The accounting requirements under the Act are described as an alternative to International Financial Reporting Standards for small and medium-sized companies that do not participate in capital markets. In announcing the new law, the German Federal Ministry of Justice (which administers the Commercial Code (ComC) in Germany) said:
The modernised ComC accounting law is also an answer to the International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB). The IFRS are geared to suit capital market oriented enterprises; in other words, they also serve information needs of financial analysts, professional investors and other participants in the capital markets.
By far the majority of those German enterprises that are required by law to keep accounts and records do not take part in the capital market at all. For this reason, there is no justification for committing all the enterprises that are required to keep accounts and records to the cost-intensive and highly complex IFRS. Also the draft recently discussed by the IASB of a standard IFRS for Small and Medium-Sized Entities is not a good alternative for drawing up an informative annual financial statement. Practitioners in Germany have strongly criticised the IASB draft because its application – compared with ComC accounting law – would still be much too complicated and costly.
The law exempts 'sole merchants' (proprietorships) with less than €500,000 turnover and Euro 50,000 profit from any obligation to keep accounts and records. Small companies (less than 50 employees, assets of €4.8 million, and annual turnover of €4.8 million) need not have an audit and may publish only a balance sheet. Medium-sized companies (less than 250 employees, assets of €19.2 million, and annual turnover of €38.5 million) have reduced disclosure requirements and may combine balance sheet items. Among the new accounting provisions of the ComC:
- Companies will be permitted to capitalise internally generated intangible assets, while getting an immediate tax deduction for the costs.
- Financial institutions will measure financial instruments designated as 'held for trading' at fair value, with value changes recognised in a 'special reserve'. The Ministry of Justice press release states: 'This special reserve has to be built up from part of the enterprise's trading profits when times are good and can then be used to offset trading losses when times get worse. Hence this special provision has an anticyclical effect. Here the necessary steps have been taken in order to respond to the financial markets crisis.'
- Special purpose entities that are controlled must be consolidated.
The new law takes effect 1 January 2010, with early application for 2009 permitted. Click for