Anticipating the Impact of IFRS on the Management of German Manufacturing Companies: Some Observations from a British Perspective

Abstract

The introduction of International Financial Reporting Standards (IFRS) in 2005 marked a significant departure from Germany's traditional financial accounting practices. This paper questions whether this change may have consequential effects on the distinctive traditional management accounting practices in the field of Controlling. We examine the possible impact on manufacturing companies drawing upon perceptions and expectations of managers in three Bavarian companies and two management consultancy firms. We consider whether financial accounting will assume an increased importance within firms, and whether this may lead to abandonment of some traditional management accounting practices and the adoption of different techniques in internal reporting compatible with the new IFRS regime for external reporting. This prompts consideration of whether such changes would lead to financial accounting domination of management accounting in Germany analogous to that argued by Johnson and Kaplan in 1987 in their ‘Relevance Lost’ thesis. We conclude that, at this juncture in the development of their information systems, German managers face an important choice between integrating external and internal reporting in ways that might fundamentally change established Controlling practices, or of continuing to operate dual accounting systems in much the same way as in the past so that adoption of IFRS is restricted to external reporting.

Acknowledgements

We gratefully acknowledge the financial support of CIMA Research Foundation (Research Project No. 292) and the work of research assistants Steve Green (University of the West of England) and Astrid Unterrieder (University of Innsbruck). We also thank Albrecht Becker and Tobias Scheytt (University of Innsbruck) and David Dugdale (University of Bristol) for their critical contributions to the research. Finally, we thank all those German managers and consultants who cooperated in the field research for this project. All errors of commission and omission in this paper are to be attributed to the authors and not to any of the above named colleagues.

Notes

1. Member States are permitted to extend the IFRS requirement to other companies and may exempt certain listed companies (but only until 2007).

2. A translation of the German equivalent of a ‘true and fair view’. Our thanks to an anonymous referee for this.

3. These items are intended to be illustrative rather than to provide a comprehensive list of differences for the details of which readers should refer to publications such as Crampton et al. (2001) and KPMG (2003).

4. This latter issue led, for instance, to a reconciling difference of €122 million between the Income Statement of BMW's 2002 IFRS Group Financial Statements and the ‘internal’ (German commercial code) Group Income Statement.

5. The effects of this practice were famously apparent in Daimler-Benz's reconciliations of German to US rules in the 1990s (see Nobes, 1997).

6. Copies of the interview schedules can be obtained from the authors.

7. We are extremely grateful to our research assistant, Astrid Unterreieder of the University of Innsbruck, for her translation of company documents and interpretation (as well as general participation) at interviews. Without her excellent support this research would not have been possible.

8. In the verbatim quotations that follow we ask readers to remember that they are, in nearly all cases, spoken in the respondent's second language, and so exact terminology and grammatical precision should not be expected.

9. In the words of an anonymous Accounting in Europe referee.

10. In this, we suspect that our German respondents are more enthusiastic and less sceptical than their UK counterparts. For example, Rees and Chandler (2004) in their questionnaire survey found only 45% of UK financial directors considered that the adoption of international accounting standards would result in ‘transparent’ financial reporting and fewer than 40% that it would produce ‘relevant and reliable information’.