Financial Reporting in Germany

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Currency Euro () (EUR) Financial Reporting Standard IFRS Capital and largest city Berlin 4th largest economy by nominal GDP 2nd largest exporter and 3rd largest importer

In lieu of the EC Regulation 1606/2002 which made it mandatory for all EU listed companies to adopt IFRS in their financial statements, Germany followed suit and all listed companies in Germany are required to file their consolidated financial statements in line with the IFRS.
For information purposes all companies in Germany are allowed to use IFRS however, for profit distribution, taxation purposes and financial services supervision the German Commercial Code (HGB) is required which contains the national accounting standards. In addition, for statutory filings the use of IFRS is only permitted for consolidated financial statements and not for separate financial statements. In November 2007, the German Parliament passed the German Accounting Law Modernization Act which seeks a closer alignment of national accounting standards and practices with IFRS. Nevertheless, in April 2009 through the Act to Modernize Accounting Law, Germany stuck to preferring national laws for small-medium sized companies and considered IFRS cost-intensive and highly complex. Currently, Germany is at Stage II of the adoption process.

German accounting rules are characterized by a high degree of prudence, influenced by the key users of financial statements and their importance in German business culture. The required valuation method based on a strict form of historical cost, in order for tax values to be objective and auditable. It is also used in the determination of distributable income. Indeed, tax accounting in Germany can play havoc with accounting information provided in non-consolidated accounts, making it difficult to compare accounting results with those of US or UK companies, although deferred tax accounting of late has mitigated some of the impact.
The most important characteristic of German accounting is its invention of the Kontenrahmen (GKR) - the Chart of Accounts - providing a detailed, standardised nomenclature of account codes for assets, liabilities, capital, revenue and expenses. Currently, there are two charts of accounts operative in Germany; the older GKR and the more recent Industriekontenrahmen (IKR). Both of these are voluntary but are widely used by German corporations. The main feature of these charts is the integration of cost and financial accounting within the charts themselves.

The European Commission has adopted the following wording for use in the notes to the accounts and in the audit reports of companies subject to EU Regulation In accordance with IFRSs as adopted by the EU". Consistent with the Directives, Germany has adopted the following requirements: Consolidated financial statements Listed companies Mandatory adoption of IFRSs starting 1 January 2005 Companies that have applied for listing Mandatory adoption of IFRSs starting 1 January 2007 Non-listed companies Option to choose between HGB and IFRSs starting 1 January 2003 Individual financial statements All companies must prepare financial statements in accordance with HGB. For informative purposes, they may also prepare financial statements in accordance with IFRSs. Starting 1 January 2005 large corporations may use IFRSs instead of HGB for publishing their individual financial statements in the Federal Gazette

Corporate income tax Corporations, such as stock corporations & limited liability companies that have their corporate place management in Germany (resident corporations) are subject to corporate income tax on worldwide income, unless otherwise provided in tax treaties. A nonresident corporation, whose corporate seat and place of management are located outside Germany, is subject to corporate income tax only on income derived from German subsidiaries. Income from German subsidiaries includes, business income from operations in the country through a branch, office or other permanent establishment, including a permanent representative, and income derived from the leasing.
Rates of corporate income tax Corporate income tax is imposed at a rate of 15% on taxable income, regardless of whether the income is distributed or retained & 5.5% solidarity surcharge is imposed on corporate income tax, resulting in an effective tax rate of

15.825%.

Administration The tax year is the calendar year. If a company adopts an accounting period that deviates from the calendar year, tax is assessed for the taxable income in the accounting period ending within the calendar year. The adoption of a tax year other than the calendar year requires the consent of the tax office.
Dividends Dividends received by German corporations and branches of nonresident corporations from their German and foreign subsidiaries are exempt from tax. German tax law does not impose either a minimum shareholding requirement or a minimum holding period requirement for qualification for this participation exemption.

Financial assets in IFRS Cash, contractual right to receive cash or another financial asset from another entity or to exchange financial instruments with another entity under conditions that are potentially favourable an equity instrument of another entity a contract that will or may be settled in the entitys own equity instruments and is a non derivative for which the entity is or may be obliged to receive a variable number of the entitys own equity instruments or a derivative
Guidance under IFRS requires that financial assets be classified in one of the following four categories: financial assets at fair value through profit or loss held-to-maturity investments loans and receivables available-for-sale financial assets

German GAAP does not define or include specific accounting guidance for financial assets. Under German GAAP a financial instrument is a contract by which one party receives a

Financial Assets in German GAAP

Financial asset and the other party has an obligation either via a financial liability or via an equity instrument.

Derivatives are also financial instruments, but they are off-balance sheet because they are firm commitments. A firm commitment is based on a contract. The parties of the contract have not fulfilled the obligations resulting from the contract at the time of reporting. Guidance under IFRS requires that financial assets be classified in one of the following four categories:
Financial assets at fair value through profit or loss (incl. held-fortrading financial assets) held-to-maturity investments loans and receivables available-for-sale financial assets