What differences between the accounting requirements in the HGB and IAS are highlighted in Volkswagen’s disclosure? Are the German requirements consistent with your characterizations in requirement 1?
The different accounting treatment between IAS and German Commercial Code may be explained in the following way through the various items: Volkswagen classifies development costs as intangible assets (IAS 38), meaning non-monetary ones or at least non identifiable. These costs are measured at cost and amortized on a recurrent basis (with amortization in the annual economic statement and the new value of the intangible asset in the balance sheet) according to the life of the asset (in this case being intangible, there would be also the possibility not to have amortization every year because there is not a specific life time period of the asset).
This is one of the most significant and challenging accounting issues in the automotive industry which creates differences between IAS and HGB. Whether the development costs are not attributable to any expected future economic benefits, it should be capitalized as expenses and not intangible assets. Both classifications recognized the historical cost but the German code does not allow any revaluations. Pension provisions classified according to the Projected Unit Credit Method (IAS 19).
Avoidance of classification of any provision related to deferred maintenance. Medium-long term provisions carried at net present value. The German principles recognize that some assets are deprived of all other creditor’s access and they are related only to the coverage of the pension obligations or comparable long term liabilities. The common factor is that they need however classified at fair value. Securities at fair value, also once exceeding cost, with reporting of all effects in the economic statement
Deferred taxes booked at the balance sheet liability method. For losses carried forward the deferred tax assets are recognized; in fact the difference between the carrying amount of the debt security and its tax basis is a deductible temporary difference that gives rise to a deferred tax asset. Potential unrealized losses or gains on the debt securities do not impact the income.
Derivatives are recognized on the balance sheet at fair value, while potential gains or losses linked to these financial instruments are classified as reserve in equity. The fact that the profit or losses deriving from the derivatives are not recognized in “real time” in the financials mean that there is a temporary maturity mismatch. While the potential gains and losses which are used to hedge the position (meaning to cover from the potential variation of the value of the position/asset underlying the derivative which creates a mark-to-market difference) are reported in the company’s book, and in particular, in the income statement.
IAS standard requires certain categories of financial instruments are classified at fair value; for the German accounting classification all financial institutions need to measured their assets held for trading at fair value. Treasury shares offset against capital and reserves: they refer to all shares a company may buy back its own non-redeemable shares ad hold them in Treasury, as foreseen by the regulation. An important thing to underline is that the nominal value of these treasury shares needs to be kept at least at 10% higher than the value of issued share capital. That’s why they are offset against capital (in case their nominal value goes down) or reserves being them included/classified in the company balance sheet under shareholder’s equity.
According to German code principles as well as to IAS standards, treasury shares should be deducted from the shareholder’s equity but these shares cannot be shown as an asset and they do not have any impact on the income statement. Moreover, according to German principles, reserves need to be deducted by the cost of the treasury shares purchased.
Receivables and payables denominated at foreign currencies (IAS 39) are not accounted at the imparity principle, but at the middle rate on the balance sheet date. Income statements are translated at the average exchange rates for the year. These translation differences are recognized directly in shareholders’ equity without effect on financial statement. Another point of consideration regards the fact that the functional currency differs from the national currency. Minority interest of shareholders are separated form capital and reserves.
Moreover, as stated above through the various items, IAS principles permit the revaluation of specific assets (both intangible and those related to investments), while the German accounting principles do not allow the revaluations (historical cost is the main accounting convention). Although both the accounting principles foresee the classification at fair value, for German ones all held for trading assets need to be measured at fair value.
Although German principles do not recognize any revaluation, exemption is represented by those assets which are deprived of all other creditor’s access and they are related only to the coverage of the pension obligations or comparable long term liabilities and they have been reported at fair value. Another point is the fact that according to IAS principles, all changes in accounting policies are accounted for retrospectively while for HGB accounts for prospectively.
The German requirements are not fully consistent with the characterizations in requirement enlisted in Volkswagen considering this Group is international and need to be compliant also with all the other local regulations, thus meaning you may create complexity to the financial reporting by adopting both the accounting principles.
