Differences and similarities between IFRS and German GAAP

IFRS

German GAAP

Components of Financial Statements

A complete set of financial statements comprises:

·         Statement of financial position (balance sheet)

·         Statement of profit or loss and other comprehensive income

·         Statement of changes in equity

·         Statement of cash flows, and

·         Notes supplemented by segment reporting for public entities

Similar to IFRS for consolidated financial statements as well as for publicly traded companies, but a management report is required.

Segment reporting is optional for consolidated financial statements of non-public entities.

A statement of financial position, statement of profit or loss, notes and management report are required for separate financial statements.

Other comprehensive income does not exist in the HGB.

Statement of financial position

IFRS requires, as a minimum, the presentation of certain items on the face of the balance sheet, but a particular format is not required.

A breakdown by maturity (current/non-current) is required for assets and liabilities except if presentation based on liquidity provides reliable and more relevant information.

Current items are expected to be realised, or settled in the normal operating cycle or within 12 months after end of reporting period and include liabilities for which the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting period.

Deferred tax assets and liabilities are presented as non-current items.

Offsetting of assets and liabilities is allowed only under restricted conditions (enforceable right and intention).

Entities with specific legal forms are required to use a particular balance sheet format. Micro and small entities are allowed to show a higher level of aggregation.

Items on the face of the balance sheet are presented in increasing order of liquidity.

Breakdown of assets into fixed and current assets is mandatory, but no such rule applies to liabilities. Fixed assets are those assets which are intended to serve business operations on a permanent basis, while current assets include all other assets.

Deferred tax assets and liabilities are presented as separate line items in the balance sheet.

Offsetting of assets and liabilities is allowed where an entity has a legally enforceable right to offset.

Statement of profit or loss

An entity can choose to present income and expenses in either:

·         a single statement of comprehensive income, or

·         a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).

IFRS does not prescribe a standard format for the statement of profit or loss and other comprehensive income, only certain minimum items are required, and all material income or expense should be presented in the statement of profit or loss or the notes.

IAS 1 includes guidance on required items for the statement of (other) comprehensive income.

IFRS allows expenses to be classified based on either their nature or their function, whichever provides reliable and more relevant information.

An entity classifying expenses by function shall disclose additional information on the nature of expenses including depreciation and amortisation and employee benefits expense.

Under German GAAP there is no “statement of comprehensive income”

A detailed structure of the statement of profit or loss for each presentation method is set out in the HGB and is mandatory.

Size-dependent simplifications apply.

Similar to IFRS. Entities can present the statement of profit or loss using the total cost method (expenses by nature) or the cost of sales method (expenses by function).

Statement of changes in equity

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

This statement will present:

·         total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests (NCI);

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

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

·         for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from

a)       profit or loss,

b)       other comprehensive income, and

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

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

to prepare consolidated financial statements.

Generally, the same approach applies to the statement of changes in equity under German GAAP.

German Accounting Standard 22 (GAS 22) requires the group statement of changes in equity to include the changes in specific components of group equity.

Adjustments resulting from retrospective application or retrospective restatement are to be made in the current year with disclosure in the notes.

Statement of cash flows

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

The statement of cash flows may be prepared using the direct or the indirect method.

Under HGB a statement of cash flows is only required for consolidated financial statements as well as for publicly traded companies which do not have an obligation

to prepare consolidated financial statements.

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