buyer- the leaseback is a finance or an operating lessor and leases the asset back. There are lease and whether the sale is at or below/ certain differences in the rules on dealing above fair value. with profit and losses arising on sale and leaseback trans­action 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 If the beneficial ownership remains by the amortised over the term of the leaseback seller-lessee, a realisation of profits from the agreement. 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.

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

IFRS German GAAP Any profit or loss is recog­ni­sed immediately Any profit or loss on sale is recognised except for off-market transactions. 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, Immediate recognition of any profit or loss, unless the loss is compensated by future unless the loss is compensated by lower rentals. In such cases, the loss is deferred future rentals. In such cases, the difference over the period over which the asset is is deferred over the period over which the expected to be used. asset is expected to be used.

58 Similarities and Differences IFRS and German GAAP Non-financial assets

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 Excess of the sale price over the fair value is of the asset sold is deferred over the period deemed to be a borrowing and must there­ for which the asset is expected to be used. fore be deferred and amor­ti­sed over the contrac­ tual­ lease term.

Lease arrangements – Leases – general – IFRS 16

IFRS German GAAP IFRS 16 introduces a single lessee According to German GAAP the attribution accounting model and requires a lessee to of rental assets depends on the beneficial recognise assets and liabilities for all leases ownership. Beneficial owner of the leased with a term of more than 12 months, unless assets is who bears the majority of the the underlying asset is of low value. chances and risks born by the leased assets. However, lease accounting follows IFRS 16 substantially carries forward the the treat­ment for tax-purposes which is lessor accounting requirements in IAS 17. treaten in certain decrees of the Federal Accor­dingly, a lessor conti­nu­es to classify Ministry of Finance. Accor­ding to these the its leases as operating leases or finance lessee is regarded as the beneficial owner leases, and to account for those two types of the leased asset (= finance lease) if: of leases differently. • 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 ex­pec­ted 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).

Similarities and Differences IFRS and German GAAP 59 Non-financial assets

IFRS German GAAP • 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 owner­ship 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 expec­ted 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).

60 Similarities and Differences IFRS and German GAAP Non-financial assets

Lease arrangements – Identifying a lease – IFRS 16

IFRS German GAAP A lease is a contract, or part of a contract, According to German GAAP the attribution that conveys the right to control the use of of rental assets depends on the beneficial an identified asset (the un­der­lying asset) for ownership. a period of time in exchange for con­si­ deration. (All leases are in the scope of See prior chapter. IFRS 16, except for certain issues in IFRS 16.3.)

1. Identified asset: An asset is typically identi­fied by being explicitly specified in a contract.

How­ever, 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 alter­native 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.

2. Control of use: To control the use of an identified asset, a customer is re­quired 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 con­tains, a lease, an entity shall account for each lease component within the con­tract 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 under­lying asset, not to sepa­rate non-lease compo­nents from lease compo­nents, and in­stead account for each lease component and any asso­ciated non-lease compo­nents as a single lease com­po­nent. A lessee shall not apply this practical expedient to em­bed­ded derivatives that meet the criteria in paragraph 4.3.3 of IFRS 9 Financial Instruments.­

Similarities and Differences IFRS and German GAAP 61 Non-financial assets

IFRS German GAAP For a contract that contains a lease compo­nent and one or more addi­tional 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 counter­party), 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 An entity shall determine the lease term as the non-can­cell­able period of a lease, the non-cancell­able 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 enforce­able 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 termi­nate 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.

62 Similarities and Differences IFRS and German GAAP Non-financial assets

IFRS German GAAP After the commencement date, a lessee reassesses the lease term upon the occur­rence of a significant event or a significant change in circum­ ­stances that is within the control of the lessee and affects whether the lessee is reasonably certain to exercise an option not previously in­clu­ded in its determination of the lease term, or not to exer­cise 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 According to German GAAP the attribution accounting model and requires a lessee to of rental assets depends on the beneficial recognise assets and liabilities for all leases. ownership. Therefore, at the commencement date, a lessee shall recognise a right-of-use asset When attributed to the lessee, finance and a lease liability. leases are recorded as an asset with a corresponding obligation for future rentals Recognition exemp­tion: A lessee may elect (present value). The asset is depreciated not to apply the requirements in IFRS 16 for: over its useful life. Rental payments are a) short-term leases apportioned into principle and interest (≤ 12 months); and payments. b) leases for which the underlying asset is of low value (approximately not more When the asset is attribute to the lessor (= than 5.000 $, however certain types of operating lease), rental expense is assets do not qualify). recognised on a straight-line basis over the lease term. IFRS 16 specifies the accoun­ting for an individual lease. However, as a practical expedient, an entity may apply this Standard to a port­folio of leases with similar characteristics if the entity reasonably expects that the effects on the financial state­ments 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 assump­tions that reflect the size and com­position of the portfolio.

Similarities and Differences IFRS and German GAAP 63 Non-financial assets

Lease arrangements – Lessee – presentation – IFRS 16

IFRS German GAAP A lessee shall either present in the See chapter “Lessee – recognition”. 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 finan­cial 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.

Lease arrangements – Lessee – measurement – IFRS 16

IFRS German GAAP Initial measurement of the right-of-use See chapter “Lessee - recognition”. 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 under­lying asset during a particular period.

64 Similarities and Differences IFRS and German GAAP Non-financial assets

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 deter­mined. 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 pay­ments), 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 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.

Subsequent measurement of the right-of-use asset: B8 After the commencement date, a lessee shall measure the right-of-use asset apply­ing 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.

Similarities and Differences IFRS and German GAAP 65 Non-financial assets

Lease arrangements – Lessee – lease modifications – IFRS 16

IFRS German GAAP A lessee shall account for a lease German GAAP does not define or include modification as a separate lease if both: specific accounting guidance for lease a) the modification in­crea­ses the scope of modifications. 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 appro­priate 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 effec­tive date of the lease modi­fi­cation 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 lia­bility by discounting the revised lease pay­ments using a revised discount rate.

For a lease modification that is not accounted for as a se­pa­rate lease, the lessee shall account for the re­mea­sure­ment 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 de­crease the scope of the lease. The lessee shall recognise in profit or loss any gain or loss relating to the partial or full termi­nation of the lease. b) making a corresponding adjustment to the right-of-use asset for all other lease modifications.

66 Similarities and Differences IFRS and German GAAP Non-financial assets

Lease arrangements – Lessor – classification – IFRS 16

IFRS German GAAP A lessor shall classify each of its leases as According to German GAAP the attribution either an oper­ating lease or a finance lease. of rental assets depends on the beneficial ownership. A lease is classified as a finance lease if it transfers substantially all the risks and See chapter “Leases – General – IFRS 16”. rewards incidental to owner­ship of an underlying asset. A lease is classified as an oper­ating lease if it does not trans­fer 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.

Indicators of situations that individually or in combination could also lead to a lease 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.

Similarities and Differences IFRS and German GAAP 67 Non-financial assets

Lease arrangements – Lessor – operating leases – IFRS 16

IFRS German GAAP A lessor shall recognise lease payments German GAAP requires an asset leased from operating leases as income on either a under an operating lease to be recog­nised straight-line basis or another systematic by a lessor as PPE and depreciated over its basis. The lessor shall apply another useful life. Rental income is gener­a­lly syste­matic basis if that basis is more recognised on a straight-line basis over the representative of the pattern in which lease term. benefit from the use of the underlying asset is diminished. A lessor shall recognise costs, in­clu­ding depreciation, in­curred in earning the lease income as an expense.

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

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

Lease arrangements – Lessor – finance leases – IFRS 16

IFRS German GAAP At the commencement date, a lessor shall German GAAP requires the amount due recognise assets held under a finance lease from a lessee to be recognised as a in its statement of fin­an­cial position and receivable at the amount of the net invest­ present them as a receivable at an amount ment in the lease. The receivable to be equal to the net investment in the lease. 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.

68 Similarities and Differences IFRS and German GAAP Non-financial assets

IFRS German GAAP Initial measurement: At the commencement date, the lease payments included in the measurement of the net investment in the lease com­prise the following pay­ments for the right to use the under­lying asset during the lease term that are not re­ceiv­ed at the commen­ce­ment date: a) fixed payments (including in-substance fixed pay­ments), 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 guaran­tees 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 fin­an­ce income over the lease term, based on a pattern re­flecting a constant periodic rate of return on the lessor’s net investment in the lease.

A lessor aims to allocate fin­an­ce 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 princi­pal and the unearned finance income.

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

Similarities and Differences IFRS and German GAAP 69 Non-financial assets

Lease arrangements – Lessor – lease modifications – IFRS 16

IFRS German GAAP Finance Lease: German GAAP does not define or include A lessor shall account for a modification to specific accounting guidance for lease a finance lease as a separate lease if both: modifications. a) the modification in­crea­ses 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 appro­priate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

For a modification to a fin­ance lease that is not accoun­ted 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 imme­dia­tely before the effec­tive date of the lease modi­ fication. b) otherwise, the lessor shall apply the require­ments of IFRS 9. Operating Lease: A lessor shall account for a modification to an operating lease as a new lease from the effective date of the modifi­ ­cation, considering any pre­paid or accrued lease pay­ments relating to the original lease as part of the lease payments for the new lease.

70 Similarities and Differences IFRS and German GAAP Non-financial assets

Lease arrangements – Sub-leases – IFRS 16

IFRS German GAAP Sub-lease: The sublease shall be classi­fied by A transaction for which an underlying asset reference to the underlying asset. is re-leased by a lessee (‘inter­mediate lessor’) to a third party, and the lease (‘head See chapter „Leases – General – IFRS 16“. 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 classi­fied 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 exam­ple, the item of pro­perty, plant or equip­ment that is the subject of the lease).

Similarities and Differences IFRS and German GAAP 71 Non-financial assets

Lease arrangements – Sale and leaseback transactions – IFRS 16

IFRS German GAAP A sale and leaseback trans­action occurs if In a sale and leaseback trans­action, the an entity (the seller-lessee) transfers an seller-lessee sells an asset to the buyer- asset to another entity (the buyer-lessor) lessor and leases the asset back. There are and leases that asset back from the certain differences in the rules on dealing buyer-lessor. with profit and losses arising on sale and leaseback transaction which are related to If the transfer of an asset by the seller- the beneficial ownership as decisive factor. lessee satisfies the requirements of IFRS 15 to be accounted for as a sale of the asset: Finance-Leaseback: a) the seller-lessee shall measure the If the beneficial ownership remains by the right-of-use asset arising from the seller-lessee, a realisation of profits from the leaseback at the proportion of the sale is not allowed. The lease object stays previous carrying amount of the asset capitalised in the seller-lessee’s financial that relates to the right of use retained statement. by the seller-lessee. Accordingly, the seller-lessee shall recognise only the For the amount received from the buyer- amount of any gain or loss that relates lessor a corresponding liability has to be to the rights transferred to the buyer- recognised and amortised over the lessor. contractual lease term. b) the buyer-lessor shall account for the purchase of the asset applying Operating-Leaseback: applicable Standards, and for the Sale at fair value: Any profit or loss on sale lease apply­ing the lessor accounting is recognised immediately. Sale lower than requirements in IFRS 16. fair value: Immediate recogni­tion of any profit or loss, unless the loss is compen­ If the fair value of the consideration for the sated by lower future rentals. In such cases, sale of an asset does not equal the fair the difference is deferred over the period value of the asset, or if the payments for the over which the asset is expected to be lease are not at market rates, an entity shall used. make the following adjustments to measure the sale proceeds at fair value: Sale higher than fair value: Excess of the • any below-market terms shall be sale price over the fair value is deemed to accounted for as a prepayment of lease be a borrow­ing and must there­fore be payments; and deferred and amor­ti­sed over the contrac­tual • any above-market terms shall be lease term. accounted for as additional financing provided by the buyer-lessor to the seller- lessee.

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 trans­fer 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.

72 Similarities and Differences IFRS and German GAAP Financial assets

H Financial assets

Definition

IFRS German GAAP Financial assets include: Financial assets include non-current • cash financial assets: • a contractual right to receive cash or • shares in affiliated enterprises another financial asset from another entity • loans to affiliated enterprises or to exchange financial instruments with • enterprises in which investments are held another entity under conditions that are • loans to enterprises in which investments potentially favourable are held • an equity instrument of another entity • securities kept as non-current assets • a contract that will or may be settled in • other loans and current financial assets: the entity’s own equity instruments and is • trade receivables a) a non-derivative for which the entity is • receivables from affiliated enterprises or may be obliged to receive a variable • receivables from enterprises in which number of the entity’s own equity investments are held instruments or • other assets (for example derivatives) b) a derivative (see “Derivatives and • shares in affiliated enterprises hedging”) that will or may be settled • other securities other than by the exchange of a fixed • cash on hand and cash deposited with amount of cash or another financial the German central bank, bank deposits asset for a fixed number of the entity’s and cheques. own equity instruments. See “Derivatives and hedging” for the accounting of derivatives.

Recognition

IFRS German GAAP IFRS requires an entity to recognise a In principle, all legal claims arising from financial asset when, and only when, the financial assets that still exist are to be entity becomes party to the contractual recognised as long as the recognition does provisions of the financial instrument. not infringe the prudence principle.

Categories

IFRS German GAAP An entity shall classify financial assets as Accounting treatment of financial assets subsequently measured at depends on whether the asset is current or • amortised cost non-current. Distinction between current • fair value through other comprehensive and non-current is determined by the income or intention to serve the busi­ness operation in • fair value through profit or loss the long term.

Similarities and Differences IFRS and German GAAP 73 Financial assets

Financial assets measured at amortised costs

IFRS German GAAP A financial asset shall be measured at In principle, all financial assets must be amortised cost if both of the following valued at amortized cost. 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.

Financial assets measured at fair value through other comprehensive income

IFRS German GAAP A financial asset shall be measured at fair Not applicable. 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 contrac­tual 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 gui­dan­ce on when cost may be an appropriate estimate of fair value. Fair value changes of equity investments are recog­nized in profit and loss unless management has elec­ted 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 contin­gent 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.

74 Similarities and Differences IFRS and German GAAP 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 Only assets which other cre­ditors can not value through profit or loss unless it is access and which are used solely for the measured at amortised cost or at fair value purpose of fulfilling debt aris­ing from through other comprehensive income in retirement obli­gations or comparable obli­ accordance. However an entity may make gations with a long-term ma­turi­ty are to be an irre­voc­able election at initial recog­nition measured at fair value through profit or loss. for particular invest­ments in equity instruments that would other­wise be measured at fair value through profit or loss to present subsequent changes in fair value in other compre­hensive income.

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

Initial measurement

IFRS German GAAP Except for trade receivables, at initial Under German GAAP the general recognition, an entity shall measure a recognition and measurement criteria for financial asset at its fair value plus, in the assets apply. The initial measurement of case of a financial asset not at fair value financial assets is at cost including through profit or loss, transaction costs that incidental acquisition expenses. are directly attributable to the acquisition of the financial asset. One exemption applies to assets which are deprived of all other creditors’ access and An entity shall measure trade receivables are used exclusively to cover pension that do not have a significant financing obligations or comparable long-term lia­ compo­nent (determined in accor­dance with bilities. They have to be mea­sured at fair IFRS 15) at their transaction price (as value. defined in IFRS 15).

Similarities and Differences IFRS and German GAAP 75 Financial assets

Subsequent measurement

IFRS German GAAP Depends on the category. After initial Current financial assets: recognition, an entity shall measure For current investments the lower of cost or a finan­cial asset at: quoted/market price applies. They must be 1. amortised cost; impaired if the fair value is less than 2. fair value through other comprehensive their carry­ing amount. An impair­ment shall income; or be reversed if the rea­sons for the write- 3. fair value through profit or loss. down no longer apply.

Amortised costs: Non-current financial assets: Interest revenue shall be calcu­lated by using Non-current assets are carried at amortised the effective interest method. This shall be cost. One exemption applies to assets calculated by applying the effective interest which are deprived of all other creditors’ rate to the gross carrying amount of a access and are used exclusively to cover financial asset except for purchased or pension obligations or comparable long- originated credit-impaired financial assets term liabilities. They have to be reported at or financial assets that are not purchased or fair value. An impairment loss must be originated credit-impaired financial assets recorded if the decrease in value is not but sub­sequent­ly have become credit- temporary; if the decrease in value is impaired financial assets. tempor­ary, impairment is optional. An impairment shall be rever­sed 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 No comparable explicit impair­ment model. expected credit loss impairment model that replaces the former incurred loss model. For non-current financial assets an The “expected credit losses” model, has the impairment loss must be recorded if the following key elements. de­crease in value is not temporary; if the decrease in value is temporary, impair­ment is optional. An impair­ment shall be reversed if the reasons for the write-down no longer apply.

76 Similarities and Differences IFRS and German GAAP Financial assets

IFRS German GAAP General model: The (lower) fair value of equity investments Under the general model, an entity will shall be deter­mined by an income app­roach recognize an im­pair­ment loss at an amount or DCF-model. The stock market price equal to the 12-month expec­ted credit loss should be included as the case may be for (stage 1). If the credit risk on the financial assessing plausibility (IDW S. 1 i.d.F. 2008). instrument has increased significantly since initial recog­nition (even without objec­tive The (lower) fair value of loans shall be evidence of impair­ment), it should recog­nize determined by the market price. An an impairment loss at an amount equal to impairment shall be reversed where the the lifetime expected credit loss (stage 2). reasons for the write-down no longer apply. Interest income is calculated using the effective interest method on the gross Trade receivables will be impaired by a carrying amount of the asset. When there is specific valuation allowance if there are objective evi­dence of impairment (for indicators that the cash inflow may be example significant financial difficulty of the doubtful. Further­more a general valuation issuer/borrower, a breach of contract; ref. allowance with regard to the general credit IFRS 9.A credit-impaired financial asset for risk is recognised for all other trade further criteria, lifetime expected credit receivables which are not individually losses are recognized and interest is impaired. 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. Scope: The guidance of IFRS 9 applies to: a) debt instruments mea­sured at amortized cost; b) debt instruments measured at fair value through other compre­hensive income; c) all issued loan commit­ments not measured at fair value through profit or loss (FVPL); d) financial guarantee con­tracts 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.

Similarities and Differences IFRS and German GAAP 77 Financial assets

IFRS German GAAP

Calculation of the impairment:­ Expected credit losses are determined using an unbia­sed 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 condi­tions 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 assess­ment.

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 expec­ted credit losses (i. e., not to apply the general model) for financial instruments that are equi­valent to “investment grade.

Purchased or originated credit impaired assets Impair­ment is determined based on full lifetime expec­ted 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 effec­tive 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.

78 Similarities and Differences IFRS and German GAAP Financial assets

IFRS German GAAP Trade and lease receivables: For trade receivables or con­tract assets which contain a significant financing com­ponent 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 recon­ciliations of opening to closing amounts and dis­clo­sure of assumptions and inputs.

Derecognition of financial assets

IFRS German GAAP In consolidated financial statements, the German GAAP adopts a risk-oriented requirements in IFRS 9 are applied at a approach to determine whether dere­ consolidated level. Hence, an entity first cognition of a financial asset is appropriate. consolidates all subsidiaries in accordance It is focused on whether substantially all with IFRS 10 and then applies those risks and rewards of an asset are paragraphs to the resulting group. permanently retained by or transferred to an entity. For receivables the credit risk is one Before evaluating whether, and to what of the substantial risks. Other financial extent, derecognition is appropriate an assets may have other risks and rewards entity deter­mines whether those para­graphs (for example a participation right or the right should be applied to a part of a financial to transfer a financial asset). asset (or a part of a group of similar finan­cial assets) or a financial asset (or a group of similar financial assets).

An entity shall derecognise a financial asset when, and only when 1. the contractual rights to the cash flows from the financial asset expire, or 2. it transfers the financial asset and the transfer qualifies for derecognition (see below).

Similarities and Differences IFRS and German GAAP 79 Financial assets

IFRS German GAAP An entity transfers a financial asset if, and only if, it either 1. transfers the contractual rights to receive the cash flows of the financial asset, or 2. 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 obli­gation to pay amounts to the eventual recipients unless it collects equi­valent 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 trans­fer contract from selling or pledging the original asset other than as securi­ty to the eventual recipients for the obli­gation to pay them cash flows. c) The entity has an obli­gation 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 even­tual recipients, and interest earned on such investments is passed to the eventual recipients.

80 Similarities and Differences IFRS and German GAAP 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 substan­tially all the risks and re­wards 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 deter­mine 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.

Similarities and Differences IFRS and German GAAP 81 Liabilities

I Liabilities

Contingent liabilities

IFRS German GAAP A contingent liability is de­fined as a Guidance for contingent liabilities pursuant possible obli­gation whose outcome will to German GAAP is similar to IFRS; be con­firmed only by the occur­rence or contingent liabilities may result from issuing non-occur­rence of one or more un­certain and transferring bills of exchange, from future events outside the entity’s control. guarantees, including bills and cheque A contin­gent liability can also be a present guarantees, from warranties and from obligation that is not recognised because it granting security for third party liabilities. is not probable that there will be an outflow of economic bene­fits, or the amount of the Due to the importance of the prudence outflow cannot be reliably measured. principle more items are recognised as Contingent lia­bilities are disclosed unless provisions rather than being only disclosed the probability of outflows is remote. as contin­gencies.

General provisions – Recognition

IFRS German GAAP A provision is recorded when three criteria Recognition criteria for pro­visions are are met: similar to IFRS. Provisions must be recog­ • that a present obligation from a past nised for uncertain liabilities, expected event exists; losses from exe­cutory contracts, deferred • that it is probable that an outflow of repair and maintenance expen­ses incurred resources will be required to settle the within the first three months from the end of obligation; and the preceding financial year, expenses for • that a reliable estimate can be made. deferred removal of earth and demo­lished buildings incurred within the following year The term “probable” is used for describing a and guarantee expenses incurred without situation in which the outcome is more likely any legal or con­trac­tual obligation. For other than not to occur. Generally, the phrase purposes than the afore­mentioned the more likely than not denotes any chance recognition of a provision is prohibited. The greater than 50%. required probability of an outflow of resources to recognise a provision is generally lower than according to IFRS.

82 Similarities and Differences IFRS and German GAAP Liabilities

General provisions – Measurement

IFRS German GAAP The amount recognised should be the best Similar, but not the same as IFRS. estimate of the expenditure required (the Provisions must be measured at the amount amount an entity would rationally pay to required to settle the obligation based on settle the obligation at the balance sheet sound business judgement in accordance date). The entity must discount the with the pru­dence principle. Provisions anticipated cash flows using a pre-tax dis­ (other than provisions for pension count rate (or rates) that re­flect(s) current obligations) with a residual term of more market assess­ments of the time value of than one year are discounted using the money and those risks spe­cific to the appropriate (based on the residual term) liability (for which the cash flow estimates seven year aver­age market rate provided by have not been adjusted) if the effect is the German Federal Bank. Long-term material. provisions for pension obligations are dis­ counted using the res­pective ten year average market rate.

Restructuring provisions

IFRS German GAAP A provision for restructuring costs is The general recognition and measurement recognised when, among other things, an rules apply. No specific guidance under entity has a present obligation. A present German GAAP. obligation exists when, among other condi­tions, the company is “de­mon­strably committed” to the restructuring. A company is usually demonstrably com­mitted when there is legal obligation or when the entity has a detailed formal plan for the restructuring.

To record a liability, the com­pany must be unable to with­draw the plan, because either it has started to imple­ment the plan or it has announced the plan’s main features to those affec­ted (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.

Similarities and Differences IFRS and German GAAP 83 Financial liabilities

J Financial liabilities

Definition

IFRS German GAAP IFRS defines a financial liability as a German GAAP does not define or contain contractual obligation: specific accounting guidance for financial • to deliver cash or a financial asset to liabilities. another entity; • to exchange financial instru­ments with Under German GAAP a financial instrument another entity under conditions that are is a contract that gives rise to receive or potentially un­favour­able; deliver cash or other financial instruments. • as a contract that will or may be settled in the entity’s own equity instrument Derivatives are also financial instruments. and is a non­derivative for which the See “Derivatives and hedging” for the entity is or may be obliged to deliver a accoun­ting of derivatives.“ 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.

Classification

IFRS German GAAP The issuer of a financial instru­ment shall Financial instruments with a contractual classify the instrument, or its component obligation to de­li­ver cash or other financial parts, on initial recognition as a financial instruments are classified as financial liability, a financial asset or an equity liabilities or equity instruments. The instrument in accordance with the sub­ following three criteria should not be fulfilled stance of the contractual arrangement and simultaneously for a financial instrument to the defini­tions of financial instru­ments. be classified as a financial liability: • subordination When there is a contractual obligation • profit-related compensation and loss (either explicit or indirectly through its terms participation up to the principal amount and conditions) on the issuer of an • long-term lending instrument to deliver either cash or another finan­cial asset to the holder; or to exchange financial assets or financial liabilities with an­other entity under condi­ tions that are potentially unfavour­able to the issuer, that instrument­ meets the defini­tion of a financial liability regardless of the manner in which the con­trac­tual obli­gation may be settled.

84 Similarities and Differences IFRS and German GAAP Financial liabilities

IFRS German GAAP To classify a financial instru­ment on initial recog­nition 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 instru­ments 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 Similar to IFRS. when the entity becomes party to the con­ trac­tual provisions of the instrument.

Categories

IFRS German GAAP Guidance under IFRS requires that financial German GAAP does not define individual liabilities be classified in one of the two categories of financial liabilities for pur­ categories: poses of recognition or measurement. • financial liabilities at fair value through profit or loss (incl. held-for-trading A distinction is made between short-term financial liabilities) and long-term liabilities for the disclosures • financial liabilities at amortised cost in the notes (for example in the ageing analysis for liabilities). 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).

Similarities and Differences IFRS and German GAAP 85 Financial 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 Not applicable. 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 pur­pose of selling or repur­chasing 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 signifi­cantly reduces a measure­ment or recognition­ 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; –– it eliminates or signifi­cantly reduces a measure­ ment­ or recognition­ 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; –– a group of financial lia­bilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or invest­ment strategy, and information about the group is provided internally on that basis to the entity’s key mana­ge­ment 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 lia­bility at fair value through profit or loss unless:

86 Similarities and Differences IFRS and German GAAP Financial liabilities

IFRS German GAAP –– the embedded deri­vative(s)­ does not signifi­cantly modify the cash flows that otherwise would be required by the contract; or –– it is clear with little or no analysis when a simi­lar hybrid (com­bined) instrument is first consi­dered that separation­ of the em­bedded deriva­ tive(s) is prohibited, such as a prepayment option em­bedded in a loan that permits the holder to pre­pay the loan for approxi­mately its amortised cost.

• all or part of the financial instrument is designated either upon initial recog­nition or subsequently as at fair value through profit or loss because –– the entity uses a credit derivative that is mea­sured 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 commit­ment) matches the re­ fer­ence entity of the cre­dit derivative (‘name matching’); and –– the seniority of the finan­cial instrument matches that of the instru­ments that can be delivered in accordance with the credit derivative.

Other liabilities

IFRS German GAAP An entity shall measure all other financial Not applicable. 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 inter­est rate are subject to specific measurement guide­lines (IFRS 9.4.2.1).

Similarities and Differences IFRS and German GAAP 87 Financial liabilities

Initial measurement

IFRS German GAAP A financial liability is recog­nised initially at Financial liabilities must initially be its fair value minus, in the case of a measured at their settlement amount. If the finan­cial liability that is not recog­nised as at settlement amount is higher than its value fair value through profit or loss, trans­action on issuance, then the financial liability may costs that are directly attri­butable to the either be measured at its settlement amount acquisition or issue of that liability. or at its value on issuance.

Trans­action costs must be recog­nized in profit or loss unless the criteria for prepaid expenses are met.

Subsequent measurement

IFRS German GAAP After initial recognition, an entity shall Financial liabilities shall continuously be measure all finan­cial liabilities at amor­tised measured at their settlement amount. cost using the effective interest method, except for financial liabilities at fair value If the settlement amount is higher than its through profit or loss. For financial liabilities value on issuance and the financial liability at fair value through profit or loss, the is initially measured at its settlement following applies: amount, the difference to its value on • Subsequent measurement at fair value. issuance may be included in prepaid • Distribution of discount/premium is expenses on the assets side of the balance implied in the fair value. sheet and shall be amortised by systematic • Changes in fair value have to be annual charges that may be allocated over recognised in the income statement. the full term of the liability. Alternatively such a difference may be recognised as an For financial liabilities desig­nated at fair expense immediately. value through profit or loss due to an accoun­ting mismatch, the management of If such a financial liability is initially that instru­ment within a group of finan­cial measured at its value on issu­ance, interest instruments eva­lu­ated on fair value basis or accrues subsequently using the effec­tive due to embedded derivative(s) (see section interest method and increa­sing the book Financial Liabilities-Categories above), value of the financial liability respec­tively. credit risk of the issuer is to be reflected in other com­pre­hensive income.

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).

88 Similarities and Differences IFRS and German GAAP Financial liabilities

Derecognition of financial liabilities

IFRS German GAAP A financial liability is dere­cog­nised when the Derecognition principles under German obligation specified­ in the contract is GAAP are similar to IFRS. discharged, cancelled or ex­pires, or when the debtor is legally released from the primary responsi­bility 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 carry­ing amount of a liability (or a portion thereof) extingu­ished or transferred and the amount paid for it should be recognised in profit or loss for the period.

Convertible debt

IFRS German GAAP For convertible instruments with a Split accounting is applied to convertible conversion feature characterised by debt where appro­priate. For the debt exchanging a fixed amount of cash for a component a liability has to be recognised fixed number of shares, IFRS requires that may either be measured at its bifurcation and split accounting between settlement amount or at its value on the subs­tantive liability and equity issuance. 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 con­version features within liability host instruments that fail the fixed-for- fixed re­quire­ment are considered to be embed­ded derivatives. Such embed­ded derivatives are bifurcated from the host debt contract and measured at fair value, with changes in fair value recognised in profit or loss.

Similarities and Differences IFRS and German GAAP 89 Equity instruments

K Equity instruments

Recognition and classification

IFRS German GAAP An equity instrument is defined as any For the classification of finan­cial contract that evidences a residual interest instruments as equity, the following three in an entity’s assets after deducting all of criteria must be fulfilled simultaneously: its liabilities. An instrument is classified • subordination as equity when it does not con­tain an • profit-related compensation and loss obligation to trans­fer economic resources participation up to the principal amount to another entity. Preference shares that • long-term lending (only applicable are not redeem­able, or that are redeemable for corporations, not for commercial solely at the option of the issuer, and partner­ships) for which distri­butions are at the issuer’s Shareholder’s equity is classified as: discretion, are classified as equity. • subscribed capital, which is the capital in respect of which the liability of the Only derivative con­tracts that result in shareholders for the liabilities of the the delivery of a fixed amount of cash, company to creditors is limited; or other financial asset for a fixed number • capital reserves, which contain, for of an entity’s own equity instru­ments, are example, the amount (premium) received classified as equity instru­ments. For this on the issuance of shares; purpose the entity’s own equity instruments • revenue reserves (including the legal do not include puttable financial reserve (for stock corporations), the instruments that are classified as equity reserves provided for under the articles of instruments. association and other revenue reserves); • retained profits/accu­mulated losses All other derivatives on the entity’s own brought forward; and equity are trea­ted as derivatives. Special • net income/net loss for the year guidance was introduced regar­ding 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.

90 Similarities and Differences IFRS and German GAAP Equity instruments

IFRS German GAAP Such instruments are classi­fied as equity For the classification of financial if all of the follow­ing criteria are met: instruments as equity, the following three • It entitles the holder to a pro rata share criteria must be fulfilled simultaneously: of the entity’s net assets in the event of • subordination the entity’s liquidation. • profit-related compensation and loss • The instrument is in the class of participation up to the principal amount instruments that is subordinate to all • long-term lending (only appli­cable other classes of instruments. for corporations, not for commercial • All financial instruments in that class have partnerships)­ identical features. • Apart from the contractual obligation Shareholder’s equity is classi­fied as: for the issuer, the instrument does not • subscribed capital, which is the capital include any contractual obligation to in respect of which the liability of the deliver cash or another financial asset. shareholders for the liabilities of the • The total expected cash flows attributable company to creditors is limited; to the instrument are based substantially • capital reserves, which con­tain, for on the profit or loss, the change in the example, the amount (premium) received recognised net assets or the change on the issuance of shares; in the fair value of the recognised and • revenue reserves (including the legal unrecognised­ net assets of the entity. reserve (for stock corporations), the • The issuer must have no other financial reserves provided for under the artic­les of instrument or contract that has: association and other revenue reserves); –– total cash flows based substantially • retained profits/accu­mu­lated losses on the profit or loss, the change in the brought forward; and recognised net assets or in the fair • net income/net loss for the year. value of the recognised/unrecognised­ net assets of the entity; and Transaction costs related to the issuance of –– the effect of substantially restricting or equity instru­ments must be recog­nised in fixing the residual return to the put­table profit or loss and cannot be deducted from instrument holders. 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 own shares are to be repurchased, they are shown as a deducted from sub­scrib­ed capital at par deduction from shareholders’ equity value. Any difference between pur­chase at cost. cost and par value is to be offset with reserves available for distribution. Incidental expenses of the acquisition are to be recog­nised in profit or loss for the period.

Similarities and Differences IFRS and German GAAP 91 Derivatives and hedging

L Derivatives and hedging

Derivatives non-hedging – Definition

IFRS German GAAP A derivative is a financial instru­ment that Same definition as under IFRS. Forward creates rights and obligations having the transactions to purchase or sell goods effect of transferring between the parties to (non-financial items, especi­ally the instrument one or more of the financial commodities) are also considered as risks inherent in an underlying primary derivatives for hedge accounting. instrument. It gives one party a contractual right to exchange financial assets or financial liabilities with another party under condi­tions that are potentially favourable, or a contractual obligation to exchange finan­cial 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.

Derivatives non-hedging – Recognition

IFRS German GAAP All derivatives are recognised on the German GAAP requires an entity to balance sheet as either financial assets recognise a deri­va­tive when and only or liabilities when the legal transaction when the criteria of a (financial) asset is concluded. See “Financial assets” or a (financial) liability is fulfilled. for recognition of financial assets and “Financial liabilities” for recognition of financial liabilities.

92 Similarities and Differences IFRS and German GAAP Derivatives and hedging

Derivatives non-hedging – Initial measurement

IFRS German GAAP Derivatives are initially measured at fair Usually at initial recognition all derivatives value on the date of initial recognition. deriving from contracts in line with current Transaction costs are recog­nised in profit market conditions have no fair value. or loss. The consideration paid or re­cei­ved for an option (option pre­mium) represents There are two exceptions: the fair value at initial recognition. On the • purchased and written options; and balance sheet the option premium is • derivatives with upfront payments. recognised as a financial asset for the buyer of the option and as a financial liability Upfront payments are recog­nised on the for the writer of the option. Contracts of balance sheet as other assets or lia­bilities. deri­va­tives which are not in line with market Those derivatives which have no fair value require upfront pay­ments. An upfront at initial recognition are not recognised on pay­ment is a single payment which is paid the balance sheet. at conclusion of the legal transaction. 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 recog­nised on the balance sheet as other assets or liabilities.

Derivatives non-hedging – Subsequent measurement

IFRS German GAAP For derivatives the subse­quent Derivatives (except options): measurement is at fair value. Changes in a • For unrealised losses of derivatives a deriva­tive’s value are recognised in profit provision is recognised. or loss as they arise, unless they satisfy the • Unrealised gains must not be recognised. criteria for hedge accounting outlined below. Options: • For the buyer of an option unrealised losses are recognised as an impair­ment 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.

Similarities and Differences IFRS and German GAAP 93 Derivatives and hedging

Hedge accounting requirements – Overview

IFRS German GAAP Hedge accounting is a technique that German GAAP defines the combination of modifies the normal basis for recognising an underlying transaction (hedged item) and gains and losses on associated hedging the hedging instrument as a “valuation unit”. 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 • the hedged item is an unrecognised firm commitment or forecast transaction, whereas the hedging instrument is already recognised.

Financial statements provide more relevant Hedge accounting is per­mitted provided information if hedge accounting is applied. that an entity meets qualifying criteria in In a hedge relationship hedge accounting is relation to: applied to the hedged item and the hedging • qualifying hedged item; instrument. • qualifying hedging instrument; • offsetting changes in value or cash flows Hedge accoun­ting is per­mitted provided form the occurrence of comparable risks; that an entity meets stringent qualifying • prospective hedge effectiveness; criteria: • intention (and ability) to hedge; and • The hedging relationship consists only of • formal documentation and designation eligible hedging instruments and eligible (similar to IFRS). 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 effectiveness­ requirements.

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 effective­ness, incl. giving a des­cription of sources of ex­pected ineffectiveness and how the hedge ratio was determined.

94 Similarities and Differences IFRS and German GAAP Derivatives and hedging

Hedge accounting requirements – Hedged item

IFRS German GAAP Hedged items can be recog­nised assets, Hedged items may be assets, liabilities, firm recognised liabilities, firm commitments, commitments or highly probable forecast forecast transactions that involve an transactions that involve an external party. external party (and that should be highly probable to qualify as hedged item), or net Derivatives qualify as hedged items investments in a foreign operation. The irrespective of whether the derivative is hedged item can be a single item or a group embedded or not. of items as well as a component of such an item or group of items. The hedged item Portfolio hedges (i. e. hedging the risk of a must be reliably measurable. group of similar items) and macro hedges (i. e. hedging the net risk of a group of Groups of items that consti­tute a net opposing items) are permitted, provided position can also be designated as that an efficient risk management system a hedged item as well as aggregated related to these hedges exists. exposures (combination of an exposure that is an eligible hedged item and a derivative). Designation of the following is admitted: As an exception to the princi­ple that only • a proportion of nominal amount of the trans­actions with an external party are hedged item; eligible hedged items, the foreign currency • a portion of a risk; and risk of an intragroup monetary item may • a portion of its term, pro­vided the qualify as a hedged item if it results in an effectiveness can be measured. exposure to foreign exchange rate gains or losses that are not fully eliminated on There is no distinction between financial consolidation. and non-financial assets or liabilities as hedged item. 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.

An entire item comprises all changes in Similar to IFRS. 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 compo­nents (including combi­nations) 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.

Similarities and Differences IFRS and German GAAP 95 Derivatives and hedging

IFRS German GAAP

Items that do not qualify as hedged item All assets, liabilities and deri­vatives (i. e. firm comprise: commitments) may qualify as hedged items, • own equity instruments provided that the risk to be hedged can be • entity method investment, such as an speci­fically identified and mea­sured. 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.

Hedge accounting requirements – Hedging instrument

IFRS German GAAP The main qualifying hedging instruments Only financial instruments can qualify as are: hedging instruments. Forward transactions • derivative financial instrument to purchase or sell goods (non-financial (incl. separate embedded derivatives items, especially commodities) are also in financial liabilities or non-financial classified as financial instruments for hedge contracts); accounting. • non-derivative financial instruments measured at fair value through P&L Embedded derivatives may only qualify (except for financial liabilities designated as hedging instruments when they are at FVTPL where changes in fair value as a separately accounted for. 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 instruments that involve a party Similar to IFRS. external to the reporting entity can be designated as hedging instruments. A written option can generally not be designated as a hedging instrument. 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.

Normally a qualifying instrument must Similar to IFRS. A financial instrument may be designated in its entirety as a hedging also be designated as a hedging instrument instrument. for a portion of time of its term

96 Similarities and Differences IFRS and German GAAP Derivatives and hedging

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 Similar to IFRS. more than one risk in two or more hedged items under certain circumstances. No specific regulations/restrictions for portfolio or macro hedges except for the In a fair value hedge of the interest rate necessity of an efficient risk management exposure of a portfolio of financial assets system related to these hedges. or financial liabilities, the portion hedged may be designated in terms of an amount of a currency rather than as indi­vidual assets (or liabilities).

Although the portfolio may, for risk management pur­poses, include assets and liabilities, the amount desig­nated 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.

Similarities and Differences IFRS and German GAAP 97 Derivatives and hedging

Hedge accounting requirements – Hedge effectiveness

IFRS German GAAP A hedge qualifies for hedge accounting Under German GAAP pros­pective and under IFRS if an entity’s designation retrospective testing of hedge effectiveness of the hedging relationship is based on is required. the economic relationship between the hedged item and the hedging instrument, There are no explicit limits for the which meets the hedge effectiveness determination whether a hedge is requirements. Hedge effectiveness is the sufficiently effective. 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.

IFRS requires that hedges are assessed for Similar to IFRS. effectiveness on an ongoing basis and that effectiveness is measured, at a minimum, Under German GAAP every economically at the time an entity prepares its annual reasonable method is accepted. 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 earn­ings. Therefore, if an entity is required to produce only annual financial statements, IFRS requires that effective­ness 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.

98 Similarities and Differences IFRS and German GAAP Derivatives and hedging

Hedge accounting requirements – Hedge relationships

IFRS German GAAP Fair value hedge: The risk of a change in the Under German GAAP there is no distinction fair value of a recognised asset or liability in the ac­coun­ting treatment between fair or an unrecognised firm commit­ment or value hedges, cash flow hedges or hedges portions thereof is hedged. of net investments in foreign operations.

Cash flow hedge: The risk of potential volatility in future cash flows is hedged.

Hedge of a net investment in a foreign operation: A hed­ging instrument is used to hedge the currency risk (trans­lation risk) of a net investment in a foreign entity.

Hedge accounting requirements – Hedge accounting – accounting treatment

IFRS German GAAP Application of hedge accoun­ting is optional Similar to IFRS. if the require­ments are fulfilled. Under German GAAP there is no distinction Fair value hedges: Hedging instruments in the accoun­ting treatment between fair are measured at fair value. Gains and value hedges, cash flow hedges or hedges losses on the hedging instrument shall be of net investments in foreign opera­tions. recognised in profit or loss (P&L) except The valuation unit/hedge is regarded as a for hed­ging instruments hedging an equity new measurement object. To the extent and instrument accoun­ted for at fair value in for the period the opposing changes of the other comprehensive income (FVOCI). fair values or cash flows of the hedged item Gains and losses of equity instruments and the hedging instrument are offsetting are not recycled to P&L; changes in the (effective part) the measurement principles fair value of the hedging instrument are of realisation, imparity and item-by-item recorded in other comprehensive income valuation are not applied. Generally, this can without recycling to P&L. The hedged item be implemented in two ways: is adjusted for changes in its fair value but • “Freeze in method”: only due to the risks being hedged. Gains The offsetting changes in the fair and losses on the hedged item attributable values/cash flows of the hedged item to the hedged risk are recog­nised in the and hedging instrument due to the risk income statement (P&L), except for those hedged is recognised neither in balance attributable to equity instru­ments sheet nor in the income statement accounted for at FVOCI, in which case (effective part). they are recog­nised in OCI.

Similarities and Differences IFRS and German GAAP 99 Derivatives and hedging

IFRS German GAAP

Cash flow hedges: Hedging instruments • “Through posting method”: are measured at fair value, with gains and The offsetting changes in the fair values/ losses on the hedging instru­ment to the cash flows of the hedged item and extent they are effective being initially the hedging instrument due to the risk defer­red in equity (OCI) and subsequently hedged will be recognised in the financial released to the income statement statement (effective part). concurrent with the earnings recognition pattern of the hedged item. Gains and For changes in the fair values/cash flows losses on financial instru­ments used to of hedged item and hedging instrument hedge forecast assets and liability due to the risk hedged that are not offset acquisitions must be included in the cost the principles of realisation, imparity and of the non-financial asset or liability – item-by-item valuation have to apply a “basis adjustment”. This is not permitted (ineffective part). for financial assets or liabilities. Hedges of net investments in foreign For changes in the fair values/cash flows operations: Similar treat­ment to cash of hedged item and hedging instrument due flow hed­ges. The hedging instru­ment is to risks not being hedged the principles of measured at fair value with gains/losses realisation, imparity and item-by-item deferred in equity, to the extent that the valuation have to apply (part/risk not being hedge is effective, together with exchange hedged). 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.

Hedge accounting requirements – Disclosure requirements

IFRS German GAAP Extensive disclosure require­ments exist Concerning valuation units/hedges German under IFRS 7. GAAP requires disclosure about: • the amount at which each of assets, An entity shall explain its risk management liabilities, firm commitments and highly strategy for each risk category of risk probable forecast transactions are exposures that it decides to hedge and included in the valuation unit/hedge; for which hedge accounting is applied. • type of hedged risks; This enables to evaluate: • type/nature of recognised valuation unit • how each risk arises. (micro-, port­folio- or macro-hedge); • how the entity manages each risk; this • amount of hedged risks; includes whether the entity hedges an • for each of the risks hed­ged: why, to item in its entirety for all risks or hedges which extent and the period for which a risk component (or com­po­nents) of an the offsetting changes in the fair values item and why. or cash flows of the hedged item and • the extent of risk exposures that the entity the hedging instrument are expected to manages. be compen­sated in the future; • method used to determine the hedge This information should in­clu­de (but is not effectiveness; and limited to) a description of: • for forecast transactions a description • the hedging instruments that are used of the trans­action and the reason why (and how they are used) to hedge risk the occurrence of the transaction will be exposures; highly probable.

100 Similarities and Differences IFRS and German GAAP Derivatives and hedging

IFRS German GAAP • how the entity determines the The disclosure requirements concern the economic relationship between notes, except if they have been disclosed in the hedged item and the hedging the management report. instrument for the purpose of assessing hedge effective­ness; and • how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are.

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 des­crip­tion 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 infor­mation to allow users of its financial statements to evaluate the terms and condi­tions of hedging instru­ments 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 break­down 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 (dis­contin­ 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.

Similarities and Differences IFRS and German GAAP 101 Derivatives and hedging

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 manage­ment strategy by using hedge accounting and designating those parti­cular hedging relation­ships; and –– an indication of how fre­quently the hedging relationships are dis­continued­ 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 ineffective­ness that are expected to affect the hedging relation­ship 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 ineffec­tive­ness.

For cash flow hedges, an entity shall disclose a des­crip­tion of any forecast trans­action 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 state­ment of financial position that includes the hedging instrument; • the change in fair value of the hedging instrument used as the basis for recognising hedge in­effec­tive­ness for the period; and • the nominal amounts (in­cluding quantities such as tons or cubic metres) of the hedging instruments.

102 Similarities and Differences IFRS and German GAAP Derivatives and hedging

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 recog­nised 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 state­ment 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 ad­just­ments 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 re­ser­ve from any hedging relationships for which hedge accounting is no longer applied. c) the following amounts se­para­tely by risk category for the types of hedges as follows: • for fair value hedges: –– hedge ineffectiveness recognised in profit or loss (or other com­pre­ hensive income for hedges of an equity instrument for which an entity has elected to present changes in fair value in other com­pre­hensive income; and –– the line item in the statement of compre­hen­sive income that includes the recognised hedge ineffectiveness.

Similarities and Differences IFRS and German GAAP 103 Derivatives and hedging

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 state­ment 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 state­ment of comprehensive income that includes the re­classification adjust­ment; and –– for hedges of net posi­tions, 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 com­ponent of equity and an analy­sis of other com­pre­hensive income in accordance with IAS 1 that, taken together: • differentiates, at a mini­mum, 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

104 Similarities and Differences IFRS and German GAAP Derivatives and hedging

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 state­ments.

Option to designate a credit exposure as measured at fair value through profit or loss.

If an entity designated a finan­cial 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 man­age the credit risk of finan­cial 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 de­sig­na­tion 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.

Similarities and Differences IFRS and German GAAP 105 Deferred taxes

M Deferred taxes

Concept of deferred taxes

IFRS German GAAP Temporary concept Temporary concept

Please note: Certain com­pa­nies (small companies, non-limited liability companies) are not obliged to apply the tem­porary 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 Temporary differences – i. e. the difference between carrying amount and tax base of between carrying amount and tax base of assets and liabilities assets and liabilities

Quasi-permanent differences (for example temporary differences within measurement of property)

IFRS German GAAP Recognition of deferred taxes due to the Recognition of deferred taxes due to the temporary concept. temporary concept.

106 Similarities and Differences IFRS and German GAAP Deferred taxes

Recognition of deferred tax assets

IFRS German GAAP A deferred tax asset shall be recognised Deferred tax assets may be recognised for all deductible temporary differences for deductible temporary differences, to the extent that it is probable that taxable tax loss carryforwards, interest carried profit will be available against which the forward and tax cre­dits. Deferred tax assets deductible temporary difference can shall be recognised in com­pliance with be utilised, unless the initial recognition the prudence principle. exception applies, see details under “initial recognition differences”. Under German GAAP a re­cog­nition option for the excess of deferred tax assets over deferred tax liabilities (expected aggregate tax bene­fit) is enacted. However, partial recognition of the expected aggregate tax benefit is prohibited. Deducti­ble temporary differences resulting from consolidation adjustments shall be recog­nised 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 Deferred taxes shall be measured with the the period when the asset is realised or tax rate that is expected to apply at the time the liability is settled, based on tax rates the temporary differences are expected to (and tax laws) that have been enacted or reverse. However, changes in tax law substantively enac­ted by the balance sheet (including tax rates) shall only be applied date. 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 Deferred taxes have to be disclosed as as non-current assets (liabilities). Additional separate balance sheet items: “Deferred statements for different components of tax assets” (sec. 266 subsec. 2 D HGB) deferred taxes must be made (ex­pec­ted and “Deferred tax liabilities” (sec. 266 realisation of deferred taxes within subsec. 3 E HGB). 12 months after the balance sheet date and beyond 12 months after the balance Presentation does not in­cor­porate the sheet date). maturity of de­ferred taxes. Disclosure on maturity is not required.

Similarities and Differences IFRS and German GAAP 107 Deferred taxes

Set off

IFRS German GAAP Setting off if the entity has a legally Deferred tax assets and liabilities may be enforceable right to set off current tax presented net. There are no specific assets against liabilities and the deferred requirements for setting off deferred tax tax assets and the deferred tax liabilities assets and deferred tax liabilities. relate to income taxes levied by the same tax authority.

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 cal­cu­lation, because these de­fer­red 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 re­quired (IAS The differences or tax loss carryforwards 12.79–12.88), for example major on which deferred taxes are based have components of tax expense (income), the to be disclosed as well as the tax rates at aggre­gate current and deferred­ tax relating which deferred taxes have been measured. to items that are charged or credited to This disclosure shall also be made for equity, an explanation of the relationship deferred taxes that have been netted; it is between tax expense (income) and not necessary for a net amount of deferred accounting profit. 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.

108 Similarities and Differences IFRS and German GAAP Deferred taxes

Tax rate reconciliation

IFRS German GAAP Explanation of the relation between tax No statutory obligation for the disclosure expenses and accounting profit (or loss) of a tax rate re­con­ciliation. 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 dis­closed.

Tax groups

IFRS German GAAP For the recognition of de­fer­red taxes on In tax groups, deferred taxes are accounted tax groups no rules exist. In practice there by the “formal approach”: deferred taxes are two different approaches. The “formal for temporary differences of the subsidiary approach” states that deferred­ taxes are company are con­sidered on the level of shown in the financial statements of the the controlling company; the subsidiary controlling company. The “stand-alone company does not recognise any deferred approach” states that deferred taxes are taxes (exception: existing of a contract for recognised on the level of the subsidiary the distribution of the tax burden). company. In case of an (expected) ter­mi­nation 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 According to German GAAP there is no temporary differen­ces resulting from initial exception for the recognition of deferred recog­nition of goodwill (only in cases of taxes on initial differences. taxable temporary differences) or of an asset or liability in a transaction that is not a business combination and at the time of the trans­action neither affects accoun­ting profit nor taxable profit (tax loss) shall not be recog­nised.

Tax non-deductible goodwill

IFRS German GAAP No recognition of deferred taxes. No recognition of deferred taxes.

Similarities and Differences IFRS and German GAAP 109 Deferred taxes

Outside basis differences

IFRS German GAAP Deferred tax liabilities for outside basis Deferred taxes for outside basis differences differences should be recognised, except shall not be recognised. to the extent that the parent, investor or venture is able to control the timing of the rever­sal of the temporary differences and it is probable that the temporary difference will not reverse in the fore­seeable future. Deferred tax assets for outside basis differences should be recog­nised 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.

Consolidation of intermediate results

IFRS German GAAP Deferred taxes arising from temporary Similar to IFRS. differences from the consolidation of inter­medi­ate 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.

Risks resulting from audits by the fiscal authorities

IFRS German GAAP No specific rules exist. How­ever effects Effects resulting from audits of the fiscal depending on audits of the fiscal authori­ties authorities have to be recognised for have to be recog­nised for de­ferred tax deferred tax purposes to the extent that pur­poses if pro­bable. they lead to temporary differences.

110 Similarities and Differences IFRS and German GAAP Share-based payments

N Share-based payments

Classification

IFRS German GAAP IFRS 2 encompasses all arrange­ments No specific guidance. The general where an entity purchases goods or recognition and measurement criteria apply. services in exchange for the issue of equity instruments (including shares or share There is no specific guidance in the options), or cash payments based on the accounting legislation. Several accounting price (or value) of the equity instruments treat­ments may be acceptable. of the entity or another group entity. Goods or services received in a share-based Share-based payment transactions are payment trans­action are recognised when classified as: they are received. Share-based payment • equity-settled share-based payment transactions include: transactions; • equity-settled share-based payment • cash-settled share-based payment transactions (entity receives goods or transactions; or services, either as consi­deration for its • share-based payment transactions with a own equity instruments or the entity has choice of settlement. no obligation to settle the transaction); • cash-settled share-based payment Allocation to the individual classes may transactions (entity acquires goods or differ for indi­vidual transactions between services by incurring a liability, but the IFRS and German GAAP. 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 arrange­ments provide either the entity or the counterparty with a choice of settlement in cash or equity.

Similarities and Differences IFRS and German GAAP 111 Share-based payments

Recognition and measurement

IFRS German GAAP Equity-settled share-based payment For equity-settled trans­actions an transactions are measured at the fair value accounting treatment similar to IFRS is of the goods or services re­cei­ved, with a recommended. Alternatively, in some cases corres­ponding increase in equity. If the entity an equity-settled transaction may not be cannot estimate reliably the fair value, recognised in the financial statements. which is deemed always to be the case for transactions with employees, the goods For cash-settled transactions an accounting or services are measured at the fair value treatment similar to IFRS is recom­mended. of the equity instruments gran­ted, ignoring Alternatively, in some cases an entity may any service or non-market vesting condi­tions recognise the intrinsic value (and not the fair or reload features. value) of the plan at the balance sheet date. Off-balance treatment of a cash settled In cash-settled share-based payment transaction is not possible, as the entity has transactions, goods or services received incurred an obligation. aremea­sured at their fair value, with a corresponding liabilityincur­red at fair value. Until the liability is settled, the fair value of the liability is remea­sured at each reporting date and at the date of final settle­ment, with any changes in fair value recognised in profit or loss.

Awards that offer the counter­party the Transactions with choice of settlement choice of settlement in equity instruments (either counter­party or entity) should be or settle­ment in cash should be bifurcated measured either as equity-settled or as and treated as a compound instrument. cash-settled, whatever is more probable. If the entity has the choice to settle in cash Before settlement the amount should or by the issue of equity instruments, the always be shown as a liability and not as entity has a present obligation (legal or an increase in equity. 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 trans­action 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.

112 Similarities and Differences IFRS and German GAAP Foreign currency translation

O Foreign currency translation

Functional currency

IFRS German GAAP Functional currency is defined as the According to Germen GAAP there is no currency of the primary economic concept of a functional currency and the environment in which an entity operates. determination thereof. Consolidated financial statements have to be prepared in IFRS provides a list of primary and Euro (sec. 2998 subsec. 1 in conjunction secondary indicators to consider when with sec. 244 HGB). determining functional currency. If the indicators are mixed and the functional currency is not obvious, management should use its judgement to deter­mine 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 trans­actions are denominated) and the currency that mainly influences labour, material and other costs of providing goods and services.

Additional evidence (secon­dary in priority) may be provi­ded 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.

Similarities and Differences IFRS and German GAAP 113 Foreign currency translation

Separate financial statements

IFRS German GAAP A foreign currency transaction is a Separate financial statements have to be transaction that is de­no­minated or requires prepared in Euro (sec. 244 HGB). settle­ment in a foreign cur­rency. A foreign currency transaction should be recorded, For initial recognition of foreign currency on initial recognition in the functional transactions no special rules are enacted. currency, by applying to the foreign Thus, general principles on recognition currency amount the spot exchange rate and valuation have to be applied. At initial between the functional currency and the recognition, for translation of the foreign foreign currency at the date of the currency trans­action the exchange rate at transaction. date of transaction has to be applied.

For subsequent measure­ment, 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 trans­lation 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 trans­lation 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 trans­action). • Non-monetary items deno­minated 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).

114 Similarities and Differences IFRS and German GAAP Foreign currency translation

IFRS German GAAP Exchange differences arising on the settlement of monetary items or on translating mone­tary items at rates different from those at which they were translated of initial recognition during the period or in pre­vious 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 re­cog­nised in other compre­hensive income (OCI), any exchange component of that gain or loss should be recog­nised in OCI. Con­vers­ely, when a gain or loss on a non-monetary item is recog­nised in profit or loss, any exchange com­po­nent of that gain or loss should be recognised in profit or loss.

Consolidated financial statements

IFRS German GAAP The results and financial position of an In consolidated financial statements, the entity whose functional currency is “modified closing rate method” is used not the currency of a hyperinfla­tion­ary for the translation of financial statements economy shall be trans­lated into a different in foreign curren­cies (sec. 308a HGB). presentation currency using the following The following translation require­ments are procedures: prescribed by German GAAP: a) assets and liabilities for each statement • Balance sheet items are translated using of financial position presented shall be the mean spot rate on the balance sheet trans­lated at the closing rate at the date date. Exception: shareholder’s equity of that statement of financial position; shall be translated at historical rates. b) income and expenses for each • Items of profit and loss shall be translated statement pre­senting profit or loss using average exchange rates. and other comprehensive income shall be trans­lated at exchange rates Translation differences arising from the at the dates of the trans­actions; and modified spot rate method shall be c) all resulting exchange differences shall recognized directly in equity in a separate be recog­nised in other comprehensive balance sheet item “equity difference due income and accumulated in a separate to currency translation” which has to be component of equity. shown after reserves. On partly or whole withdrawal of a foreign subsidiary from For practical reasons, a rate that the basis of consolidation (for example: approximates the ex­change rates at the disposal, liquidation), the translation dates of the transactions, for example an difference is released into profit or loss, average rate for the period, is often used partly or in full, respectively. to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

Similarities and Differences IFRS and German GAAP 115 Foreign currency translation

IFRS German GAAP

IFRS does not specify how to translate equity items. Mana­ge­ment 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 state­ments of the reporting entity or the individual financial state­ments 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 con­ducted 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 differen­ces shall be recog­nised in other comprehensive income and reclassified from equity to profit or loss on disposal of the net invest­ment.

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 trans­lated at the closing rate.

116 Similarities and Differences IFRS and German GAAP Foreign currency translation

IFRS German GAAP The cumulative amount of exchange differences recognised in other comprehensive income is carried forward as a separate com­ponent 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 accu­mulated exchange differences also applies to the loss of joint control or significant influence over a jointy con­trolled 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 pro­por­tio­nate share of the accu­mu­la­ted 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.

Similarities and Differences IFRS and German GAAP 117 Related parties

P Related parties

Definition of a related party

IFRS German GAAP A related party is a person or entity that is Determination of “related party related to the entity that is preparing its relationships” in German GAAP is based on financial statements. the definition according to IFRS (reference a) A person or a close member of that to IAS 24). person’s family is related to a reporting entity if that person: (i) has control or joint con­trol 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 re­por­ting 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 asso­ciate 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.

118 Similarities and Differences IFRS and German GAAP 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 manage­ment 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 German GAAP requires, as a minimum with all related parties and the nature of the requirement, the disclosure of all material relationship is disclosed, together with the transactions with related parties which are amounts involved. not at arm’s length. German GAAP offers a policy choice whether to include all material There is a requirement to dis­close the trans­actions with related parties or just amounts involved in a transaction, the those that are not at arm’s length. amount, terms and nature of the out­ Disclosures that have to be made for standing balances, any doubtful amounts these transactions include: related to those outstanding balances and • the nature of the related party balances for each major category of related relationship; parties. • the nature of the trans­action; • the value of the transaction; and The compensation of key management • any additional information necessary for personnel is disclosed in total and by an under­standing of the financial position. category of compensation. Transactions with and be­tween indirectly (Amendments of IAS 24 include a revision of and directly wholly owned com­panies the definition of related parties and the included in a set of consolidated financial exclusion of state controlled entities from state­ments are excluded from the related parties.) 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.

Similarities and Differences IFRS and German GAAP 119 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 No requirement to report EPS. 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 con­soli­dated financial state­ments and se­parate financial statements, respec­tively, the disclosures required need be presented only on the basis of the consoli­dated information.

IFRS German GAAP Basic and diluted EPS for profit or loss from continuing operations attributable to the ordi­nary equity holders of the parent entity and for profit or loss attri­butable 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 state­ment of com­pre­hensive income. An entity that reports a discontinued operation shall disclose the basis and diluted amounts per share for the dis­continued operation either in the statement of comprehensive in­come 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 opera­tions optionally in the notes).

120 Similarities and Differences IFRS and German GAAP Other issues

Discontinued operations

IFRS German GAAP In the statement of comprehensive income No specific regulations. the profit/loss after tax of the discontinued operation shall be presented separately with a further break­down in the statement of comprehensive income or in the disclosure notes.

Interim financial reporting

IFRS German GAAP IAS 34 does not man­date which entities According to the German Securities Trading should be required to publish interim Act (WpHG) interim financial state­ments and financial reports. The standard applies if an interim management reports are required entity is required (for example accor­ding to for certain issuers of shares and debt national securi­ties regulators rules) or elects securities. to publish an interim report in accordance with IFRS. Condensed financial statements and condensed manage­ment 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 state­ments are pre­pared vie the discrete-period approach, wherein the interim period is viewed as a separate and dis­tinct accounting period, rather than as part of an annual cycle. Therefore, the sprea­ding of costs that affect the full year is not appropriate.

The interim tax pro­vision is determined by applying an estimated average annual effective tax rate to interim period pretax income. To the extent practi­cable, 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, ex­change differences that Similar to IFRS. form part of an entity’s net investment in a foreign entity (subject to strict criteria of what qualifies as net invest­ment) are recog­nized initially in other com­prehensive income and are re­cycled from equi­ty to profit or loss on dis­posal of the foreign operation.

Similarities and Differences IFRS and German GAAP 121 Contacts

Contacts

WP StB CPA Prof. Dr. Rüdiger Loitz WP StB Guido Fladt Leader Capital Markets & Leader National Office Accounting Advisory Services Tel: +49 69 9585-1455 Tel: +49 211 981-2839 [email protected] [email protected]

WP StB Björn Seidel Thorsten Seidel Partner Capital Markets & Senior Manager Capital Markets & Accounting Advisory Services Accounting Advisory Services Tel: +49 40 6378-8163 Tel: +49 30 2636-4440 [email protected] [email protected]

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