«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
IAS 12 – Income taxes establishes that deferred tax liabilities should be recognized for all taxable temporary differences. There are three exceptions to the requirement to recognise a deferred tax liability: a) liabilities arising from initial recognition of goodwill for which amortisation is not deductible for tax purposes, b) liabilities arising from the initial recognition of an asset/liability other than in a business combination which, at the time of the transaction, does not affect either the accounting or the taxable profit, and c) liabilities arising from undistributed profits from investments where the entity is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future. A deferred tax asset should be recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability other than in a business combination which, at the time of the transaction, does not affect the accounting or the taxable profit.
The impact of the adoption of IAS 12 on equity and net income depends on two factors:
first, on the net effect that IAS 12 had on certain accounting figures (e.g. depreciation, inventories) and second on the differences between the accounting for deferred taxes under Italian GAAP and IFRS. Table 9 shows that the adoption of IAS 12 has led to an average increase in equity 2.86% and an average decrease in net income of 3.99%. The application of the Wilcoxon signed rank test and the one-sample t test however does not confirm this difference as significant.
B) Germany Employee Benefits DRS 19 – Pensionsverpflichtungen und gleichartige Verpflichtungen im Konzernabschluss and the requirements of the HGB, Article 28 EGHGB (Introductory Act to the German Commercial Code) and § 6a EStG deal with accrued pensions in Germany. Article 28 EHGB establishes significant exceptions from the need to accrue for pensions, as pensions based on direct promises granted before 1987 and pensions based on indirect promises (mostly based on companies’ welfare funds) do not have to be recognized in the balance sheet, but the amounts not accrued must be disclosed in the notes. This results in a reported pension obligation that is significantly lower than the economic pension obligation. Moreover, according to German commentaries, interest rates used in the calculation of the pension liability may range between 3 and 6% (§ 6a EStG requires a discount rate of 6%, while HGB permits also lower ones) while interest rates used for IFRS-based calculations must consider current market rates of interest for long-term obligations.
The adoption of IAS 19 in Germany has led to an average decrease in equity of 7.43% and an average increase in net income of 2.85%. The reduction in equity is consistent with the increase of the pension accruals under IFRS, as pension obligations not accounted for under German GAAP have to be recognized under IFRS, as well as lower discount factors are used for the calculation of the pension liability under IFRS. The application of the Wilcoxon signed rank test and the one-sample t test confirms the significance of the changes for shareholders equity for both the median and the mean at 1%, but not for net income (Table 11). 85.71% of the companies present a negative partial index of proportionality, which gives further evidence to the significance of the change for equity (Table 12).
Intangible assets DRS 12 – Immaterielle Vermögenswerte des Anlagevermögens and the requirements of the HGB establish that intangible fixed assets can be recognized only if purchased, i.e. they cannot be capitalized if created by the use of internal resources. Therefore, the capitalization of basic and applied research costs, development costs and advertising costs under German GAAP is forbidden. Start-up costs can be capitalized and subsequently amortized under certain conditions. On the other hand, intangible current assets must be recognized even if they are not purchased from a third party.
The adoption of IAS 38 in Germany has been considered only for equity, and not for net income, since this standard affected the bottom line figure of only 8 companies (10 have been selected for analysis). Table 11 shows that the implementation of IAS 38 has led to an average increase in equity of 4.38%. This difference between domestic GAAP and IFRS is confirmed to be statistically significant with respect to the median at 5% by the Wilcoxon signed rank test. Lower evidence at 10% is provided by the one-sample t test for the mean.
The increase in equity may be due to the capitalization of internally developed intangibles and development cost which could not be capitalized under German GAAP, but can or must be capitalized under IFRS.
Inventories According to the German accounting regulation, inventories must be stated at the lower of cost or market value. Acquisition costs include the purchase price (after price reductions) plus incidental cost and expenses incurred to render the asset ready for use. Manufacturing costs comprise expenses that are incurred through the consumption of goods and services in order to manufacture, enlarge or improve an asset significantly beyond its original value. § 255 HGB allows companies to value inventory at various combinations of direct and full cost, while IFRS require full cost accounting for inventories. For interchangeable goods, historical cost can be determined by applying the FIFO, LIFO or average cost method. Interest expenses may be included in manufacturing costs only under exceptional conditions. German companies have a wide range of options for inventory valuation and many of them comply with tax requirements. As an example, the German tax regulation allows companies to determine the net realizable value by considering a mark-down to the sales price for an adequate entrepreneur’s profit or the recognition of inventory reserves to anticipate future price reductions.
According to IAS 2 – Inventories, inventories are required to be stated at the lower of cost and net realisable value. The cost should include costs of purchase (including taxes, transport, and handling) net of trade discounts received, costs of conversion (including fixed and variable manufacturing overheads) and costs incurred in bringing the inventories to their present location and condition. IAS 23 – Borrowing costs identifies some limited circumstances where borrowing costs (interests) can be included in cost of inventories that meet the definition of a qualifying asset. For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. The LIFO formula is not allowed.
As for IAS 38, also the adoption of IAS 2 has been considered for one accounting figure only, in this case net income. The results of the analysis show that the implementation of this standard in Germany has led to an average decrease in net income of 9.01% (Table 11). This is mainly due to the disapplication of all the different recognition options which are allowed under German GAAP (tax law), but not under IFRS and the valuation of inventories at full cost rather than at direct cost. However, the Wilcoxon signed rank test and the one-sample t test do not confirm the significance of this decrease.
Income taxes DRS 10 – Latente Steuern im Konzernabschluss, the dispositions of the German Commercial Code (HGB) and the EStG establish that deferred taxes must be recognized if, as a result of different recognition criteria between financial reporting and tax reporting, the value of assets and liabilities in the Handelsbilanz (commercial accounts) and Steuerbilanz (tax accounts) vary. These timing differences must be subject to tax imposition and it must be probable that they will reverse in future years. As a special feature of German accounting regulations, certain qualifying cash receipt and expenditures must be recognized as deferral items and separately shown on the balance sheet. These captions are mere deferral positions and are not to be qualified as assets or liabilities.
The adoption of IAS 12 – Income taxes in Germany has led to an average increase in both equity and net income. Precisely, equity has increased on average by 4.17%, while net income has increased by 1.29% (Table 11). Table 12 shows that most of companies (61.54% and 69.23% respectively for equity and net income) are classified in a range showing a positive impact on both equity and net income, As for Italy, the impact of such accounting standard on equity and net income depends on two factors: the net effect that IAS 12 has on certain accounting figures (e.g. depreciation, inventories), and the differences between the accounting for deferred taxes under German GAAP and IFRS. The application of the Wilcoxon signed rank test and the one-sample t test provide no evidence that there is a significant difference in equity and net income between German GAAP and IFRS with respect to income tax accounting.
Provisions, contingent liabilities and contingent assets In accordance with the German accounting regulation, provisions are recognized for uncertain liabilities and anticipated losses from uncompleted transactions. Expense provisions are also permitted. The general rule is that these provisions are shown at the amounts required in accordance with prudent business judgement, which contrasts with the principle of true and fair view of IFRS. Therefore, while provisions are measured for HGB purposes on the basis of prudent management judgment, for IFRS purposes they are measured at their most probable amount. While lump-sum allowances taken on accounts receivable to cover general concerns over credit risks are widely diffused in Germany, no such thing is allowed under IFRS.
Indeed, whereas provisions are recognized under IFRS only to the extent to which liabilities to third parties exist, the HGB also allows, and in some cases requires, provisions without existing obligations to third parties (e.g. provisions for repair and maintenance not undertaken in the current year and expected to be made up within the first three month of the following year). The adoption of IAS 37 in Germany has led to an average increase of 2.38% in equity and to an average decrease of 1.37% in net income (Table 11). Table 12 confirm this result by showing the highest percentage of companies classified with a partial index between 0 and 5% for both equity (45.45%) and net income (33.33%). The increase in equity is due to the fact that many provisions recorded under German GAAP are not based on an existing legal or constructive obligation, which result in a decrease of provisions. Furthermore, items which are previously reported under provisions now have to be reported under liabilities. The decrease in net income can be due to the increase of amortization charges, which result from the application of the actuarial method of valuation. Nevertheless, the Wilcoxon signed rank test and the one-sample t test provide no evidence that the differences with regard to net income are significant. On the other hand, the differences between equity under German GAAP and that under IFRS are significant for both the median and the mean at 5%.
Financial instruments In accordance with German GAAP, financial assets are classified under long-term assets if they are held for a sufficiently long time and not for speculative purposes. Those classified under current assets are financial assets whose purpose is to invest non-utilized cash.
Furthermore, the HGB requires all financial assets to be recorded at their cost. Unrealized gains at the balance sheet date resulting from an increase in the market value of the asset cannot be recorded, while losses due to drops in the market value of the asset must be charged against income. A subsequent revaluation of the asset can be made only up to the original cost. Financial liabilities on the other hand have to be recorded at their redemption value.
Therefore, loans and receivable must be recognized at their net realizable value, held-tomaturity investment and financial assets held for trading and available-for-sale financial assets at the lower of cost or market. Derivatives are not recognized.
IAS 39 – Financial instruments: recognition and measurement requires the recognition of a financial asset or a financial liability when, and only when, the entity becomes a party to the contractual provisions of the instrument, subject to the following provisions in respect of