Differential reporting in Germany – A historical analysis

Abstract

Based on a contingent perspective of accounting change, this paper reviews the historical development of differential reporting in Germany, by drawing on primary and secondary sources. The main objective of the paper is to shed light on the driving forces and main influential parameters that have shaped the existing differential reporting framework. This historical approach supplies interesting insights for the current discussion on differential reporting in Germany produced by the EU Regulation on the application of International Accounting Standards.

Keywords:

• ‘Contingent’ model of accounting evolution
• differential reporting
• German accounting history
• influential factors on accounting
• little GAAP
• relaxations for small and medium-sized entities

Acknowledgements

The author is thankful for help and advice from Axel Haller and Lisa Evans as well as for comments received from the participants of the School of Management Seminar Series 2002/3 of the University of Edinburgh. Thanks are also due for comments received at the 2003 Annual Congress of the European Accounting Association. Useful remarks received from two anonymous referees are also gratefully acknowledged.

Notes

1. Such differential reporting was, for example, introduced in New Zealand in 1994 and revised in 1997 (Institute of Chartered Accountants of New Zealand, 1997); in the UK in 1997 and last revised in 2005 (UK Accounting Standards Board, 2005); in Canada in 2002 (Canadian Accounting Standards Board, 2002); and proposed in Hong Kong in August 2002 (Hong Kong Society of Accountants, 2002).

2. Articles 11, 27, 46, 47 and 51 Fourth Council Directive 78/660/EEC of 25 July 1978; Article 6 Seventh Council Directive 83/349/EEC of 13 June 1983. From 2005 these relaxations will only be available for non-publicly traded entities (Article 1(20) and Article 2(3)(a) Council Directive 2003/51/EC of 18 June 2003).

3. In conceptual terms comparable to the UK public limited company.

4. Conceptually comparable to the UK private limited company.

5. There are two different forms of regular partnerships in Germany. First, the Offene Handelsgesellschaft, whose partners all have unlimited liability, and which is similar to the general partnership in the UK. Second, the Kommanditgesellschaft, which has at least one general partner with unlimited liability and one partner whose liability is limited. The Kommanditgesellschaft is similar to the limited partnership in the UK.

6. A very common legal form is, for example, the GmbH & Co. KG, which is a Kommanditgesellschaft (limited partnership) whose general (personally liable) partner is a GmbH (private limited company). Thus, by choosing this combination the liability of the general partner can be restricted to the net assets of the GmbH.

7. For further details on reporting requirements for registered cooperatives and specific industries, see, for example, Förschle and Kofahl (1999: pp. 2098–2126).

8. Research studies conducted in the UK suggest that the main non-statutory recipients of financial statements of smaller companies are bank managers, other lenders, the Inland Revenue and management (Carsberg et al., 1985: pp. 41–42; Barker & Noonan, 1996: pp. 19–20; Collis & Jarvis, 2000: pp. 56–58).

9. For a more detailed discussion on the advantages and disadvantages of differential reporting, see Walton and Harvey (1996: pp. 11–17); Canadian Institute of Chartered Accountants (2002: pp. 11–15).

10. In Germany there are two means of financial statement publication: filing with the commercial register (Handelsregister) and publication in the Federal Gazette (Bundesanzeiger). The Bundesanzeiger is the official bulletin of the Federal Ministry of Justice for official announcements.

11. This is also evidenced by empirical research in the US. Interviews with various user groups of private companies revealed that users perceived cost/benefit considerations quite differently (Abdel-khalik, 1983: p. 2).

12. For a fuller discussion of the impossibility of normative accounting standards, see, for example, Demski (1973).

13. For full titles and bibliographical references of draft legislation referred to in this section, see the Appendix.

14. The ADHGB 1861 had to be ratified and implemented by the member states of the Deutscher Bund after it was accepted by the Bundesversammlung (national assembly), since the Deutscher Bund itself did not have any legislative power (Eckardt, 1999: p. 20).

15. The Deutscher Bund was disbanded in 1866 (after the Prussian-Austrian war) and the Norddeutscher Bund, a confederation of Prussia with northern German states, was established.

16. The ADHGB was strongly influenced by the Prussian Civil Code 1794, due to the political and economic significance of Prussia, and by the French Code de Commerce, which was during the Napoleonic power enacted in several German states. In addition, Austria also played a major role in the development of the ADHGB.

17. This involved state licensing for the formation of an AG, and subsequent state supervision.

18. The legislation for AGs was, with some modifications, also adopted for the Kommanditgesellschaft auf Aktien (KGaA), which is a mixture between a stock corporation and a limited partnership, where however at least one general partner is personally liable. Beginning with the HGB 1897, KGaAs were subject to the same financial reporting requirements as AGs. As this paper is intended to focus only on major divergences, differentiations of accounting requirements between AGs und KGaAs that existed between 1870 and 1897 are not specifically dealt with.

19. GoB are accounting principles that develop through the interpretation of existing codified and non-codified rules. Due to the implementation of the 4th Directive many previously non-codified GoB are now included in law. GoB assure a dynamic evolution of the otherwise very inflexible, legalistic German accounting system. The development of new and the improvement of existing GoB does not follow any formalized process. Major sources for the development of GoB are, for example, journal articles, commentaries, pronouncements by the accounting profession, as well as court judgements on different interpretations of accounting principles (Haller, 2003: pp. 93, 99–100).

20. Only small AGs were temporarily exempted from the application of this new regulation, due to a lack of professional auditors. This exemption was, however, abandoned in 1934 (List, 1998: pp. 165–166).

21. In other words, those with a balance sheet total of not more than 3 Mio. DM or not more than 10 Mio. DM, if the corporation was family owned. Shareholders had however the right to require a full profit and loss account with disclosure of annual turnover.

22. The size criteria and thresholds have not been changed since the introduction of the PublG 1969. Minor amendments however were caused by the introduction of the Euro. When the PublG was passed in 1969 a business qualified as a large entity if it exceeded the following criteria on three consecutive years: balance sheet total > DM 125 Mio.; turnover > DM 250 Mio.; number of employees > 5,000.

23. The Draft PublG 1968 did not include any such exemptions (Art. 5 (2) Draft PublG 1968).

24. The first official draft of the 4th Directive also included major distinctions between stock corporations and private limited companies (vorschlag einer Vierten Richtlinit des Rates vom 16. November 1971). This was however abandoned in the final version to prevent any competitive disadvantage (remarks to Art. 44 and 45 Anhörung des Wirtschafts und Sozialausschusses, 1973) and to take into account that in some member states enterprises might choose the legal form of a private limited company, whilst in others the stock corporation might be a more common choice (Biener, 1979: p. 208).

25. With the BiRiLiG the legislature also revised the accounting rules of the PublG to adjust them to the amended HGB rules. The legislation did not, however, impose all the measurement principles applicable to large AGs/KGaAs/GmbHs on enterprises subject to the PublG. The legislature did not want to severely tighten accounting regulation for enterprises not subject to the 4th and 7th Directives. Correspondingly, large partnerships and sole proprietorships were also exempted from preparing notes to their individual accounts, and a directors' report.

26. This is also demonstrated by the weak German interpretation of the ‘true and fair view principle’ (Haller, 1992: p. 317; Ordelheide, 1993: pp. 84–87).

27. As the historical development of the 4th Directive reveals, the Directive's size thresholds for SMEs were a political compromise. Some member states favoured low thresholds, as, for example, Belgium, to ensure adequate information for all stakeholders (Biener, 1979: pp. 185–186), whereas others, including Germany, insisted on generous relaxations (Biener, 1979: pp. 223, 226) to prevent undue burdens on private limited companies which had previously not been subject to audit and publication requirements. Those favouring more generous relaxations succeeded and the thresholds in the final 4th Directive were considerably higher than those in the earlier drafts.

28. The reunification of Germany in 1989 did not involve a change in the accounting rules of the HGB, but resulted in West German law also attaining legal force in East Germany.

29. This was however a temporary solution which expired at the end of 2004.

30. This option expired however at the end of 2004.

31. This commission was appointed by the Federal Minister of Justice in September 2001 to develop a corporate governance code. The members of the commission were institutional investors, members of the supervisory boards of quoted companies, staff representatives, scientists, stock exchange representatives and auditors. In February 2002 the commission finalized its work and adopted the DCGK. The DCGK is a ‘Code of Best Practice’ modelled on the British Combined Code (Wolfram, 2002: pp. 45–46; Government Commission of the German Corporate Governance Code, 2004).

32. For a more detailed discussion of the new enforcement regime, see Eierle and Haller (2004a: pp. 10–11).

33. For details on the amendments introduced by the BilReG, see also Eierle and Haller (2004b).

34. In Germany not only AGs and GmbHs, but also partnerships may have issued debt securities which are traded on a regulated market.

35. For a discussion of profit distribution rules in Germany, see, for example, Ordelheide and Pfaff (1994: pp. 72–76).

36. The stakeholder view is also reflected in the German co-determination rules requiring employee participation on the supervisory boards of larger AGs, GmbHs and KGaAs (see e.g. Ordelheide & Pfaff, 1994: pp. 47–49; Huke, 2004).

37. According to the Basis for Conclusions of the BilReG, the increase of the EU size thresholds goes back to a political initiative from Germany (Draft BilReG 2004: p. 49).

38. Therefore, Germany traditionally has taken a very prudent approach to accounting (Evans & Nobes, 1996: p. 362, with further references).

39. Although tax law has always required specific accounting treatments (Haller, 2003: pp. 97–98), due to options available under the HGB and the tax act it was, until 1997, possible to prepare a set of financial statements in compliance with the HGB that could without any further adjustments also be used for tax purposes. This is no longer possible, since the tax legislation now requires specific tax treatments which conflict with the accounting principles codified in the HGB – e.g. tax law prohibits the recognition of provisions for anticipated losses in incomplete contracts; long-term liabilities and provisions need to be discounted; and impairment losses for current assets can only be recognized if they are expected to be permanent.

40. Industry appears to regard the Maßgeblichkeitsprinzip as a protection against an unrestrained tax authority, fearing changes to relevant regulation, should it be abandoned. However, as recent tax legislation reveals, the Maßgeblichkeitsprinzip cannot guarantee such protection.

41. Although the IASB intends to base its differential reporting concept on qualitative characteristics, and in particular public accountability, it nevertheless regards the economic size of an entity as one presumptive indicator of public accountability. Other indicators suggested are, for example, public listing of securities; providing essential public services; or holding assets in a fiduciary capacity for a large group of outsiders (i.e. banks, insurance companies, pension funds, etc.) (International Accounting Standards Board, 2004). The IASB does not intent to prescribe size tests, but wants to leave the determination of size criteria and thresholds to national jurisdictions (International Accounting Standards Board, 2004: p. 24).