UK - IAS Plus · PDF fileSTART-UP COSTS 35 4. TANGIBLE FIXED ASSETS 37 ... governed by detailed legal regulations. The UK has a long history of wide share ownership, with not only

EUROPEANCOMPARISON:UK&GERMANYThe main differences between UK and German accounting practice

by Adrian Crampton, Sasha Dorofeyev, Susanne Kolb and Wolfram Meyer-Hollatz

COVER 25/1/01 12:45 pm Page 1

Contents

Page

ABBREVIATIONS 5

INTRODUCTION 8

SCOPE OF BOOKLET 9

STANDARD-SETTING IN THE UK 10

STANDARD-SETTING IN GERMANY 13

COMPARISON OF FINANCIAL STATEMENT FORMAT 18

MAJOR DIFFERENCES IN ACCOUNTING POLICIES 27

1. CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES 27

2. GOODWILL 29

� TREATMENT 29

� NEGATIVE GOODWILL 31

� IMPAIRMENT REVIEWS 32

3. OTHER INTANGIBLE ASSETS 34

� AMORTISATION 34


� RESEARCH AND DEVELOPMENT 35

� START-UP COSTS 35

4. TANGIBLE FIXED ASSETS 37

� INITIAL MEASUREMENT 37

� REVALUATION 37

CONTENTS 1

UK/Germany comparison 25/1/01 9:56 am Page 1

Page

� CAPITALISATION OF BORROWING COSTS 40

� DEPRECIATION 40


5. ACCOUNTING FOR INVESTMENTS 4

� INVESTMENT PROPERTIES 45

� ACCOUNTING FOR ASSOCIATED UNDERTAKINGS 46

� JOINT VENTURES 50

6. STOCKS/INVENTORIES AND LONG-TERM CONTRACTS 52

� STOCK VALUATION 52

� LONG-TERM CONTRACTS 54

7. DEBTORS: IMPUTED INTEREST 56

8. DEBT AND CAPITAL INSTRUMENTS 57

� CAPITAL INSTRUMENTS 57

� PROFIT-PARTICIPATION RIGHTS 57

� NON-EQUITY SHARES IN SUBSIDIARIES 58

� DISCOUNTS AND PREMIUMS ON ISSUE OF DEBT 59

� DEBT ISSUE COSTS 60

9. EMPLOYEE BENEFITS 61

� PENSION COSTS 61

� PENSIONS 61

� POST RETIREMENT BENEFITS OTHER THAN PENSIONS 66

� ACCOUNTING FOR SHARE OPTIONS 66

10. ACCOUNTING FOR INCOME TAXES 67

11. OTHER PROVISIONS 71

� GENERAL REQUIREMENTS 71

� RESTRUCTURING COSTS 72

� SPECIAL ACCOUNT WITH CHARACTERISTICS OF RESERVE 73

12. SHARE CAPITAL AND RESERVES 75

� CAPITAL RESERVES AND LEGAL RESERVES 76

� REVALUATION RESERVE 77

� PURCHASE OF OWN SHARES 77

� REVENUE RESERVES AND REVENUE RECOGNITION 78

2 CONTENTS


Page

13. DIVIDENDS AND FINANCE COSTS OF SHARES 79

� FINANCE CHARGE IN RESPECT OF NON-EQUITY SHARES 80

� DIVIDENDS RECEIVABLE FROM EQUITY INVESTMENTS 81

14. EXTRAORDINARY AND EXCEPTIONAL ITEMS 82

� EXTRAORDINARY ITEMS 82

� EXCEPTIONAL ITEMS 83

15. DISCONTINUED OPERATIONS 84

16. CHANGES IN ACCOUNTING POLICIES/PRINCIPLES 86

17. EARNINGS PER SHARE 87

18. FOREIGN CURRENCY TRANSLATION 88

� IN INDIVIDUAL COMPANY’S FINANCIAL STATEMENTS 88

� IN CONSOLIDATED FINANCIAL STATEMENTS 89

19. LEASES 92

� FULL AMORTISATION CONTRACTS 93

� PARTIAL AMORTISATION CONTRACTS 95

� SALE AND LEASEBACK 98

20. BUSINESS COMBINATIONS 99

� MERGER (POOLING-OF-INTERESTS) ACCOUNTING 99

� ACQUISITION (PURCHASE) ACCOUNTING 101

21. CONSOLIDATION 106

APPENDICES 110

APPENDIX I 111

� CONSOLIDATED BALANCE SHEET – BRITISH HOLDINGS PLC 111

� BALANCE SHEET – GERMAN COMPANY 112

APPENDIX II 115

� CONSOLIDATED PROFIT AND LOSS ACCOUNT – BRITISH HOLDINGS PLC 115

� PROFIT AND LOSS ACCOUNT – GERMAN COMPANY 116

Format 1 – Expenses classified by their nature (Gesamtkostenverfahren) 116

Format 2 – Expenses classified by function (Umsatzkostenverfahren) 118

CONTENTS 3


Page

APPENDIX III 119

� CONSOLIDATED CASH FLOW STATEMENT – BRITISH HOLDINGS PLC 119

� RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT – BRITISH HOLDINGS PLC 120

� CASH FLOW STATEMENT – GERMAN COMPANY (INDIRECT METHOD) 121

LIAISON RESOURCES 122

OFFICES IN THE UNITED KINGDOM, CHANNEL ISLANDS AND THE ISLE OF MAN 123

OFFICES IN GERMANY 126

INTERNATIONAL OFFICES 128

4 CONTENTS


Abbreviations

UNITED KINGDOM

ASB Accounting Standards Board

ASC Accounting Standards Committee

1985 CA Sch 4 Schedule 4 of the 1985 Companies Act

FRED Financial Reporting Exposure Draft issued by the ASB

FRS Financial Reporting Standard issued by the ASB

SOP Statement of Principles for Financial Reporting

ICAEW Institute of Chartered Accountants in England and Wales

SORP Statement of Recommended Practice

SSAP Statement of Standard Accounting Practice issued by the UK accountancy bodies

STRGL Statement of total recognised gains and losses.

UITF Urgent Issues Task Force

INTERNATIONAL

G 4 + 1 Representatives of national standard setting bodies fromAustralia, Canada, New Zealand, United Kingdom and theUnited States of America together with representatives of theIASC

IAS International Accounting Standards

IASC International Accounting Standards Committee

ABBREVIATIONS 5


ISA International Standards on Auditing

IFAC International Federation of Accountants

US GAAP US Generally Accepted Accounting Principles

GERMANY

AG Aktiengesellschaft (Stock Corporation)

AktG Aktiengesetz (Stock Corporation Law)

BGB Bürgerliches Gesetzbuch (Civil Law)

DRSC Deutsches Rechnungslegungs Standards Committee (GermanAccounting Standards Committee or GASC)

DRS Deutscher Rechnungslegungs Standard (German AccountingStandard)

DVFA Deutsche Vereinigung für Finanzanalyse und Anlageberatunge.V. (German Association of Financial Analysis andInvestment Consulting)

EStG Einkommensteuergesetz (Income Tax Law)

EStR Einkommensteuerrichtlinien (Directives to Income Tax Law)

GmbH Gesellschaft mit beschränkter Haftung (Limited LiabilityCompany)

GmbHG GmbH-Gesetz (Limited Liability Companies Law)

GmbH & Co KG Partnership with a limited liability company as general partner

GoB Grundsätze ordnungsmäßiger Buchführung (GenerallyAccepted Accounting Prinicples)

HFA Hauptfachausschuß des IDW (Main Technical Committee ofthe IDW)

HGB Handelsgesetzbuch (Commercial Code)

EGHGB Einführungsgesetz zum Handelsgesetzbuch (Introductory Lawto the Commercial Code)

IDW Institut der Wirtschaftsprüfer (Institute of ProfessionallyQualified Auditors)

KGaA Kommanditgesellschaft auf Aktien (Partnership Limited byShares)

6 ABBREVIATIONS


KonTraG Gesetz zur Kontrolle und Transparenz imUnternehmensbereich (Law on Control and Transparencywithin Enterprises)

PublG Publizitätsgesetz (Publicity Law)

SABI Sonderausschuss Bilanzrichtlinien-Gesetz des IDW (SpecialCommittee of the IDW for the Accounting Directives Law)

ABBREVIATIONS 7


Introduction

Due to European Union harmonisation, many believe that financial statementsprepared in the UK are similar to those prepared in Germany. Those familiarwith practice in both countries know this is not the case. Significant differencesremain particularly in the detailed methods of computing profits.

These differences are partly attributable to the differing business traditionswithin the two countries and the different historical development of the legalsystems. The heavily codified law in Germany with its comprehensive legalprovisions contrasts sharply with the common law and case law prevalent in theUnited Kingdom. As a result accounting in Germany has been basicallygoverned by detailed legal regulations.

The UK has a long history of wide share ownership, with not onlymultinationals but also medium-sized domestic companies obtaining listings onthe London market. The requirements of shareholders and the desire ofcompanies to demonstrate continuously upward profit trends have, as a result,influenced significantly, the development of UK accounting practice.

In the past German industry was dominated by the “Mittelstand” – privatecompanies (many of which are effectively family businesses), whose capital hastraditionally been provided by the banking sector. Consequently, the majordevelopments in German accounting have been driven by the needs of thecreditors (the so called “Gläubigerschutzprinzip”) rather than those of theshareholders. Indeed, it is possible to argue that whilst profitability (the profitand loss account) is most important to the general user of UK financialstatements, financial security (the balance sheet) has traditionally been ofgreatest significance to the German user. There is, however, a clear trend inGermany towards wider share ownership and the attractiveness of the legal formof public company is coming to bear.

8 INTRODUCTION


UK accounting practices have developed separately from tax law and recon-ciliations between tax accounts and statutory accounts are often complex,whereas German accounting has been significantly affected by tax rules. Theimportant German principles of “Massgeblichkeit” (§ 5 (1) 2 EStG) and“umgekehrte Massgeblichkeit”, which have no precise UK equivalents, result inmany tax incentives being claimable only if the same treatment is adopted in thecommercial (statutory) financial statements. The effect of this is that differencesin Germany between tax and financial accounts are generally minimisedalthough, as a result of recent legislation, both commercial and taxation, there isnow a distinctive trend away from these principles.

In Germany, profit distributions are assessed and taxed on the basis of thecompanies’ individual accounts. In the past, individual accounts were, hence,the focus of interest whereas consolidated financial statements were traditionallyof minor importance. As a result of increased cross-border capital flows and theorientation of many enterprises towards the requirements of internationalcapital markets, consolidated financial statements are gradually becoming thefocus of public interest.

The German legislation supports this development by allowing enterpriseswhose securities are publicly traded to prepare their consolidated financialstatements according to International Accounting Standards (IAS) or USGenerally Accepted Accounting Principles (US GAAP) rather than according toGerman Generally Accepted Accounting Principles (§ 292a of the CommercialCode (HGB)). This provision came into existence in 1998 and it is envisaged thatit will be applicable until the year 2004. At the time this book was printed, it wasnot clear whether consolidated financial statements which are preparedaccording to UK GAAP also come under this provision.

SCOPE OF BOOKLET

This booklet is intended to assist companies which trade in both the UK andGermany to obtain a general understanding of the differences between UK andGerman GAAP. The differences outlined are a high level overview only.

The differences between UK and German GAAP discussed in this booklet are asummary of those most likely to arise for companies trading in non-specialisedindustries. It is not possible to identify all differences that could exist as a resultof particular circumstances. Consequently, where differences at a detailed levelare important, for example in complex areas such as leasing and pensionaccounting, the reader is advised to consult his financial advisor at one of theoffices listed in the back of this booklet.

INTRODUCTION 9


The analysis does not attempt to cover differing accounting practice inspecialised industries such as banking, insurance, oil and gas or utilities.

Differences in disclosure requirements in both countries are not the primaryfocus of this booklet. Discussion of disclosure requirements included below islimited to assisting the reader in understanding the primary differences inaccounting policies only. Significant differences do, however, exist in requiredfinancial statement disclosure. Furthermore, companies which are listed on astock exchange in the UK or in Germany must comply with disclosure rulespublished by these institutions. Such rules may cause additional financialreporting differences not discussed in this publication.

This booklet reflects accounting practices followed and standards that wereissued prior to 30 November 2000.

STANDARD-SETTING IN THE UK

Standard-setting outside company law began in 1970, with the establishment ofthe Accounting Standards Steering Committee by the Institute of CharteredAccountants in England and Wales (ICAEW). In 1976, this committee wasreconstituted as a joint committee of the six accountancy bodies who comprisethe Consultative Committee of Accountancy Bodies, and was known as theAccounting Standards Committee (ASC).

By 31 July 1990, the ASC had still in issue 22 Statements of StandardAccounting Practice (SSAPs), two Statements of Recommended Practices(SORPs), and numerous exposure drafts of proposed SSAPs.

SSAPs generally deal with broad principles on areas of accounting that areapplicable to almost all UK companies. There remain significant issues forwhich no statements have been produced and issues, although covered bySSAPs, where a variety of treatments are acceptable. The existence of suchvariety results from two features of SSAPs:

� SSAPs may recognise more than one basis of accounting (e.g. revaluation offixed assets); and

� SSAPs may specify acceptable practice, however the emphasis on broadprinciple permits a number of different interpretations which lead toalternative treatments.

The ASC was very slow to respond to changes in the financial reportingenvironment, because it needed to secure the agreement of six accounting

10 INTRODUCTION


institutes and because it lacked necessary resources. Many observers also feltthat the ASC was too willing to compromise. These factors coupled withincreasing complexity of accounting issues and a growing demand for moresophisticated financial reporting led to implementation of a new standard-setting and regulatory framework.

The new framework is as follows:

INTRODUCTION 11

Financial Reporting Council

� guides the ASB;

� nominates committee members;

� provides funding.

Financial Reporting Review Panel

� investigates when it appearsthat requirements of theCompanies Act, principally therequirement that financialstatements show a true andfair view, have been breached.

Accounting Standards Board(ASB)

� develops, issues andwithdraws accountingstandards.

Urgent Issues Task Force (UITF)

� assists the ASB in areas wherean accounting standard orCompanies Act provisionexists, but whereunsatisfactory or conflictinginterpretations have developedor seem likely to develop.

In August 1990, the Accounting Standards Board (ASB) replaced the ASC, withstatutory authority to issue accounting standards without the need to seekapproval from the six accountancy bodies that make up the ConsultativeCommittee of Accountancy Bodies. The ASB has adopted and still retains13 SSAPs issued by the ASC and, prior to 30 November 2000, issued 16Financial Reporting Standards (FRS). Work on a conceptual framework hasresulted in the issue of the Statement of Principles for Financial Reporting


(SOP) in December 1999. As of the date of publication, the ASB has additionallyissued three more standards:

Standards Topic

FRS 17 (issued 30/11/00) Retirement Benefits (superseding SSAP 24)

FRS 18 (issued 07/12/00) Accounting Policies (superseding SSAP 2)

FRS 19 (issued 07/12/00) Deferred Tax (superseding SSAP 15)

The new standards on pension costs and deferred tax represent a significantchange from the current requirements and have extended implementationperiod. These changes are referred to in the relevant parts of the comparison:Section 9 “Employee Benefits” and Section 10 “Accounting for Income Taxes”.

The Urgent Issues Task Force (UITF) was established by the ASB in 1991. Itassists the ASB in areas where an accounting standard or Companies Actprovision exists, but where unsatisfactory or conflicting interpretations havedeveloped or seem likely to develop. The results of the UITF’s deliberations on asubject are promulgated by means of published Abstracts.

Statements of Recommended Practice (SORP)The ASC developed and issued two SORPs related to pension schemes andcharities, together with an Explanatory Foreword to SORPs. In addition the ASC‘franked’ SORPs developed by bodies representative of the industry/sector towhich the SORP would apply. The ASB has announced that it will not issue itsown SORPs. However, SORPs will be developed by bodies recognised by theASB to provide guidance on the application of accounting standards to specificindustries. The ASB will not ‘frank’ such SORPs. Instead, where it is satisfiedabout certain particulars it will require to be appended to the SORP a ‘negativeassurance statement’.

The Companies ActThe Companies Act 1985 regulates the constitution and conduct of practically allBritish corporations. Its provisions cover:

� company formation;

� company administration and procedure;

� allotment of shares and debentures;

� increases, maintenance and reduction of share capital;

� annual financial statements;

12 INTRODUCTION


� audit of financial statements; and

� distribution of profits and assets.

The requirement for all companies, both private and public, to prepare annualfinancial statements giving a true and fair view, to appoint auditors (the verysmallest companies are exempt from audit) and to file such financial statementswith the Registrar of Companies, comes from the Companies Act. Holdingcompanies of a certain size must file consolidated financial statements inaddition to the individual company financial statements.

The Companies Act 1989 amended the Companies Act 1985 introducing into ita definition of “accounting standards” along with a requirement for companiesover a certain size to disclose in financial statements whether or not they havebeen prepared in accordance with applicable accounting standards, and if not,particulars and reasons for any departure. Auditors are required by regulationand professional standards to have regard to all applicable accounting standardsin reaching a ‘true and fair’ opinion.

In 1998 UK government commenced wide-scale review of the companieslegislation which is expected to result in fundamental changes in several yearstime.

STANDARD-SETTING IN GERMANY

Financial statements of all business entities in Germany are required to bedrawn up in accordance with generally accepted accounting principles(Grundsätze ordnungsmäßiger Buchführung or GoB, § 243 (1)Handelsgesetzbuch or HGB).

Traditionally, German accounting practice is a result of detailed codification.The main accounting rules are governed by the Commercial Code (HGB):

� Regulations applicable to all business entities including keeping of booksand records, accounting and valuation rules, retention periods (§§ 238 – 263HGB);

� Supplementary regulations for companies1 including requirements onclassification of balance sheet and profit and loss account items, specialvaluation rules, notes to the accounts, management report, groupaccounting, audit and disclosure (§§ 264 – 335 HGB);

INTRODUCTION 13

1 Here and elsewhere in this book references to ‘companies’ in the German side of the comparison comprise the following legalforms of entities: Stock Corporation (Aktiengesellschaft or AG),Limited Lability Company (Gesellschaft mit beschränkterHaftung or GmbH), Partnership with a limited liability company as general partner (e.g. GmbH & Co KG) and Partnershiplimited by shares (Kommanditgesellschaften auf Aktien or KGaA).


� §§ 290 to 315 of the HGB includes specific provisions governing preparationof consolidated financial statements. Generally, the rules applicable tostatutory (individual company’s) financial statements also apply toconsolidated financial statements (§ 298 (1) HGB). However, under theprovisions of §§ 300 (2) and 308 (1) HGB, all elements and the valuation ofassets, liabilities, prepaid expenses and deferred income in the consolidatedfinancial statements can, however, deviate from the underlying individualcompany’s financial statements;

� Supplementary regulations for co-operatives and enterprises operating incertain industries such as banking and insurance (§§ 336 – 341o HGB);

� Regulations specifying remit of a private accounting body serving asadvisory board for accounting matters (§§ 342, 342a HGB).

Furthermore, special regulations applicable to specific legal forms are includedin the Stock Corporation Law (Aktiengesetz or AktG) dealing with publiccompanies and in the Law on Limited Liability Companies (GmbH-Gesetz orGmbHG). Additionally, all other large business entities must comply with theregulations under the Publicity Law (Publizitätsgesetz or PublG). Under thislaw, all enterprises meeting particular size criteria defined under § 1 PublG arerequired to publish their accounts.

Since 1998 four new laws have come into force which have significantly changedthe HGB and contributed towards convergence of German accountingprinciples with international accounting practice:

� Law on Control and Transparency within Enterprises (Gesetz zur Kontrolleund Transparenz im Unternehmensbereich or KonTraG);

� Law on the Facilitation of Raising of Capital(Kapitalaufnahmeerleichterungsgesetz or KapAEG);

� Law on Individual Share Certificates (Stückaktiengesetz or StückAG); and

� Law on Partnerships with a Limited Company as General Partner(Kapitalgesellschaften-und-Co-Richtlinie Gesetz or KapCoRiLiG), with theintroduction of which, for example, the “GmbH & Co. KG’s” lose theirexemption from the stringent auditing and disclosure requirements.

Written legal regulations have been complemented by the “GoB” which applyto all matters not otherwise covered in the law or in all cases where specificlegal regulations require an interpretation. The GoB are the generally acceptedrules of maintaining commercial books of account (documentation) as wellas preparing the annual financial statements (accounting) of entities.

14 INTRODUCTION


A large number of the GoB, which were originally not fixed in writing have, overthe years, been included in the law, for example:

Principles of preparation of the financial statements §§ HGB

Clearness and understandability 243 (2)

Completeness 246 (1)

Prohibition of offsetting 246 (2)

Balance sheet continuity 252 (1) 1

Going concern concept 252 (1) 2

Separate determination of the value of items 252 (1) 3

Prudence concept 252 (1) 4

Accruals concept / matching principle 252 (1) 5

Consistency concept 252 (1) 6

Historical cost principle 253 (1)

Another source of interpretation and guidance is the pronouncements issued bythe Institut der Wirtschaftsprüfer (IDW) which are to some extent similar innature to standards and interpretations issued by the ASB and the UITF in theUK. Interpretation guidance is developed by the IDW and its Main TechnicalCommittee, HFA. It is issued in the form of statements of the IDW.

As part of the ongoing efforts to move German accounting and auditingprinciples closer to the internationally accepted practice, the IDW has started torevise its statements on accounting and auditing renaming them “IDWPrüfungs-standards” or “IDW PS” (Auditing Standards), “IDW Stellungnahmenzur Rechnungslegung” or “IDW RS” (Accounting Standards), “IDWPrüfungshinweis” or “IDW PH” (Auditing Practice Statements), and “IDWRechnungslegungshinweis” or “IDW RH” (Accounting Practice Statements).The classification of the Auditing Standards is based on the scheme used byIFAC in developing the International Statements on Auditing (ISA).

Traditionally, in Germany great importance is also attached to the detailed viewsset out in numerous commentaries on accounting issues (referred to further inthe text of this book as ‘accounting literature’ or ‘literature’).

German Accounting Standards Committee (GASC)In 1998 the German Accounting Standards Committee (DeutschesRechnungslegungs Standards Committee or DRSC) was set up by the

INTRODUCTION 15


government. According to § 342 HGB, this body, which itself is a nongovernmental organisation, was given the following tasks:

� the development of accounting standards for listed companies’ consolidatedfinancial statements;

� advising the German Ministry of Justice on new legislation concerningaccounting standards and

� liaison with international standard setters and representation of the FederalRepublic of Germany on international accounting committees.

Since its formation, GASC has issued the following accounting standards andexposure drafts:

Standards Topic

DRS 1 (published 22/7/00) Exempting Consolidated Financial Statements in Accordance with § 292a HGB

DRS 2 (all published 31/5/00) Cash Flow Statements

� DRS 2-10 � Cash Flow Statements of Financial Institutions

� DRS 2-20 � Cash Flow Statements of Insurance Enterprises

DRS 3 (all published 31/5/00) Segment Reporting

� DRS 3-10 � Segment Reporting by Financial Institutions

� DRS 3-20 � Segment Reporting by Insurance Enterprises

E DRS 4 (adopted 29/8/00) Purchase Accounting

E DRS 5 (issued 24/11/00)) Risk Reporting

� DRS 5-10 (adopted 29/8/00) � Risk Reporting by Financial Institutions

E DRS 6 (issued 8/9/00 Interim Financial Reporting

E DRS 7 (issued 2/10/00) Presenting Equity in Consolidated Financial Statements

E DRS 8 (issued 8/11/00) Accounting for Investments in Associates

16 INTRODUCTION


The final standards on purchase of shares (DRS 4) and reporting of risk bybanks (DRS 5) are expected shortly, and other proposals are in the pipeline. Oneof these other proposals is a discussion paper on accounting for share options.

INTRODUCTION 17


Comparison of FinancialStatement Format

UNITED KINGDOM

Requirements for preparation, audit and publication of financial statements aswell as those in respect of the form and content of the financial statements varydepending on the size of the company concerned (§ 267 HGB in Germany andCompanies Act in the UK respectively). The following comparison is based onthe requirements in respect of large companies only.

GERMANY

18 COMPARISON OF FINANCIAL STATEMENT FORMAT

All companies (see Standard Settingin Germany) are required to preparea balance sheet, profit and lossaccount and notes to the accounts,which together must comply withGoB and present a true and fair view.(§§ 266, 275, 284-288, 264 (1), 264 (2)HGB)

As a means of explaining the balancesheet and profit and loss account, thenotes to the financial statements areequivalent to UK disclosure practice.

Additionally, companies are requiredto prepare a management report(“Lagebericht”). As in the case ofdirectors’ report in the UK, themanagement report must beconsistent with the information inthe annual financial statements.(§ 289 HGB)

Schedule 4 of the Companies Actcontains permitted financialstatement formats for the balancesheet and profit and loss account.Formats for other primarystatements are contained in therelevant accounting standards. FRS 1(revised 1996) discusses the Cashflow statement and FRS 3 discussesthe Statement of total recognisedgains and losses.

All financial statements are requiredby the Companies Act to beaccompanied by a directors’ reportwhich must include certain specifieddisclosures. (1985 CA s234 and Sch 7)


Many large companies alsoaccompany their accounts with ageneral review of performance in theyear.

Some additional disclosures may berequired by the London StockExchange.

Balance sheetThe Companies Act 1985 permitstwo formats:

� a “vertical” format with currentliabilities deducted from currentassets to show net current assetsor liabilities. This is the mostcommonly used format. SeeAppendix I for example;

� a “two-sided” balance sheetshowing total assets to the left ortop of the page and total capital,reserves and liabilities to theright or bottom of the page.

Assets and liabilities are presented inreverse order of liquidity.

Balance sheets are required to bepresented with comparative figures.

FRS 4 requires additionalinformation to be disclosed. The faceof the balance sheet should showShareholders’ funds and minorityinterests in subsidiaries analysedbetween equity and non-equityinterests. Similarly, liabilities mustbe analysed between convertible andnon-convertible obligations.

Some additional disclosures may berequired by the Deutsche Börse AG.

Balance sheets are required to bepresented in a “two-sided” formatwith assets segregated into fixed andcurrent categories (§ 266 HGB).However, in Germany liabilities donot have to be segregated betweencurrent and long-term (thisdisclosure is required to be made inthe notes to the accounts). SeeAppendix I for example of thebalance sheet format used instatutory accounts. The HGB has nospecial regulations in respect of theformat of consolidated financialstatements.

As in the UK, assets and liabilitiesare presented in reverse order ofliquidity.

Comparative figures are required forcompanies (§ 265 (2) HGB) and largebusiness entities (§ 5 (1) PublG).

In contrast to UK GAAP,shareholders’ funds and minorityinterests are not analysed betweenequity and non-equity. However,similar to UK GAAP, loans must beanalysed between convertible andnon-convertible on the face of thebalance sheet.(§ 266 (3) HGB)



Profit and loss accountFour formats are permitted by theCompanies Act 1985:

� two “vertical” formats, onecategorising expenditure as costof sales, distribution costs andadministrative expenses andshowing gross profit; and theother showing more detail, forexample change in stocks, ownwork capitalised, raw materials,other external charges, staffcosts. The former is the mostcommonly used; and

� two “horizontal” formatsshowing expenses on one sideand income on the other; theseformats are rarely used bycommercial entities.

See Appendix II for example of mostcommonly used format.

FRS 3 requires additionalinformation to be disclosed on theface of the profit and loss account.Specifically, turnover and operatingprofit must be analysed betweencontinuing operations, acquisitionsand discontinued operations.

Profit and loss accounts are requiredto be presented with comparativefigures.

Only the “vertical” formats arepermitted. As under UK GAAP,expenditure may be categorisedeither by function, showing grossprofit (§ 275 (3) HGB), or by type ofexpenditure (§ 275 (2) HGB), thelatter being the most commonlyused.

See Appendix II for example of bothacceptable formats.

There is no comparable requirementin the HGB, but certain informationis required to be disclosed if theeffect of discontinuance of abusiness activity is presented as anextraordinary item. (See Section 15Discontinued Operations).

Comparative figures are required forcompanies (§ 265 (2) HGB) and largebusiness entities (§ 5 (1) PublG).



Statement of capital and reservesThe Companies Act 1985 requiresmovements in share capital to beshown in the notes to the accounts.Movements on reserves for thecurrent period may be shown eitheras a separate statement or in a noteto the accounts. FRS 3 requires anote reconciling total opening andclosing shareholders’ funds for theperiod. This reconciliation may becombined with the note or statementshowing movements on reserves.

UK law does not generally requirecompanies to perform procedures inrespect of the appropriation ofprofits similar to those in Germany(other than in respect of dividendentitlements for the year), and thepractice of allocation of retainedprofits to various specific purposereserves/funds is less common.

A specific case of appropriation ofprofit in respect of finance costs ofnon-equity shares is discussed inSection 13 Dividends and FinanceCosts of Shares.

Disclosure of profit appropriationThe movements in reserves as aresult of profit appropriation arerequired to be disclosed by AG’s andKgaA’s on the face of the profit andloss account after net profit or lossfor the year or, alternatively, in thenotes to the accounts in accordancewith the format given in § 158 (1)AktG. Similar disclosure isrecommended for GmbHs.

Specifically, the followingmovements in reserves are requiredto be disclosed by AG’s and KgaA’s:

� transfers from capital reserves;

� transfers to and from thefollowing revenue reserves:

– legal reserves;

– reserve for own shares;

– statutory reserve accordingto provisions of the articlesof association;

– other revenue reserves.

The balance sheet may be preparedto reflect either partial or completeappropriation of the profit for theyear. (§ 268 (1) HGB)

On 2 October 2000 the DSR issuedthe draft standard E-DRS 7“Presenting Equity in ConsolidatedFinancial Statements”. Under thisstandard the notes to theconsolidated financial statementsshould include a systematicpresentation in matrix format of the



Statement of total recognisedgains and lossesFRS 3 requires companies to includea Statement of total recognised gainsand losses. This is a primarystatement with the followingcomponents:

� profit or loss before thededuction of dividends;

� adjustments to asset valuations;and

� differences in the netinvestment in foreignenterprises due to changes inforeign currency exchange rates.

Contributions from or distributionsto shareholders are excluded fromthe statement. These include:

� the proceeds of a share issue;

� redemption or purchase of ownshares;

� dividends or distributions; and

� capital contributions.(FRS 3)

development of group equity, brokendown into its significant componentparts, and differentiating betweengroups of transaction types.

No similar requirement exists inGermany.



Cash flow statementFRS 1 (revised 1996) requires thepresentation of a cash flow statementfor all entities except:

� companies and otherunincorporated bodies whichmeet the “small company”limits as defined by the CA1985;

� subsidiary undertakings where90% or more of the voting rightsare controlled within the group,provided that the consolidatedfinancial statements in whichthe subsidiary undertakings areincluded are publicly available;

� pension funds;

� building societies; and

� mutual life assurancecompanies.

Cash for purposes of the cash flowstatement is defined as cash in handand deposits repayable on demandwith any qualifying financialinstitution, less overdrafts from anyqualifying financial institutionrepayable on demand. Cash includescash in hand and depositsdenominated in foreign currencies.It is the movement in cash sodefined that is reconciled in the cashflow statement.

A cash flow statement is notrequired to be included in individualentity’s (statutory) financialstatements.

However, with the introduction ofKonTraG in 1998, all listedcompanies are now required toinclude a statement of cash flows inthe notes to their consolidatedfinancial statements.(§ 297 (1) HGB)

On 31 May 2000, the GermanMinister of Justice published thestandard on cash flow statement(DRS 2) adopted by the DRSC. Therequirements of GermanAccounting Standard No. 2 (DRS 2)are broadly similar to therequirements of FRS 1 in the UK.

The statement of cash flowsreconciles the movements in cashand cash equivalents, so-called “cashfunds” (“Finanzmittelfond”). Bankoverdrafts which are repayable at anytime and which are an integral partof an enterprise’s cash managementmay be included in “cash funds”.



Cash flows are classified under thefollowing headings:

� operating activities;

� dividends from joint venturesand associates;

� returns on investments andservicing of finance;

� taxation;

� capital expenditure andfinancing and investment;

� acquisitions and disposals;

� equity dividends paid;

� management of liquidresources; and

� financing.

The indirect method of presentationis required, although theinformation given by the directmethod may be added. Areconciliation of operating profit tonet cash flow from operatingactivities is shown as a note to thestatement.

A statement reconciling themovement of cash in the period withthe movement in net debt isrequired. Such a statement shouldnot form part of the cash flowstatement, but it may be givenadjoining the cash flow statement;alternatively, it may be shown as anote to the financial statements.

The DRSC recommends to classifycash flows under the followingheadings:

� current business activities;

� investment activities (includingdisposals); and

� financing activities.

The cash flow from current activitiescan be presented either under director indirect method.

The composition of the “cash funds”is required to be disclosed in thenotes to the accounts.



Cash flows of foreign subsidiaries orbranches are translated using theaverage rate for the period or closingrate whichever is used for the profitand loss account. Foreign cash flowsof the entity are normally translatedat the current exchange rate at thetime of the cash flow.

The effect of exchange rate changeson cash held in foreign currencies isincluded in the reconciliation of netdebt.

Material non-cash transactions aredisclosed where such disclosure isnecessary to understand theunderlying transactions.(FRS 1 revised 1996)

See Appendix III for example.

Directors’ Report Among other things a directors’report must include:

� discussion of principal activitiesof the company and itssubsidiaries during the financialyear and details of anysignificant change in theseactivities during the year;

� discussion of the likely futuredevelopments in the business ofthe company and itssubsidiaries;

� particulars of any important postbalance sheet events;

Cash flows denominated in foreigncurrencies are, in principle, requiredto be translated into the reportingcurrency at the rates ruling at thedate of payment. Weighted averagerates may be used when this methodresults in reasonable approximation.

Changes in the “cash funds” due tothe effect of changes in exchangerates on consolidated foreignsubsidiaries are required to bedisclosed as a separate line of thecash flow statement.

Major investment and financingtransactions without cash flowimpact as well as other non-cashtransactions are required to bedisclosed in the notes to theaccounts.

See Appendix III for example.

Management Report As a minimum, the managementreport shall describe the course ofbusiness and the state of thecorporation in such a way that itpresents a factually accuratepicture. The disclosure requirementsunder German law have recentlybeen significantly extended byKonTraG and now includerequirement to disclose analysis ofthe risks of future developments.The DRSC has issued a draftaccounting standard E-DRS 5, “RiskReporting”, that deals with thereporting on risks of futuredevelopments within the



� the amount of recommendeddividend, if any.

management reports in connectionwith business combinations.

The management report should alsodeal with:

� events of special importance thattook place after the end of thefiscal year;

� the anticipated development ofthe corporation;

� the activities in the field ofresearch and development;

� branch offices of the company.



GERMANY

Major Differences in Accounting Policies


1. CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES

UNITED KINGDOM

Current assets are not defined bylaw. However, fixed assets are legallydefined in § 247 (2) HGB as assetsintended for use on a continuingbasis. Consequently, accountingliterature defines current assets asassets which are neither fixed assetsnor prepaid expenses.

Similar to UK GAAP.

The amount of debtors due aftermore than one year must bedisclosed on the face of the balancesheet (§ 268 (4) HGB), however, inpractice disclosure is often made inthe notes to the accounts.

Current assets are defined by law asassets not intended for use on acontinuing basis in the company’sactivities. There is no restriction thatsuch assets must be realised, sold orconsumed within a specified period. (1985 CA, Sch. 4)

Current assets which are transferredto fixed assets, are transferred at thelower of cost or net realisable value. (UITF Abstract 5)

Companies Act 1985 requiresdisclosure in the notes of the size ofdebtors due after more than oneyear. Where the amount of debtorsdue after more than one year ismaterial to the total of net currentassets, then that amount is disclosedon the face of the balance sheet. (UITF Abstract 4)


Liabilities are classified as amountsfalling due within one year oramounts falling due after more thanone year. The classification of loansmust be based on the earliest date onwhich the lender can requirerepayment if he exercises all optionsand rights available to him.(1985 CA, Sch. 4, FRS 4)

Similar disclosure is required inrespect of amounts or creditors dueafter more than five years. Additionaldisclosures are required in respect ofmaturity of total debt.(1985 CA Sch 4:48, FRS 4)

“Provisions for liabilities andcharges” and, depending upon thebalance sheet format adopted,“Accruals and deferred income” maybe excluded from current liabilities.(1985 CA, Sch. 4)

Deferred income can be shown aspart of creditors falling due withinone year or after one year asappropriate or, alternatively it can bepresented as a separate line on theface of the balance sheet.(1985 CA, Sch. 4)

There is no such distinction inclassification on the face of thebalance sheet. However, the amountof liabilities due within one yearmust be disclosed on the face of thebalance sheet (§ 268 (5) HGB). Inpractice, disclosure is often made inthe notes to the accounts.

Amounts falling due after more thanfive years must be disclosed in thenotes for each balance sheet linerelating to the liabilities. (§ 285 no. 1 and 2 HGB)

“Provisions for liabilities andcharges” and “accruals” are bothincluded within the balance sheetposition “accruals” (Rückstellungen).(See Section 11 Other Provisions.)

Deferred income is shown as aseparate line item, “PassiverRechnungsabgrenzungsposten”.

28 MAJOR DIFFERENCES IN ACCOUNTING POLICIES


UNITED KINGDOM

TREATMENTGoodwill arising on a businesscombination accounted for as anacquisition is calculated as thedifference between the cost of theentity acquired and the fair value ofthe net identifiable assets acquired.This applies both to the purchases ofthe companies accounted for in theconsolidated financial statementsand to the purchases of non-incorporated business accounted forin the individual company’saccounts.

In its recently issued FRS 10, theASB has outlawed the previouslypreferred treatment of eliminatingthe full amount of goodwill againstreserves at the time of acquisition.

Goodwill is now required to becapitalised as an asset. The usefuleconomic life of goodwill ispresumed to be 20 years or less. Thatpresumption may be rebutted andeither a longer life or an indefinitelife may be substituted if the

GERMANY

Goodwill is calculated as thedifference between the cost of theacquisition and the value of theindividual assets of the companyacquired less the liabilities at thetime of the acquisition. (§ 255 (4) HGB)

Assets and liabilities acquired –irrespective of their previous balancesheet values and the prices agreedbetween the parties – are valued atthe date of take-over (rather than atthe first balance sheet date afteracquisition) taking into account theintended use; profitability aspects(e.g. in the case of equityinvestments or land) or liquidationvalues (where assets will be disposedof shortly after the acquisition). As aconsequence of the general principleof prudence the valuation should beconservative.

There are alternative treatments forgoodwill in individual company’sfinancial statements. Goodwill canbe written off either immediately orby at least 25% a year (i.e. over fouryears or shorter period) following theyear of acquisition. Alternatively, itcan be systematically amortised overits estimated useful life. Theestimated useful life mostcommonly assumed in theindividual financial statements isfifteen years, being the period


2. GOODWILL


durability of the acquired businesscan be demonstrated and it justifiesestimating the useful economic lifeto exceed 20 years and the goodwill iscapable of continued measurement.If both conditions are met, thegoodwill will either be amortisedover a period greater than 20 years orremain unamortised. In either case,it becomes subject to the annualimpairment reviews discussed in thenext Section. If not deemed to havean indefinite life, goodwill isdepreciated over its useful life usinga straight line method unlessanother method is shown to be moreappropriate. (FRS 10)

FRS 10 is effective for accountingperiods ending on or after23 December 1998.

Transitional provisions of FRS 10give several options:

� at one extreme, all goodwillwhich has been previouslyeliminated against reservesremains under the old regime,provided it is included as part ofan existing reserve;

� at the other extreme, all ‘old’goodwill may be capitalised, andbecome subject to the new rules,with any amortisation whichwould have been provided inearlier years being shown asprior year adjustment;

allowed for tax purposes. Whenjustified, a longer useful life can beused for amortisation. However, aperiod of more than 40 years is likelyto be seen as not admissible. Thestraight-line depreciation method isgenerally applied.

In consolidated financial statementsgoodwill can be offset againstreserves or amortised by at least 25%a year or over a period of itsestimated useful life, if longer. (§ 309 (1) HGB)

In August 2000 the DRSC adoptedan accounting standard DRS 4,“Purchase Accounting”. Under thisstandard the maximum useful lifefor goodwill in consolidated financialstatements is set at 20 years. Thismust be taken through the profit &loss account and may no longer becharged directly against reserves.



� between these two extremes,there are two further optionswhich allow recent goodwill tobe capitalised but older goodwillto remain eliminated.

Upon disposal of a previouslyacquired business (either all or inpart) where the attributable goodwillhas been eliminated against reserves,the resulting gain or loss isdetermined by including theattributable amount of goodwill.(FRS 2 and FRS 10)

NEGATIVE GOODWILLNegative goodwill is initiallyrecognised as a negative asset, and isshown immediately below thegoodwill heading and followed by asubtotal giving the net amount ofpositive and negative goodwill.

Unlike the German accountingprinciples, UK GAAP requires thesame treatment to be applied forboth negative goodwill attributed tofuture costs and losses (that do notrepresent identifiable liabilities at thebalance sheet date; those that do –are accounted separately) andnegative goodwill attributed tobargain purchase.

Negative goodwill up to the fair valueof the non-monetary assets acquiredare recognised in the profit and lossaccount in the periods in which thenon-monetary assets are recovered,whether through depreciation orsale.

Goodwill which was previouslywritten off against the reserves in theconsolidated financial statements isrequired to be included in thecalculation of the net gain/loss ondisposal which is recognised in theprofit or loss account.

Requirements for the presentation ofnegative goodwill exist for the groupaccounts only (§ 309 (2) HGB). Inindividual company’s accounts acorresponding accrual (provision)can be set up.

Negative goodwill arising in abusiness combination can be shownas a separate line, “Unterschieds-betrag aus der Kapitalkon-solidierung”, within the equitysection on the liabilities side of thebalance sheet.(§ 301 (3) 2 HGB)

Alternative treatments are allowed ifnegative goodwill can be attributed toone of the two causes:

� future costs or losses; or

� bargain purchase.



FRS 10 does not prescribe the periodover which to recognise in the profitand loss account the excess of thenegative goodwill over the fair valuesof the non-monetary assets acquiredas it is expected to occur extremelyrarely.(FRS 10)

IMPAIRMENT REVIEWSIf goodwill is deemed to have anindefinite life, or one of more than20 years, an impairment review isrequired at the end of each year.Otherwise an impairment review isonly required at the end of the firstfull year following the acquisition orif there is a change of circumstancesin future years indicating animpairment in value.

When negative goodwill relates tofuture costs or losses it is consideredto be similar to an accrual (provision)and is required to be separatelydisclosed on the balance sheet aspart of “Accruals for liabilities andcharges”.(§ 309 (2) 1 HGB)

When negative goodwill arises as aresult of a bargain purchase it isdisclosed separately within reserves.

In both cases, negative goodwill isreleased to profit and loss accountwhen:

� an unfavourable development inthe results of the enterprisewhich was foreseen at the timeof acquiring the shares (orpreparing consolidated accountsfor the first time) occurs, orwhen expenditure anticipated atthat time is recognised; or

� it becomes clear at the balancesheet date that it is a realisedprofit.

German GAAP does not have anotion of impairment reviews.However, exceptional amortisationshould be provided for a permanentdiminution in value. (§ 253 (2) 3 HGB)



Any impairment loss is recognisedin the profit and loss account.

Where an external event caused therecognition of an impairment loss inprevious periods, and subsequentexternal events clearly anddemonstrably reverse the effects ofthat event in a way that was notforeseen in the original impairmentcalculations, any resulting reversal ofthe impairment loss is recognised inthe profit and loss account.(FRS 10)

When the circumstances that causeda permanent diminution in value tobe recognised change, reversal of theoriginal write down must also berecognised in the profit and lossaccount.(§ 280 HGB)



UNITED KINGDOM

An internally generated intangibleasset can be capitalised, but onlywhere it has a ready ascertainablemarket value.

Similarly, if an intangible asset has aready market value it can be carriedat a revalued amount.(FRS 10)

An intangible asset purchasedseparately from a business is initiallyrecorded at cost.

See Section 21 BusinessCombinations for a discussion ofintangible assets of an acquiredbusiness.

AMORTISATIONAs for goodwill.(FRS 11)

IMPAIRMENT REVIEWSAs for goodwill.(FRS 11)

GERMANY

An internally generated intangibleasset (e.g. software, brands etc.)cannot be capitalised. (§ 248 (2) HGB)

German GAAP does not allowrevaluation of assets in excess oforiginal cost as reduced bydepreciation.

An intangible asset purchased froma third party is recorded at cost.

Intangibles are required to beamortised over their usefuleconomic lives.


3. OTHER INTANGIBLE ASSETS


Development costs related to definedprojects may be deferred to futureperiods, provided that the outcomeof the projects can be assessed withreasonable certainty as to theirtechnical feasibility and commercialviability (i.e. future expenditure canbe recovered from future revenueand adequate resources exist).Otherwise development costs (exceptthose which are reimbursable undercontracts with third parties and thoseincurred in locating and exploitingmineral deposits) and all researchcosts are written off as incurred.(SSAP 13)

START-UP COSTSThe “preliminary” expenses of acompany may not be capitalised.However, they may be written offagainst a company’s share premiumaccount. These expenses normallyinclude any legal fees and otherexpenses associated with the processof company registration. Theseexpenses do not include operatinglosses in the first years of operation.(CCA 1985 Sch 4 Pt I and CA 1985Pt V Ch III)

Certain start-up costs are capitalisedas part of acquisition or self-construction of a tangible fixedasset if they relate to the periodwhen the asset is available for usebut incapable of operating atnormal levels without such a start-up or commissioning period.

Generally, own research anddevelopment expenditure is requiredto be expensed as incurred.(§ 248 (2) HGB)

Expenses incurred to start up orexpand a business, to the extent theyare not capitalised as part of otherassets, may be carried forward as anaccounting convenience. This item isrequired to be presented on the faceof the balance sheet above fixedassets under the heading “Start-upand Business Expansion Expenses”and must be explained in the notes.

Start-up expenses within themeaning of § 269 HGB are definedas all expenses which are incurredduring the start-up phase of abusiness including the initialestablishment of the internal andexternal organisation and thepreparation of the business forthe start of the regular productionof goods and services.


RESEARCH AND DEVELOPMENT


However, operating losses due tolack of demand may not becapitalised. For example the lossesincurred by a hotel or a bookshop,which could operate at normal levelsalmost immediately, but for whichexperience teaches that demand willbuild up slowly and full utilisationwill be achieved only over the periodof several months, may not becapitalised.(FRS 15)

Other start-up costs that relate tonew activities such as opening of anew facility, introducing a newproduct or service, conductingbusiness in a new territory, etc. arerequired to be accounted on the basisconsistent with the accountingtreatment of similar costs incurredas part of on-going activities. Incases, where there are no suchsimilar costs, start-up costs can onlybe recognised as assets if they meetthe recognition criteria in therelevant standards such as thosedealing with tangible fixed assets,intangible assets or developmentscosts.(UITF 24)

Examples include preliminarymarket studies and other planningcosts, recruitment and training ofstaff, test runs of production facilitiesas well as depreciation, rent andrentals, interest and other personnelexpenses incurred during the start-up phase.

Even if such expenditure iscapitalised it is deducted from profitsavailable for distribution.(§ 269 HGB)

Amounts recorded in respect of start-up and business expansion expensesmust be amortised in each followingfinancial year by at least one quarter.(§ 282 HGB)

Capitalisation of start-up andexpansion costs is not permitted fortax purposes, and therefore it resultsin recognition of a deferred taxliability. (See Section 10 Accountingfor Income Taxes). (§ 274 HGB)



UNITED KINGDOM

INITIAL MEASUREMENTTangible fixed assets are initiallyrecorded at cost.

REVALUATIONThe law permits tangible fixedassets, intangible fixed assets (exceptgoodwill), investments and stocks(inventories) to be recorded at avaluation (generally current cost ormarket value at the date of the lastvaluation). (1985 CA, Sch.4)

FRS 15, which is effective for periodsending on or after 23 March 2000,requires companies revaluing assetsto use the following valuation basesfor unimpaired tangible fixed assets:

� non-specialised properties –existing use value, with theaddition of notional directlyattributable acquisition costs,where material;

� specialised properties –depreciated replacement cost;

GERMANY

Tangible fixed assets are initiallyshown at historic purchase (§ 255 (1)HGB) or manufacturing cost (§ 255(2) HGB).

Items costing not more than DM 800(excluding VAT) referred to as“geringwertige Wirtschaftsgüter” or“GWGs” are usually expensed whenpurchased. This treatment is basedon German tax law.

German GAAP does not permitrevaluation of fixed assets in excessof original cost as reduced bydepreciation.


4. TANGIBLE FIXED ASSETS


� properties surplus to an entity’srequirements – open marketvalue, after deducting expecteddirectly attributable selling costs,where material; and

� tangible fixed assets other thanproperties – market value, ordepreciated replacement costwhere market value is notavailable.

(FRS 15)

Surpluses arising from upwardrevaluation are credited directly to arevaluation reserve and shown in thestatement of total recognised gainsand losses. Deficits are taken to theprofit and loss account to the extentthat they do not represent a reversalof a previous upwards revaluation.

Generally, revaluation losses whichreverse previously recognisedrevaluation gains related to the sameasset are recognised in the statementof total recognised gains and lossesto the extent of the previouslyrecognised gain.

However, if the revaluation loss isclearly caused by the consumption ofeconomic benefits, it is considered tobe similar to depreciation andrecognised in the profit and lossaccount.

FRS 15 requires other losses to berecognised in the statement of totalrecognised gains and losses to theextent that the asset’s recoverableamount is greater than its revalued



amount. Such losses, which havebeen demonstrated not to beimpairments, are in the nature oflosses caused by a general fall inprices.

Where fixed assets are revalued,depreciation is charged to the profitand loss account based on therevalued amounts.(FRS 15)

FRS 3 requires that recognition ofprofit or loss on disposal of an assetwhich has been revalued be based onits net carrying value at the date ofdisposal. Any past valuationsurpluses or deficits in therevaluation reserve relating to theasset are shown as a reserve transfer.The gain or loss calculated on ahistorical cost basis is shown in anote.

The note of historical cost profits andlosses reconciles the reported profiton ordinary activities before taxationto the equivalent historical costamount, and also shows retainedprofit on a historical cost basis.(FRS 3)



Interest on capital specificallyborrowed to finance the productionof an asset may be included in thecost of the asset to the extent itaccrues in the period of production.(1985 CA, Sch. 4)

Although many companies capitaliseinterest, it is equally commonpractice not to capitalise interest.

DEPRECIATIONGenerally, UK GAAP requiresdepreciation of all assets with finiteuseful economic life to be recognisedin the current period unless neithercurrent year charge nor accumulatedamount of such unrecogniseddepreciation is material.

As in the UK, interest may beincluded in the cost of an asset to theextent that the interest is incurredduring the period of production.(§ 255 (3) HGB)

In practice, however, only fewcompanies opt for capitalisation.

Due to the principle of “umgekehrteMassgeblichkeit” (see Introduction)depreciation rates tend to be taxdriven. Although new depreciationtables have recently been issued bythe tax authorities with generallylonger useful lives than in the past,the tax driven nature of the rates hastraditionally resulted in fixed assetsbeing stated at a lower value and thetotal depreciation charge for the yearnot necessarily reflecting economicuse of the assets. (§ 273 HGB)

Examples of tax allowed depreciationinclude:

� special accelerated depreciation;

� reducing balance depreciation;

� write off of moveable assetscosting less than DM 800; and

� half year simplification rule.


CAPITALISATION OF BORROWING COSTS


UK GAAP allows the use of bothstraight-line method and reducingbalance method as well as any othermethod that results in depreciationcharge being allocated on asystematic basis over usefuleconomic life.

However, it is expected that the ASBwill shortly ban back-end loadedmethods such as annuity baseddepreciation with the only exceptionof an asset purchased through afinance lease where this asset issubsequently leased out on anoperating lease.

There is no specific requirement asto how depreciation is charged in theyear of acquisition of an asset.

Companies are required to justifyand disclose the amount ofdepreciation recognised in theincome statement that was basedsolely on tax regulations. (§ 281 (2) HGB)

Companies are also required todisclose the extent to which resultsof the current, preceding and futurefinancial years were (are, will be)affected by accounting entries basedon tax regulations, includingcreation of a “special account withcharacteristics of reserve” (seeSection 11 Other Provisions).(§ 285 No. 5 HGB)

Both the straight-line and thereducing balance methods may beused, however, the reducing balancemethod is only permitted to be usedfor movable fixed assets. Due tothese restrictions, buildings andintangible fixed assets are alwaysdepreciated/amortised usingstraight-line method. Otherdepreciation methods are allowed ifthey reflect the actual usage of assets.

Movable assets acquired during thefirst half of the accounting yearqualify for 100% of the normalcharge; those acquired during thesecond half, for 50% of the normalcharge, based on German tax law.



Where the depreciation method ischanged, the unamortised cost of theasset should be written off over theremaining useful life using the newmethod.(FRS 15)

Where estimates of useful economiclives of fixed assets are changed, theundepreciated cost should bedepreciated over the revisedestimates of remaining lives.(FRS 15)

IMPAIRMENT REVIEWSFRS 11 requires an impairmentreview to be carried out if events orchanges in circumstances indicatethat the carrying amount of fixedassets or goodwill may not berecoverable. The review will comparethe carrying amount of a fixed assetor of an income generating unit withits recoverable amount (i.e. thehigher of net realisable value, ifknown, and value in use). Anyshortfall (or for revalued assets anyfall below depreciated historical costor one that is clearly caused by aconsumption of economic benefit)will be taken to the profit and lossaccount. For the revalued assets, theother part of the shortfall is setagainst revaluation reserve andrecognised in the STRGL.

An enterprise is permitted to switchfrom reducing balance to straight-line depreciation at any time, but thereverse change is not permitted.Where the method is changed netbook value of an asset is amortisedover the remaining useful life.

Similar to UK GAAP.

German GAAP does not have anotion of impairment reviews.However, German GAAP requiresexceptional depreciation charge to becharged to the profit and lossaccount for any permanentdiminution in value. (§ 253 (2) 3 HGB)



Net realisable value will be based onmarket value. Value in use will becalculated based on the present valueof the future cash flows of the assetor income-generating unit. (FRS 11)

Where, after an impairment loss hasbeen recognised, the recoverableamount of a tangible fixed assetincreases because of the change ineconomic conditions or in the use ofthe asset, the resulting reversal of theimpairment loss is recognised in thecurrent period to the extent that itincreases the carrying amount of thefixed asset up to the amount that itwould have been had the originalimpairment not occurred. A reversalof the impairment loss is recognisedin the profit and loss account (forrevalued assets – to the extent thatthe original impairment loss,adjusted for subsequentdepreciation, was recognised in theprofit and loss account; theremaining balance is recognised inthe STRGL).(FRS 11)

Where the circumstances thatcaused permanent diminution inprior periods change, the amountpreviously charged in the profit andloss account is reversed. However,the amount of reversal cannot resultin an asset carried at value in excessof its historic cost as reduced by thedepreciation which would have beencharged had the write-down notoccurred. (§ 280 (1) HGB)



UNITED KINGDOM

UK accounting for investments doesnot distinguish between interestbearing and equity investments.

Under the historical cost convention,investments classified as fixed (long-term) are valued at cost lessprovision for permanent diminutionin value. Any reduction in valuefrom cost is charged to the profit andloss account. A provision fordiminution in value which is nolonger required must be writtenback. Investments carried as fixedassets may also be carried at avaluation.(1985 CA, Sch. 4)

Under alternative valuation rules(which are relatively rarely used inpractice) investments classified asfixed assets may be valued either:

� at market value as determined atthe date of their last valuation;

� at a value determined on anybasis which the directorsconsider to be appropriate in thecircumstances.

(1985 CA, Sch. 4: 31(3))

GERMANY

Fixed asset investments (long-terminvestments) are recorded at cost lessprovision for any permanentdiminution in value.(§ 253 (2) HGB)

Any such reduction in value ischarged to the profit and lossaccount. Provisions for diminutionin value which is no longer requiredmust be written back.(§ 280 (1) HGB)


5. ACCOUNTING FOR INVESTMENTS


Where there is an intention to holdto maturity fixed asset securitieswhich bear no coupon rate but carrya premium at maturity it would benormal practice to accrue thepremium over the term of thesecurity.

Investments classified as currentassets will normally consist of eitherdeposits or short-term loans toinstitutions, such as buildingsocieties and banks, or of marketablesecurities. Under the historical costaccounting rules, each separateinvestment held should be valued atthe lower of cost and net realisablevalue with any provision fordiminution in value charged to theprofit and loss account.

INVESTMENT PROPERTIESInvestment properties (defined asland and/or buildings held forinvestment potential but excludingproperty held for own use or leasedto group companies) are notdepreciated and are included in thebalance sheet at their open marketvalue.(SSAP 19)

In accordance with HFA 1/1986 andaccounting literature it is a normalpractice to accrue the premium overthe term of zero coupon bonds andsimilar investments.

Current asset investments are valuedat the lower of cost or market value.Where investment is listed orpublicly traded its quoted price isdeemed to be the best estimate of itsmarket value.(§ 253 (3) HGB)

German GAAP does not make adistinction between investmentproperties and other fixed assets.The rules relating to fixed assetsapply.



An associate is an investment overwhich the investor exercisessignificant influence, and significantinfluence is presumed when aninvestor owns between 20 per centand 50 per cent of the voting rightsof the investee. However, this is arebuttable presumption. If theinvestor does not actively exercise itssignificant influence in its investee’saffairs, the investment may notqualify as an associate. Thereforeinvestments where investors such asbanks or venture capitalists have thepower to influence financial andoperating policies but, in practice,hold the investments as part of aportfolio which will ultimately besold, are excluded from definition ofan associate.

In consolidated accountsinvestments in associatedundertakings are required to beaccounted for using equity method.There is no specific exemption fornot significant associates. However,UK accounting standards are notintended to apply to immaterialitems.

As under UK GAAP, in Germany anassociate is defined as an investmentover which the investor exercisessignificant influence. Significantinfluence may be exercised by virtueof voting rights and businessarrangements such as purchase ordistribution agreements. It ispresumed where investor ownsmore than 20 per cent but less than50 per cent of the voting rights of theinvestee. Similar to UK GAAP, thispresumption is rebuttable when itcan be demonstrated that asignificant influence cannot beexercised. However, unlike underUK GAAP active involvement in theinvestee’s affairs is not required.

Equity method is not required inrespect of investments in associatesthat are not significant for thepresentation of a true and fair viewof net worth, financial position andresults of the group.(§ 311 (2) HGB)


ACCOUNTING FOR ASSOCIATED UNDERTAKINGS


Under the equity method ofaccounting, an investment in anassociate is initially recorded at cost.Goodwill arising on acquisition of aninvestment is determined in thesame way as on the acquisition of asubsidiary. Goodwill less anyamortisation or write-down isincluded in the carrying amount forthe associates. The carrying amountof the investment in an associate isadjusted in each period by theinvestor’s share of any relevant gainsor losses, and any other changes inthe investee’s net assets includingdistributions to its owners, forexample by dividend.(FRS 9)

In the consolidated balance sheetinvestment in an associate is valuedeither:

a) at book value,

in which case, in the first year wheninvestment in the associate isincluded in the consolidatedfinancial statements the differencebetween the book value (cost) of theinvestment and the share in the netequity of the associate (based onbook values of assets and liabilitiesof the associate) should be separatelydisclosed either on the face of theconsolidated balance sheet (throughan ‘of which’ note) or in the notes tothe financial statements. Thisdifference should be allocated to theassets or liabilities of the associatedenterprise to the extent that theirvalues are higher or lower thancarrying values. Remainingunallocated portion of the difference,positive or negative (expected tooccur only in exceptional cases), istreated as goodwill or negativegoodwill (see below). In subsequentperiods, amounts of the differenceallocated to various assets andliabilities are amortised/released tothe result of the associate in a waythat reflects the way these assets andliabilities are realised/settled in theindividual accounts of the associatedenterprise.(§ 312 (1) HGB)



or

b) at the proportionate share of itsnet equity (subject to the limitequal to the cost of investment).

Under this method, theproportionate share is determinedusing either the fair values at thetime of acquisition or at the date ofpreparing consolidated accounts forthe first time (however this amountcannot exceed cost of theinvestment). When results of theassociate are included in theconsolidated financial statements ofthe investor for the first time, thedifference between the book value(cost of the investment) and theshare in the equity method is to beshown separately in the consolidatedbalance sheet on first application ormentioned in the notes to thefinancial statements. The whole ofthis difference represents goodwill.

Under both methods, goodwill(residual difference in the book valuemethod) should be amortised ineach following year by at least 25% ofthe original amount. Alternatively, itcan be amortised over the periodexpected to benefit. The methodused should be disclosed.(§ 309(1) HGB).



Adjustments are required to bemade to achieve consistency withgroup accounting policies. Inpractice, such adjustments arerestricted to items that have amaterial impact on the consolidatedaccounts of the investor.(FRS 9)

Where profits and losses resultingfrom transactions between theinvestor and its associate areincluded in the carrying amount ofassets in either the investor orinvestee, the part relating to theinvestor’s share should beeliminated.(FRS 9)

In consolidated accounts, an investorcontinues to account for aninvestment in an associate when theassociate has net assets of nil ornegative net assets unless there issufficient evidence that an event hasirrevocably changed the relationshipbetween the investor and theassociate.

Once an investment ceases to beaccounted for as an associate underthe equity method, it may not beaccounted for as an associate againin the future.

Disclosure is required whereassociate is consolidated using itsown accounting policies which differfrom the group’s policies.(§ 312(5) HGB)

Unrealised profits and losses onstocks transferred to or fromassociates should be eliminated tothe extent that the appropriateinformation is known or available.(§ 312(5) HGB)

German GAAP requires similartreatment.

There is no similar requirementunder German GAAP. If theconditions for the treatment as anassociate are met it can be accountedfor as an associate again.



In the consolidated profit and lossaccount and statement of totalrecognised gains and losses, theshare of associate items is separatelydisclosed.(FRS 9)

JOINT VENTURESFRS 9 describes two forms ofarrangement which involve jointcontrol but which result infundamentally different accountingtreatments:

� Joint venture – a jointlycontrolled entity (entity meaninga venture with a trade orbusiness of its own, which mayor may not be a legal entity);

� Joint arrangement that is not anentity (JANE) – a jointlycontrolled asset, operation, orlegal entity which amounts to anextension of the investor’s owntrade.

Joint venture is an entity in whichthe reporting entity holds an intereston a long-term basis and is jointlycontrolled (no one entity can alonecontrol but all together can do so) bythe reporting entity and one or moreother venturers under a contractualarrangement.

In an investor’s consolidatedaccounts, joint ventures areaccounted for on the gross equitymethod, which is similar to equitymethod (or net equity method) but

In the consolidated profit and lossaccount, results relating to associatedenterprises shall be shown under aseparate heading.

In November the DRSC issued adraft accounting standard E-DRS 8,“Accounting for Investments inAssociates”.

Joint ventures are contractualagreements in respect of commoneconomic activities between two ormore parties.(HFA 1/1993)

The basis of accounting for jointventures will depend on whether it isan incorporated entity, orunincorporated entity, e.g. an entityconstituted under civil law (BGB-Gesellschaften) or partnership.

An investment in a joint venture thatis an incorporated entity should beaccounted for either as an associateor using the rules for consolidatedfinancial statements.

An investment in a joint venture thatis an unincorporated entity isaccounted as follows:

� proportional consolidation isallowed where an investorjointly manages the jointventure with one or more otherinvestors provided that theaccounts of the investee are notbeing fully consolidated by theother investor(s), and the



requires additional information to beshown on the face of the financialstatements: investor’s share ofturnover in joint venture on the faceof the profit and loss account,separately from group turnover; andshare of gross assets and liabilities ofjoint venture on the face of thebalance sheet. (FRS 9)

The requirement for a JANE is thateach participant should account forits own assets, liabilities and cashflows, measured according to theterms of the agreement governingthe arrangement. Each participantaccounts for its share of those itemsthat are not wholly attributable to anyone participant. This treatment hasan effect which is similar toproportional consolidation.(FRS 9)

investment itself does not meetcriteria for full consolidation inthe investor’s accounts;

� if the joint venture is managedjointly and is not consolidatedon a proportionate basis or ifjoint venture is not managedjointly but the investor has asignificant influence in the jointventure it must be accounted foras an associate.

(HFA 1/1993)



UNITED KINGDOM

STOCK VALUATIONStocks are generally valued at thelower of cost (purchase orproduction) and net realisable value. (SSAP 9)

Inclusion of foreign exchange gainsand losses in cost of stock isgenerally not permitted under UKGAAP.

Any provision for diminution invalue of stocks which is no longerrequired must be written back.(1985 CA, Sch. 4)

SSAP 9 contains no exceptions to the‘lower of cost and net realisablevalue’ rule. However, Companies Actallows stocks to be valued at currentcost, and in certain (very few)industries, such as commoditybrokers and plantation companies, itis accepted trade practice to valuestocks/inventories at market value. (SSAP 9, Sch. 4))

GERMANY

Stocks are valued at the lower of costand either of:

� net realisable value;

� market value;

� replacement value; or

� another value permitted by taxrules.

(§§ 253 (3), 254 HGB)

Where stocks purchased in a foreigncurrency are valued at the lower ofcost and replacement value,subsequent fall in the exchange rateresults in a corresponding write-down in the carrying value of thestock.

Same as for UK GAAP.(§ 280 HGB)

No similar exceptions are allowed byGerman GAAP. Stocks are notallowed to be carried at a value thatexceeds cost.


6. STOCKS/INVENTORIES AND LONG-TERM CONTRACTS


Cost of stocks comprise allexpenditure which has been incurredin the normal course of business inbringing the product or service to itspresent location and condition.

Production costs include all directexpenses as well as all relatedproduction overheads, even thoughthese may accrue on a time basis. Onthese grounds, generaladministrative and selling expensesare normally excluded.(SSAP 9)

Interest on borrowed capital tofinance the production of an assetmay be capitalised. In addition tointerest, the total cost of financecapitalised may include, for example,the amortisation of the issue costsand/or any premium on redemptionof the borrowing instrument(s).(CA 1985 Sch 4: 26)

Cost comprises purchase cost ormanufacturing cost. Manufacturingcost must include costs of rawmaterials and production costs(including special production costs)directly attributable to production.(§ 255 (2) HGB:“Herstellungskosten”)

In addition, the following costs mayalso be included:

� an appropriate proportion ofmaterials overheads, productionoverheads and depreciation oftangible fixed assets (these costare required to be included fortax purposes to the extent thatthey result from themanufacturing process and areincurred during the period ofproduction);

� costs of general administrationincluding expenditure for socialinfrastructure and facilities,voluntary staff benefits andpensions.

Selling costs must be excluded.(§ 255 (2) HGB)

Interest on loan capital used tofinance the production of an asset,may be included to the extent that itis incurred during the period ofproduction.(§ 255 (3) HGB)



A number of various costapproximation methods arepermitted including weightedaverage, standard cost, FIFO, etc.However, as the LIFO method doesnot usually provide a fairapproximation of actual costincurred during the period, thismethod is not generally accepted.(SSAP 9)

LONG-TERM CONTRACTSOne method of revenue recognitionon long-term contracts is permitted.Such contracts are assessed on acontract by contract basis, andturnover and related costs recordedas contract activity progresses. Theprofit recorded reflects theproportion of work completed andany known inequalities ofprofitability in the various stages ofthe contract.

No profit is taken where the outcomeof the contract cannot be assessedwith reasonable certainty. Where noloss is expected, turnover isrecognised as a proportion of thetotal contract value using a zeroestimate of profit. When a contract isexpected to make a loss, the whole ofthat loss is recognised immediately.

The definition of long-term contractsincludes significant contracts of lessthan one year’s duration where theirexclusion from turnover and profitswould not give a true and fair view.(SSAP 9)

Weighted average cost and LIFO(§ 256 HGB) are commonapproximations of cost which arecommonly used in practice as bothare accepted for tax purposes. FIFOis not permitted for tax purposes,unless it can be shown that it accordswith actual pattern of consumption.

The percentage of completionmethod is generally not permitted inGermany. Normally, profit isrecognised when the contract issubstantially completed. Conditionsfor the earlier recognition of profitare more stringent than those in theUK. As in the UK, all foreseeablelosses must be recognisedimmediately. According to a leadingcommentary on HGB, the method ofpartial recognition of profit (asopposed to the percentage ofcompletion method) is seen aspermitted if all of the followingconditions are met:

� duration of the contract extendsbeyond one financial year;

� long-term contracts represent asignificant part of the company’sactivities;

� recognition of the profit oncompletion of the contractwould considerably distort theview of the earnings position ofthe business;



� expected profit is reasonablydeterminable (based oncomparison of initial forecastsand the actual performance) andthere are no risks identified(such as potential claims by thecustomer) which may materiallyaffect the expected result;

� all potential warranty costs andrepairs are carefully taken intoconsideration;

� performance under the contractcan be divided into identifiablecomponents for the purpose ofthe calculation of profit;

� the profit proportionately relatedto these components is themaximum allowed to berealised; and

� if actual costs to date differ fromthe forecasted costs, profit maybe recognised only to the extentthat the remaining costs to beincurred do not exceed expectedincome.



UNITED KINGDOM

Debtors are normally recorded attheir nominal values withoutadjustment for imputed interest,except in rare circumstances wherean item has clearly been establishedin such a way that a proportion ofthat item represents interestreceivable or payable.

FRS 7 “Fair Values in AcquisitionAccounting” recognises that onacquisition the fair value of amountsreceivable or payable should takeaccount of the timing of receipt orpayment, either by discounting or byreference to market price.

GERMANY

Debtors are normally recorded attheir nominal values less appropriateallowances. If a long-term delay inpayment is granted without interestpayment or at low interest, thedebtor is recorded at its presentvalue. The unwinding of thediscount (accruing of interest) isrecognised in the profit and lossaccount as interest income.

In German practice, on acquisitionaccounts receivable and payable arenot revalued.


7. DEBTORS: IMPUTED INTEREST


UNITED KINGDOM

CAPITAL INSTRUMENTS

Capital instruments (other thanshares) are classified as debt if theycontain an obligation to transfereconomic benefits.(FRS 4)

Convertible debt is shown separatelyunder liabilities. Conversion of thedebt should not be anticipated. Onconversion, shares issued arerecorded at the amount equal to thecarrying value of debt at the date ofconversion.(FRS 4)

GERMANY

PROFIT-PARTICIPATIONRIGHTSGerman GAAP does not generallydeal with complex financialinstruments with exception ofpronouncements in respect of zerocoupon bonds (see discussion under‘Discounts and Premiums on Issueof Debt’ below) and “profitparticipation rights”. “Profitparticipation rights”(“Genussrechtskapital”) are debtinstruments which do not give rightof ownership but give right to areturn paid by the issuer which is ofa nature that would typically beearned by a shareholder: forexample, participation in profitsand/or on liquidation.

Depending on the type of economicbenefits granted in the accounts ofthe issuing party profit participationrights are:

� recorded as a liability;

� recorded directly within equity;or

� recognised as profit in the profitand loss account.

(HFA 1/1994)

Profit participation rights arerecorded in equity if the followingrequirements are met:

� on liquidation repayments aresubordinated to claims of othercreditors;


8. DEBT AND CAPITAL INSTRUMENTS


� return (interest) is calculated bythe reference to profits only withexposure to losses up to the totalamount of capital invested;

� the capital provided is of a longterm nature and neither theinvestor nor the issuer can callon the early repayment.

Profit-participation rights may becredited to the issuing party’sincome if the investor has no rightsto repayment and it has expresslystated its intent to make an incomecontribution.

In all other cases, profit-participationrights are carried as a liability.


NON-EQUITY SHARES IN SUBSIDIARIESAs an exception to the general rule inUK GAAP of classifying shareswithin equity, non-equity shares insubsidiaries are disclosed inconsolidated financial statements asa liability to the extent that anymember of the group has anobligation to transfer economicbenefits. In all other cases they arereported as part of minority interests.(FRS 4)

See Section 12 Share Capital for adiscussion of non-equity shares.

There is no equivalent requirementin Germany.


Any instruments issued as a meansof raising finance includingdebentures, loans and debtinstruments are initially recorded atnet proceeds. The finance costs,being the difference between netproceeds and total amounts payablein respect of the debt, are allocatedover the term of the debt at aconstant rate on the carryingamount. (FRS 4)

Generally, liabilities are required tobe stated at their redemptionamount.(§ 253 (1) HGB)

If the amount to be repaid in respectof a liability is higher than its valuewhen it arose, the difference may beaccounted for as a prepaid expensewhich must be either disclosedseparately in the balance sheet orexplained in the notes.(§§ 250 (3), 268 (6) HGB)

The difference is amortisedsystematically over the term of theliability.

There is a specific exception fromthe above rule for the zero couponbonds, the treatment of which isgoverned by HFA 1/1986. Initiallysuch liabilities are recorded at theamount of proceeds of issue.Thereafter the difference betweenboth amounts is accrued over theterm of the loan.


DISCOUNTS AND PREMIUMS ON ISSUE OF DEBT


DEBT ISSUE COSTSThe Companies Act prohibits debtissue costs being recorded as assets.FRS 4 requires the debt to bepresented net of debt issue costs.

The Companies Act permits issuecosts to be debited to the sharepremium account (additional paid incapital). This is achieved by means ofa reserve transfer each year, for theproportion of the debt finance chargerelating to issue costs, from theprofit and loss account reserves tothe share premium account.(CA 1985, Sec. 130 and Sch. 4:22and 24)

According to some leadingcommentaries on HGB, debt issuecosts should be charged to the profitaccount as expenses of the currentperiod due their non-recurringnature.

Discounts may be capitalised andshown as prepaid expenses andsubsequently amortised bysystematic annual charges spreadover the full term of the debt.(§ 250 (3) HGB)

Similarly, premiums may berecorded on the balance sheet asdeferred income and subsequentlyamortisied to profit and loss accountof the life of the instrument.



UNITED KINGDOM

PENSION COSTSFor defined contribution schemes, acharge against profits should bemade for the amount ofcontributions payable to the pensionscheme in respect of the accountingperiod.(SSAP 24)

For defined benefit schemes, SSAP24 permits use of a range of actuarialmethods and assumptions,providing the resulting annualpension expense is a substantiallylevel percentage of current andexpected future pensionable payroll.No specific method of amortisationof variations from regular cost overthe service lives of members isrequired.(SSAP 24)

GERMANY

PENSIONSDefined contribution schemes arerarely used in Germany.

Pension obligations are normallyrecognised in the financialstatements. Most of the employeepension schemes in Germany areinternally funded with pensionassets held directly by the company(direct pension obligations). Noseparate trust or fund is created butthe employer is required to take outmandatory insurance againstcompany insolvency(“Pensionssicherungsverein” or“PSV”). Consequently, the liabilityfor future benefits (as opposed toliability for contributions to thepension fund set up outside of thecompany which is recognised by thecompanies in the UK) is shown inthe company’s books rather than inthe accounts of a pension fund. Thisprovides a substantial liquiditybenefit for the company.

Pension obligations relating toperiods prior to 1.1.1987 (Art. 28EGHGB) do not have to be accrued.However, the amount of theprovision that would otherwise berecognised must be disclosed in thenotes.


9. EMPLOYEE BENEFITS


Pension liabilities are usuallydiscounted using an interest raterepresenting the expected long-termreturn on plan assets.

In Germany in most cases pensionaccruals are traditionally calculatedin accordance with tax regulationswhich specify actuarial methods andthe basis for the calculation inaccounting for pensions.(§ 6a and section 41 EStR)

Pension obligations are valued onthe basis of actuarial calculations ofthe discounted amount of the futureliability to employees. (§ 253 (1) HGB)

The basis of computation differsfrom that under UK GAAP, forexample, in the following respects:

� German tax law generally fails totake account of future salaryincreases, future pension planamendments and ignoresemployees under 30.Consequently, it may excludecertain parts of total liabilityreflected under UK GAAP;

� the discount rate is fixed by taxlaw at 6%.

The amount of accrual determinedunder § 6a EStG is the minimumamount that must be recognised inthe financial statements. Theamount of pension obligationsrecognised in the financialstatements may be increased to takeinto account other valuation basessuch as the present value, the cashvalue, the quoted cash value.



Variations from regular cost(experience gains and losses, theeffect of changes in assumptions,retroactive amendments) can beamortised over remaining employeeservice lives either in the aggregateor by separately amortising thevariation arising from eachvaluation.

Additionally, a lower discount ratemay be used for commitments inrespect of future pension increasesand other changes in the pensionplan.

Some companies fund their pensionobligations by purchasing lifeassurance policies(“Rückdeckungsversicherungen”) fortheir employees from externalinsurance and life assurancecompanies. These are mostcommonly used to provide pensionsfor senior executives. Where suchpolicies are purchased they arerequired to be recognised separately(cannot be set off against pensionobligation) and are shown underother assets or long-term financialassets. Their carrying value isdetermined based on an actuarialvaluation.

For tax purposes, increases inpension expenses over 25% may bespread over three years. (§ 6a EStG)

In practice, prior service cost andother changes in pension benefitsare normally charged to the profitand loss account in full in the year ofchange.



Companies are encouraged toinclude anticipated ex-gratia pensionincreases in actuarial assumptions,with any actual experience variationsfrom assumptions included in theoverall experience gain or loss.Alternatively, provided the increasesgenuinely are ex-gratia and are notthe result of an impliedcommitment, the capitalised cost ofthe increase not covered by a surplusis expensed at the time of the award.(SSAP 24)

There is no requirement to record adeficiency of net assets comparedwith the pension obligation (but seetransitional provisions below) as aliability.(SSAP 24)

The frequency of plan valuations isnot specified but this is normallydone triennially.(SSAP 24)

Plan assets may be valued using anyreasonable method.(SSAP 24)

Refunds of contributions that aresubject to deduction of tax may beaccounted for in the period when therefund occurs.(SSAP 24)

German GAAP does not provideguidance for recognition of ex-gratiaincreases in pensions.

Plan valuations are performedannually by qualified actuaries.

Investments held to satisfy pensionobligations in the future are treatedin the same way as other investmentassets of the company.



When the normal level ofcontributions is significantlychanged in order to eliminate asurplus or deficit resulting from asignificant reduction in members,any reduction in contributions isrecognised as it occurs, except wherethe reduction of members is relatedto the sale or termination of anoperation. In such cases, theassociated pension cost or creditshould be recognised immediately tothe extent necessary to provide forany losses not expected to be coveredby the future profits of the operationor the disposal of its assets.(SSAP 24 as amended by FRS 3)

30 November 1999 the ASB issuedFRS 17 Retirement Benefits which willintroduce major changes to thecurrent regime:

� use of market values for schemeassets;

� use of a high-quality corporatebond rate in discounting forpension obligations;

� immediate recognition ofdeficits and surpluses on thebalance sheet and in the STRGL;and

� prescribing the use of projectedunit method for actuarialcalculation of the liability.

FRS 17 becomes fully effective foraccounting periods ending on orafter 22 June 2003.



Although arrangements to providepost retirement benefits other thanpensions are still relatively rare inthe UK, many UK holdingcompanies have overseassubsidiaries which do provide suchbenefits.

UITF Abstract 6 extends the scope ofSSAP 24 to cover the provision ofother post retirement benefits.

Provisions may be set up for directand indirect obligations that aresimilar to pensions. As in the UK,such arrangements are rare andnormally arise only in foreignsubsidiaries.


POST RETIREMENT BENEFITS OTHER THAN PENSIONS

ACCOUNTING FOR SHARE OPTIONSProfit and loss account is chargedwith intrinsic value of optionsawarded to employees spread overthe relating performance period.Intrinsic value is measured as thedifference between the fair value ofthe options at the grant date less anyamount that the employees arerequired to pay for them.(UITF 17)

GASC has issued a discussion paperwhich proposes to spread the cost ofgranting stock options to the incomestatement (as staff expense) over theperiod of related performance. Theoptions will be measured on thegrant date and will reflect the fairvalue (the sum of intrinsic and timevalue) of the options at that date. Thefair value will be calculated withreference to an options-pricingmodel such as Black-Scholes model.


UNITED KINGDOM

Deferred taxation is provided fortiming differences for which it isprobable that a liability or asset willcrystallise. If it is not probable that aliability or asset will crystallise, thenno deferred taxation provision ismade in respect of that timingdifference. This is called a partialprovision approach. This approachrequires assessment of:

(i) the probability that the reversalof timing differences will bereplaced by new (future) timingdifferences so that a tax liabilityor asset will not crystallise; and

(ii) the likelihood that deferred taxassets will be recovered in thefuture.

The accounting rules for deferredtaxation in consolidated financialstatements are the same as for singleentity financial statements.(SSAP 15)


10. ACCOUNTING FOR INCOME TAXES

GERMANY

As financial accounting in Germanyis still largely tax-driven, deferred taxis relatively rarely recognised in theindividual financial statements, andthe amounts involved are usuallyless significant than in the UK.Additionally, while deferred taxliabilities are generally required to beprovided for, recognition of deferredtax assets is optional. (§ 274 (1) and (2) HGB)

In consolidated financial statements,both deferred tax liabilities anddeferred tax assets arising from theconsolidation adjustments arerequired to be recognised to theextent that they will reverse in futureyears. (§ 306 HGB)

Deferred tax balances are usuallymore significant in consolidatedfinancial statements as these are notaffected by tax valuation principlesand many of the tax-drivenaccounting entries are usuallyreversed on consolidation increasingthe divergence between accountingand tax profits.


Deferred taxation is calculated usingthe liability method. This methodapplies the tax rates likely to be ineffect during the periods in whichthe liability or asset is expected tocrystallise.(SSAP 15)

Deferred tax assets are recognisedfor future deductions and utilisationof tax credit carryforwards whererecovery is assured beyond areasonable doubt.(SSAP 15)

Deferred tax provisions should beincluded in the balance sheet underthe heading “Provisions for liabilitiesand charges” as part of the provisionfor “Taxation, including deferredtaxation”. (1985 CA Sch. 4:8)

Deferred tax assets and liabilities arecalculated based on the probablefuture tax liability (or tax saving)taking into account expected futurechanges in the tax law. (§ 274 (1) and (2) HGB, SABI3/1988)

Deferred taxes should be calculatedtaking into account proposeddividend payments (prior to 2001 thetax rate for distributed profits wasdifferent from the tax rate thatapplies to profits transferred toretained earnings).

Recognition of deferred tax assetsdoes not increase the amount ofdistributable profits: after thedistribution, the freely distributablereserves plus retained profits lessany accumulated losses must be atleast equal to the deferred tax asset. (§ 274 (2) HGB)

Loss carryforwards are not allowed tobe taken into account in thecalculation of a deferred tax asset.(§ 306 HGB)

A deferred tax liability should eitherbe classified in the balance sheetunder “Provision for taxation”,separately analysed, or shown as aseparate balance before or afterprovision for taxation.(SABI 3/1988)



SSAP requires that deferred tax debitbalances which are expected to beoffset in the future against reversalof a deferred tax liability should berecorded net of that liability. Whereany deferred tax is to be carried asasset it should be split between thecurrent and the non current asexplained above. Similarly, deferredliabilities are classified as current ornon current based on the period inwhich they are expected to crystallise.

The retention of earnings overseas isa timing difference only if there is anintention or obligation to remit themand remittance would result in a taxliability after taking account of anyrelated double tax relief. Wheredeferred tax is not provided onearnings retained overseas, this factshould be disclosed.

Either full provision basis(recognising the tax effect of alltransactions in the period), or partialprovision basis (accounting for thetax which is temporarily deferred oraccelerated which will reverse in theforeseeable future without beingreplaced) may be used in accountingfor deferred tax arising fromrecognition of pension and/or otherpost-retirement benefit obligations.(SSAP 15, as amended)

A deferred tax asset has to be shownseparately on the face of the balancesheet and has to be explained in thenotes.(§ 274 (2) HGB)

Deferred tax assets and liabilities arenot generally distinguished betweencurrent and non current.

German GAAP does not havespecific guidance for thesecircumstances.

German GAAP does not havespecific guidance on this matter.



7 December 2000 the ASB issuedFRS 19 Deferred Tax which willreplace the current partial provisionbasis for deferred tax with a form offull provisioning called theincremental liability approach. FRS19 which becomes effective foraccounting periods ending on orafter 23 January 2002 will:

� require full provision for alltiming differences, including,for example, acceleratedallowances for depreciation,short-term timing differencesand unrelieved tax losses;

� exempt provision for deferredtax on revaluation gains, rolledover gains and unremittedearnings of subsidiaries,associates and joint ventures;

� allow, but not require, deferredtax liabilities and assets to bediscounted.



UNITED KINGDOM

GENERAL REQUIREMENTSProvisions are liabilities of uncertaintiming or amount. Provisions shouldbe recognised when:

� an entity has a presentobligation (legal or constructive)as a result of a past event;

� it is probable that a transfer ofeconomic benefits will berequired to settle the obligation;and

� the amount of the obligation canbe reliably estimated.

On this principle no provisionshould be made for future operatinglosses.

However, provision should be madefor the present obligation under anonerous contract. Onerous contractsare narrowly defined, an example is alease on vacant property.

The amount provided should be thebest estimate of the expenditurerequired to settle the presentobligation at the balance sheet date.The provision should be discountedwhere this has a material effect.

Gains on the expected disposal ofassets should not be taken intoaccount in measuring a provision.(FRS 12)

GERMANY

Provisions for liabilities and chargesand accruals are both includedwithin the balance sheet position“Accruals” (“Rückstellungen”).

Accruals are required to be set up forliabilities of uncertain nature and foranticipated losses from uncompletedtransactions.(§ 249 (1) HGB)

Accruals for potential losses frompending transactions are no longerallowed to be set up in determiningtaxable income for business yearsending after 31 December 1996. Adeferred tax assest may thereforeresult from their inclusion in thebalance sheet.(§ 274 (2) HGB)

Accruals are also required to be setup also for:

� necessary repairs andmaintenance expenditureincurred within the first threemonths from the end of thepreceeding financial year.Accrual may also be set up forrepairs and maintenanceexpenditure incurred within oneyear of the prior balance sheetdate, however, this additionalaccrual is not deductible in thetax accounts;


11. OTHER PROVISIONS


RESTRUCTURING COSTSA restructuring provision isrestricted to the direct expendituresarising from the restructuring,which are those that are both:

� necessarily entailed by therestructuring; and

� not associated with the ongoingactivities of the entity.

� land reclamation expenseincurred during the followingyear;

� guarantee expenses which areincurred without legal orcontractual obligation.

(§ 249 (1) HGB)

Accruals may also be set up forexpenses attributable to the financialyear (or a prior period) which can beprecisely determined by the type ofexpense, and which are probable orcertain at the balance sheet date, butuncertain in respect of the amountor the timing when they will beincurred (so-called expenseequalisation accruals). A typicalexample is an accrual in respect ofthe proportionate cost of a majorrepair which is carried out only everyfew years. Expense equalisationaccruals are not allowable in the taxaccounts.(§ 249 (2) HGB)

Under German GAAP, arestructuring accrual may only be setup if there is a commitment to athird party. An example of this is asocial plan commitment (i.e. acommitment to employees), which isonly to be recognised in the financialstatements if an appropriateresolution has been taken bymanagement.



Restructuring costs should beprovided for only when the generalrecognition criteria for provisions aremet. A constructive obligation torestructure arises only when theentity has a detailed formal plan forthe restructuring and has raised avalid expectation in those affectedthat it will carry out therestructuring, by starting toimplement that plan or announcingits main features to those affectedby it.(FRS 12)

Due to existence of the principle of“Massgeblichkeit” in Germany (seeIntroduction), balance sheet mayinclude provisions which aredeductible for tax purposes but notnecessarily reflect economicsubstance. These provisions may bededucted from relevant asset in thebalance sheet. Alternatively, theymay be recorded separately andincluded in a “special account withcharacteristics of reserve”(“Sonderposten mitRücklageanteil”). If created, thisspecial account should be disclosedas a separate item on the balancesheet and the reason for this accountshould be explained in the notes.


SPECIAL ACCOUNT WITH CHARACTERISTICS OF RESERVEThere is no equivalent concept in theUK. It is not normally required, or inmost cases permitted, to recognisetax related provisions in the statutoryfinancial statements of UKcompanies. In fact, over the last fewyears Inland Revenue in UK hasmoved closer to accepting incomeand expenses recognised in “trueand fair” financial statements to beused in calculation of corporationtax. This, for example, relates toprovisions recognised in accordancewith FRS 12.


The balance in this account isreversed when amount previouslyaccrued for tax purposes is actuallyincurred, as, for example, in the caseof tax write down being replaced byeconomic depreciation of fixed assets(see Section 4 Tangible FixedAssets).

In practice, many Germancompanies prefer to show all taxrelated provisions in one account tomake their financial statementsmore transparent.

Expense and income recognised inthe profit and loss account as a resultof transfers to and from the specialaccount are required to be shownseparately as part of other operatingexpenses or other operating income.(§ 281 (2) HGB)



UNITED KINGDOM

Although many shares have featureswhich make them economicallysimilar to debt, because of their legalstatus, UK GAAP requires them tobe classified as shares and includedin shareholders’ funds. While thiscategorisation reflects the legal formof the instruments, FRS 4 requiresadditional analysis between equityand non-equity interests on the faceof the balance sheet to reflecteconomic substance. Shares areclassified as equity or non-equityshares on the following basis:

� non-equity – shares having anyright which limits the amount ofdividends (other than byreference to profit or assets), orlimits the amount of capitalrepayable (if this has acommercial effect), or which areredeemable at the request of theholder;

� equity – unrestricted shares.(FRS 4)

Under UK GAAP, any instrumentwhich is capable of being separatelytransferred or redeemed is separatelyaccounted for. For example, if a debtinstrument is issued with warrantsand the warrants are capable ofbeing separately transferred, a valueis allocated to the warrants andreported within equity.

GERMANY

German GAAP does not generallydistinguish between the equity andnon-equity shares. Preference shares(“Vorzugsaktien”) are generallypresented within shareholdersfunds. See also Section 8 Debt andCapital Instruments for a discussionof a specific type of capitalinstruments – profit participationrights – which may be classified asequity or liability depending on theirparticular features.


12. SHARE CAPITAL AND RESERVES


If a company issues shares at apremium, the amount received inexcess of the nominal value shouldbe transferred to a share premiumaccount, which is required to beshown separately on the face of thebalance sheet.(CA 1985 s 130 (1), CA 1985 Sch 4)

There is no similar requirement inthe UK.

Share premium account can be usedto:

� issue fully paid bonus shares;

� write off preliminary expenses;

� write off expenses, commissionor discount on any issue ofshares or debentures;

� provide for any premiumpayable on the redemption ofshares and debentures of thecompany.

(CA 1985 s 130(2))

Capital reserves include:

� amounts received in excess ofnominal value, on issue ofshares (including rights);

� amounts received on issue ofconvertible debentures andshare options;

� amounts paid by shareholders inconsideration of preferentialrights to shares;

� other capital contributions fromshareholders.

(§§ 150 (1) AktG, 272 (2) HGB)

AG and KGaA are required totransfer 1/20 of the profit for theyear (reduced by accumulated lossesbrought forward) to a legal reserveuntil such time as the legal reserveand capital reserves together reach10% of subscribed capital.(§§ 150 (2), 278 (3) AktG)

Legal reserves and capital reservesmay be used by AG and KGaA toeliminate loss for the year, to issuebonus shares and for other limitedpurposes. Details are described in §150 (3) and (4) AktG.


CAPITAL RESERVES AND LEGAL RESERVES


REVALUATION RESERVEThis reserve is used to record anygains and losses (subject tolimitations) arising from revaluationof assets. The balance of therevaluation reserve representsunrealised surplus and is notdistributable.

PURCHASE OF OWN SHARESCompany law requires that sharesredeemed or purchased must becancelled.

A public company is required tomake the redemption or repurchaseonly from distributable profits. Inaddition to writing off any premiumon redemption/ repurchase, a capitalredemption reserve is created and anamount equal to the nominal valueof the shares redeemed orrepurchased is transferred to thisreserve from distributable profits.(CA 1985 ss 160(1)(a), 170 and171(1))

In certain circumstances a companymay hold its own shares through aspecially created trust, for example,to satisfy its obligations under anemployee share option scheme. Itthis case, such shares should beshown as an asset on the balancesheet in accordance Companies Act1985 formats for accounts.(UITF 13)

Revaluation of assets is notpermitted in Germany.

Own shares are only allowed to beacquired in the cases specified in§ 71 (1) AktG. The company is notentitled to any rights from ownshares (§ 71 b AktG).

A reserve for own shares has to beset up for an amount equivalent tothe amount of own shares includedin assets. It may be created fromexisting revenue reserves.(§ 272 (4) HGB)

Reserve for own shares is alsorequired to be created in respect ofinterest in shares of the parententity.(§ 272 (4) HGB)



UK GAAP does not currently haveany specific guidance on revenuerecognition. However, in accordancewith the Companies Act 1985, onlyprofits realised at the balance sheetdate should be included in the profitand loss account and, consequently,in the net profit or loss for theperiod.

A company may also create otherreserves such as, for example, specialreserves as provided for by thecompany’s Articles of Association.However, this is not common in theUK.

Accumulated profits or losses shouldbe shown in the balance sheetseparately.(CA 1985 Sch 4: 8)

Revenue reserves may only includeamounts transferred from profits ofthe financial year or earlier years.(§ 272 (3) HGB)

Companies are required to showseparately on the face of the balancesheet:

� retained profits/accumulatedlosses brought forward;

� net profit or loss for the year.(§ 266 (3) HGB)


REVENUE RESERVES AND REVENUE RECOGNITION


UNITED KINGDOM

The total of dividends paid andproposed is shown as a separate itemin the profit and loss account, anyunpaid amounts are shown in thebalance sheet as a current liability.(1985 CA, Sch. 4)

It is a normal practice for listed andbig non-listed companies in the UKto pay interim dividends. Generally,the same rules apply for interimdividends as for the final dividends.

Dividend entitlements calculated byreference to time are accrued andincluded in the dividends proposed,or other finance chargeappropriation, based on whether it isintended to be paid in the nextperiod or not.

Dividend income on shares held inemployee share ownership trust isexcluded from the aggregate profitbefore tax. Instead, it is deductedfrom the aggregate of dividends paidand proposed.

GERMANY

The disclosure of dividends generallycomprises only dividends paid or forwhich a formal shareholders’resolution exists. A simple proposalof dividend is not generally sufficientfor recognition of the related liability.

There is no precise equivalent tointerim dividends in Germany, withdistributions being made annually.However, some GmbHs makeadvance dividend payments whichare, in effect, similar to interimdividends in the UK.


13. DIVIDENDS AND FINANCE COSTS OF SHARES


The finance charge in respect ofnon-equity shares is calculated in thesame way as for debt (see Section 8).The difference between the initialnet proceeds and the total amountsto be paid on the shares arerecognised over the term of theshares at a constant rate on thecarrying amount. The finance chargetherefore includes amortisation ofany premium or discount on theredemption of redeemable shares.

The amount of finance charge inrespect of non-equity shares isnormally shown as the appropriationof profit at the bottom of the profitand loss account (with credit entrygoing to appropriate reserve). As thetotal amount of dividends paid inrespect of each year is required to beshown on the face of the profit anloss account (see above), anydifference between the financecharge for the period and dividendspaid or proposed is shown as anappropriation of profit.


FINANCE CHARGE IN RESPECT OF NON-EQUITY SHARES


In the UK, it is not normal practiceto recognise dividends receivableunless the dividend was declaredbefore the receiving company’s yearend. However, dividends receivablefrom subsidiaries and associates inrespect of accounting periods endingon or before that of the parentcompany are normally accrued in theparent’s financial statements, even ifdeclared by the subsidiary orassociate after the parent’s year end(on the basis of decision of theEuropean Court).

Dividends are shown includingwithholding taxes (gross) butexcluding (net of) tax credits andother applicable taxes includingunderlying taxes. Withholding tax isdefined as tax deducted by the payerof dividends or other income andpaid to the tax authorities wholly onbehalf of the recipient.(FRS 16)

In Germany, similar rules wouldgenerally apply.

However, special rules apply for non-incorporated subsidiaries. Profits ofsuch subsidiaries are normallyrequired to be shown as receivable inthe parent’s balance sheet.

Dividends received are shown grossin the profit and loss account, i.e.including the withholding tax.

Companies must also gross up thedividend receivable to include thecorporate income tax charge relatingto the dividend which was sufferedby the subsidiary.

Under the recent German taxreform, the above remains valid onlyfor dividends received in 2001 and inexceptional cases (e.g. year enddeviates from fiscal year endDecember 31) in 2002.

From 2002 in case of domesticincorporated subsidiaries dividendsreceived are completely tax-free.


DIVIDENDS RECEIVABLE FROM EQUITY INVESTMENTS


UNITED KINGDOM

EXTRAORDINARY ITEMSFRS 3 includes a very restrictivedefinition of extraordinary items.Extraordinary items are defined asmaterial items possessing a highdegree of abnormality which derivefrom events or transactions outsidethe ordinary activities of thecompany and which are not expectedto recur. In practice, there are noexamples.

Extraordinary items are shown afterprofit on ordinary activities.(FRS 3)

GERMANY

There is no distinction in Germanybetween extraordinary andexceptional items. Extraordinaryincome or expenses which aredefined as those which arise outsidethe normal course of businessactivities of the company. They arerequired be disclosed separately inthe profit and loss account. Toqualify as extraordinary, such itemsmust be unusual and material.However, materiality in this contextis not legally defined.(§ 277 (4) HGB)

Examples of extraordinary itemsinclude:

� profit/loss on sale of affiliates;

� closure of part of business; or

� severance pay in the case ofmass redundancies.

Extraordinary items are required tobe shown after results from ordinaryactivities but before taxes on income(see appendix for an illustration ofthe presentation of extraordinaryitems).


14. EXTRAORDINARY AND EXCEPTIONAL ITEMS


The amount of each extraordinaryitem and related income tax incomeor expense is required to be disclosedon the face of the balance sheet or inthe notes.(FRS 3)

Medium sized and large companiesmust additionally disclose in thenotes the amount and nature of eachextraordinary item if such items arematerial for evaluation of the resultsof the company for the period.(§§ 277 (4) and 326 HGB)


EXCEPTIONAL ITEMSFRS 3 defines exceptional items as,material items which derive fromevents or transactions that fall withinthe ordinary activities of thereporting entity and whichindividually or, if of a similar type, inaggregate, need to be disclosed byvirtue of their size or incidence if thefinancial statements are to give atrue and fair view. All exceptionalitems are included in profit or lossfrom ordinary activities. Exceptionalitems are required to be includedunder appropriate headings inarriving at operating profit unlessthey are one of the three ‘non-operating exceptional items,’ namely:profits or losses on the sale ortermination of an operation; costs ofa fundamental reorganisation orrestructuring; and exceptional profitsor losses on the disposal of fixedassets.(FRS 3)

Most items included in extraordinarycategory in Germany would requiredisclosure as exceptional itemsunder UK GAAP (see above).


UNITED KINGDOM

Profits and losses on discontinuanceof a business segment and othergains or losses from sale orabandonment of fixed assets may notbe reported as extraordinary itemsunder FRS 3.

An operation is treated asdiscontinued if it is sold orterminated and it meets all of thefollowing conditions:

� sale or termination is completedwithin the year or before theearlier of the end of the threemonth period after the year endor the approval date of thefinancial statements;

� if a termination, activities haveceased permanently;

� the sale or termination hasmaterial effect on the nature andfocus of the reporting entity’soperations and represents amaterial reduction in operatingfacilities resulting from eitherwithdrawal from a particularmarket or a material reductionin turnover from continuingmarkets; and

� the discontinued assets,liabilities and operations areclearly distinguished physically,operationally and for financialreporting purposes.

GERMANY

Discontinued operations are notdefined in the commercial code.Profits and losses on discontinuanceof a business segment may beclassified as an extraordinary item, ifthe criteria defined under § 277 (4)HGB are met (see Section 15Extraordinary and ExceptionalItems).

Additional disclosures may berequired in the notes to the accountsif because of the effect ofdiscontinuance of an operation theannual financial statements do notpresent a true and fair view of thenet worth, financial position andresults. (§ 264 (2) 2 HGB)


15. DISCONTINUED OPERATIONS


The standard requires that as aminimum, turnover and operatingprofit for the current period beanalysed between continuingoperations, acquisitions anddiscontinued operations on the faceof the profit and loss account; withanalysis for the remaining statutoryheadings to operating profit shownin the notes. Comparative figuresmust be similarly analysed either onthe face of the profit and lossaccount or in the notes.(FRS 3)

See Appendix II for examplepresentation.



UNITED KINGDOM

The cumulative effect of a change inan accounting policy is shown as anadjustment of the opening balance ofreserves. The prior year comparativeinformation is restated under thenew policy.

The cumulative adjustment is to benoted at the bottom of the statementof total recognised gains and lossesof the current period, and includedin the reconciliation of movementsin shareholders’ funds of thecorresponding period. (FRS 3)

In addition to disclosure of the effecton the results for the precedingperiod, UITF 14 requires disclosureof the effect on the current year’sresults.

Exceptions to this general rule mayoccur when an accounting policychanges because of a new standard.Transitional provisions in applicablestandards specify the acceptableapproach(es) to record such changes.

GERMANY

Adjustments in respect of prior yearsare included in the profit and lossaccount of the current period.Indeed, any adjustments to theopening balances would conflict withthe “balance sheet continuity”principle (“Bilanzidentität”)according to which amountsincluded in the opening balancesheet must agree to the closingbalance sheet of the precedingfinancial year. (§ 252 (1) 1 HGB)

If adjustments in respect of prioryears are material their amount andnature must be disclosed in thenotes to the financial statements.(§ 277 (4) 3 HGB)

However, accounting methods andpolicies may be amended only inexceptional circumstances, e.g.:

� changes in commercial or taxlaw or other legal changes;

� material changes in shareholderstructure or management; and

� debt restructuring activities.(IDW HFA 3/1997)

Consequently, the cumulative resultof a change in accounting policy isrequired to be included in the profitand loss account of the currentperiod. The effect of such changemust be disclosed in the notes.(§ 284 (2) 3 HGB)


16. CHANGES IN ACCOUNTING POLICIES/PRINCIPLES


UNITED KINGDOM

FRS 14 requires all listed and wouldbe listed companies to disclose onthe face of the income statementbasic and diluted earnings per sharebased on the amount of net profit forthe period. Companies making thisdisclosure on a voluntary basis arerequired to follow requirements ofthe standard.(FRS 14)

GERMANY

German GAAP does not contain anyrequirements concerning calculationand disclosure of earnings per share.

A private institution called DVFAdeveloped a formula that is disclosedby listed companies in their annualreports voluntarily. The componentsof the calculation and reconciliationto the reported net profit or loss forthe period are not necessarilydisclosed in the accounts.


17. EARNINGS PER SHARE


UNITED KINGDOM

Companies legislation does not placeany restrictions on companieswilling to prepare their accountsdenominated in a different currency.

GERMANY

German financial statements mustbe expressed in Deutsche Marks orin Euro, and as from financial yearsending in 2001 – in Euro only.(§ 244 HGB)


18. FOREIGN CURRENCY TRANSLATION

IN INDIVIDUAL COMPANY’S FINANCIAL STATEMENTSUK GAAP requires the use oftemporal method to translate foreigncurrency transactions of individualcompanies. As in Germany, foreigncurrency transactions are initiallyrecorded using the exchange rateruling at the date of each transactionunless amounts are going to besettled at an agreed fixed rate orwhere a hedging instrument is used,in which case the rate appropriate forthe transaction is used.Approximations are permitted whenthe rates do not fluctuatesignificantly.

Subsequently, all monetary assetsand liabilities are retranslated usingthe exchange rate ruling at eachbalance sheet date unless amountsare going to be settled at an agreedfixed rate (or when they are fixedthrough hedging).

Non-monetary assets and liabilitiesnormally remain at the fixedrecorded amount and are notretranslated.

Foreign currency transactionsundertaken by a company arerecorded at the rate ruling at the dateon which each transaction occurs.

At each balance sheet date, inaccordance with the Germanprinciple of “Imparitätsprinzip":

� cash and bank balances inforeign currency may betranslated using the year endrate;

� foreign currency monetary assetsand liabilities are retranslatedusing the year end rate but onlyto the extent that it results in aloss, recognition of unrealisedgains is not permitted;

� if an amount of foreign currencybalance is going to be settled atan agreed fixed rate or for whichthere is a related and matchingforward exchange contract, thisrate/ (forward contract rate) mayused and the balance does nothave to be retranslated.

(§ 252 (1) 4 HGB).


Exchange differences arising fromtranslation of foreign currencytransactions are recognised in theprofit and loss account.(SSAP 20)


IN CONSOLIDATED FINANCIAL STATEMENTSSSAP 20 requires one of twotranslation methods, the closing rate/net investment method or thetemporal method, depending uponthe economic environment in whichthat enterprise operates. The netinvestment method is applied to thefinancial statements of foreignenterprises in the group whichoperate as a separate or quasi-independent entities from that of theinvesting company. The temporalmethod should be applied to foreignenterprises whose affairs are soclosely connected with those of theinvesting company as to constitutean extension of the economicenvironment of the investingcompany.

Under the net investment methodthe translation adjustments arisingfrom exchange rate fluctuations onthe net investment in a foreignenterprise which does not normallytransact business in the reportingcurrency of its parent (and which,therefore, have no impact on cashflows) are not included in theconsolidated profit and loss accountbut are treated as adjustments toequity and recognised in thestatement of total recognised gainsand losses.

German law (HGB) does not requireany particular method to be used. Inliterature and practice, the followingmethods for the translation offinancial statements of foreigncompanies were developed:

� closing rate/net investmentmethod;

� modified closing rate method(balance sheet at closing rate,profit and loss account ataverage rate);

� temporal method.

The HFA submitted a draftstatement on foreign currencytranslation in consolidated financialstatements in 1998. This statementis based on SFAS 52 in the US andIAS 21. It essentially follows asimilar approach to the one in SSAP20 in the UK:

� the method used to translate thefinancial statements of a foreignoperation depends on the way inwhich it is financed andoperates in relation to thereporting enterprise;

� a foreign operation that isintegral to the operation of thereporting enterprise and carries


The profit and loss account may betranslated using either the averagerate for the period or the closing rate. (SSAP 20)

In circumstances of high inflation(where the distortions affect the trueand fair view and in any event wherecumulative inflation rate approaches100% or more in a three yearperiod), the local currency financialstatements should be adjusted toreflect current price levels beforetranslation.

Two acceptable methods are to:

� adjust the local currencyfinancial statements to reflectcurrent price levels; or

� use a stable currency as thefunctional (“local”) currency.

(UITF Abstract 9)

on its business as if it were anextension of the reportingcompany’s operation shouldapply the temporal method;

� a foreign entity which hassubstantially all of its cash andother monetary items, incomeand expenses as well assubstantially all borrowingsdenominated in its localcurrency should apply the netinvestment method.

Treatments of translation differencesvary, with some companies takingthese directly to reserves, otherstaking them to the profit and lossaccount.

There are currently no specificrequirements, but in practice,treatment in Germany is similar toUK GAAP.



In consolidated financial statements,exchange differences arising fromforeign currency borrowings used tofinance or provide a hedge againstforeign equity investments may beoffset against reserve movementsrepresenting the exchangedifferences arising on the netinvestments in foreign enterprises.This treatment is available for alltypes of foreign equity investments,and foreign currency borrowingsmay be in a different currency fromthat of the investment providing thatsuch borrowings do not exceed theamount of cash which theinvestment is expected to generate.Similar treatment is used in thecompany’s own financial statementswhere foreign currency borrowingsare used to finance or hedge thecompany’s investment in a foreignentity.(SSAP 20)

The cumulative translationadjustments related to an investmentwhich has been sold or substantiallyliquidated are not reported ondisposal as part of the gain or loss onsale or liquidation.(FRS 3)

Hedges are not specifically dealt within German accounting rules, and avariety of treatments are adopted inpractice.



UNITED KINGDOM

A lease is treated as a finance lease ifit transfers substantially all the risksand rewards of ownership of theasset to the lessee. Where thepresent value of the minimum leasepayments equals 90% or more of theasset’s fair value, it is presumed thatthe lease is a finance lease. (SSAP 21)

In more complicated arrangementseven if the “90% test” is not met, thesubstance of the arrangement maybe one of financing. In this situationthe lessee capitalises the asset at thenet present value of the leasepayments.(FRS 5)

Lessors classify leases as finance oras operating based on the samecriteria used by lessees.(SSAP 21)

GERMANY

There are no regulations inCommercial Law dealing with leasesand, in practice, most companies usethe tax rules as the basis of theiraccounting. Complex definitionswithin tax law distinguish betweenoperating and finance leases, andthese definitions are applied both infinancial accounting and in thedrafting of lease agreements.

Relatively few leased assets arecapitalised by lessees. This is largelydue to unfavourable tax treatmentfor a lessee in a finance lease asdepreciation deductions generallyremain with the lessor.Consequently most leases aredesigned to qualify as operatingleases in order to avoid capitalisation.

In contrast to UK GAAP, Germanaccounting rules do not require toconsider the present value ofminimum lease payments as acriterion for classification of leases.

Where leased assets are capitalised,they are frequently not disclosedseparately, unless material.


19. LEASES


No UK equivalent. A lease is considered to be a fullamortisation contract when thefollowing three criteria are met:

� a lease contract is for a basiclease term (fixed contractuallease period);

� during this term the lease is noncancellable;

� the lease payments are equal orexceed lessor’s acquisition ormanufacturing costs (includingall direct expenses and financecosts).

Full amortisation contracts arefurther distinguished betweencontracts for moveable and non-moveable property.

For moveable property, a leased assetgenerally remains on the balancesheet of the lessor unless any of thefollowing apply, in which case it iscapitalised by the lessee:

� the basic lease period is eitherless than 40% or more than 90%of the economic useful life ofthe asset;

� the basic lease period is morethan 40% but less than 90% ofthe economic useful life of theasset and the lessee has anoption to purchase the asset at aprice lower than the expectedresidual net book value(assuming a straight linedepreciation) or fair marketvalue of the asset at the timewhen the option becomesexercisable;


FULL AMORTISATION CONTRACTS


� the basic lease period coversbetween 40% and 90% of theeconomic useful life of the assetand the lessee has an option toextend the lease and the sum ofthe lease payments is less thanthe reduction in value over theextension period;

� Special Leasing agreements existunder which the asset has beentailored to suit the requirementsof the lessee and at the end oflease term the asset will have noeconomic benefit to any otherparty.

The same criteria apply to buildings(“non-movable property”), exceptthat where there is an extensionoption the criterion is whether thelease payments in the extensionperiod are more or less than 75% ofthe usual rent which would be paidfor similar property.

Land is always recorded on thebalance sheet of the lessor, exceptwhere there is a purchase option atthe end of the lease term, in whichcase the land is treated in the sameway as the buildings.



No UK equivalent. Leases are classified as partialamortisation contracts where thecosts of the lessor are not fullycovered by the lease payments overthe period of the basic lease term.Accounting for these leases by thelessor or by the lessee is determinedby the economic characteristics ofthe contract. Who derives thebenefits of a leased asset andtherefore records an asset on itsbalance sheet is determined asdescribed below.

A “moveable asset” is recorded onthe balance sheet of the lessor where:

� there is an option for the lessorto sell the asset to the lessee at aprice determined already whenthe contract is concluded;

� the asset is sold for a price belowthe difference between the totalcosts of the lessor and the leasepayments over the periods of thebasics lease and the lessee has topay this amount to the lessor;

� the asset is sold for a priceexceeding the differencebetween the total costs of thelessor and the lease paymentsover the periods of the basicslease and the lessee receives lessthan 75% of this amount.

� the leasing contract is cancelledby the lessee and the lessee hasto pay an amount covering thedifference between the totalcosts of the lessor and the sum


PARTIAL AMORTISATION CONTRACTS


of the lease payments, reducedby 90% of the gain from the saleof the lease asset; if the gainexceeds the difference betweenthe total costs of the lessor andthe sum of the lease payments,the lessor will keep theexceeding amount.

Land and buildings are normallyrecorded on the balance sheet of thelessor, unless one of the following istrue:

� there is a Special Leasingagreement;

� the lessee has an option topurchase the asset and either thebasic lease term is more than90% of the asset’s usefuleconomic life or the option priceis less than the residual bookvalue assuming straight-linedeprecation;

� the lessee has an option toextend the lease and either thebasic lease term is more than90% of the asset’s usefuleconomic life or the leasepayments over the extensionperiod are less than 75% of thenormal rent for such property;

� there is either a purchase orextension option and the lesseebears the risk of partial orcomplete deterioration of theasset or it has to reimburse coststo the lessor in cases where thelease agreement is terminatedearly.



An asset under finance lease isrequired to be capitalised by thelessee. The amount capitalisedshould be equal to the present valueof the minimum lease payments,discounted at the interest rateimplicit in the lease. Fair value of theleased asset may be used if itapproximates the present value ofthe minimum lease payments.

The total finance charge is allocatedto the accounting periods so as toproduce a constant periodic rate onoutstanding liability.

An asset is depreciated over theshorter of the lease term and theasset’s useful economic life.(SSAP 21)

Unearned income on a finance leaseis amortised to earnings by the lessorbased on the net cash investment inthe lease (i.e. the amount invested inthe lease after taking into account allcash flows including those arisingfrom grants, taxation and interestfrom related borrowings).(SSAP 21)

If a lease is required to be capitalisedin the accounts of the lessee, thelessee records the asset and sets up acorresponding liability. The amountcapitalised as an asset should beequal to the acquisition cost used bythe lessor for determining the leasepayments. The lease payments haveto be separated into a portioncontaining interest and costs and aportion reflecting the repayment ofthe accrued liability.

The leased asset is depreciated inaccordance with the usual rules forcapitalised fixed assets.



SALE AND LEASEBACKA gain or loss on the sale of an assetwhich is leased back is deferred ifthe leaseback is a finance lease, andis recognised immediately when theleaseback is an operating lease (butin the latter case, some of the gain orloss is deferred if the sale price is notthe fair value). Measurement of gainor loss is made after providing forany permanent diminution in valuebased on the asset’s fair value priorto the leaseback.(SSAP 21)

Sale and leaseback transactions arenot specifically dealt with in GermanGAAP. In practice, both sale andleaseback are accounted for asseparate transactions. Profit on saleis recognised immediately.Consideration is then required as towhether the lessee should make aprovision for any losses which willbe incurred as a result of the leasingagreement.



UNITED KINGDOM GERMANY


20. BUSINESS COMBINATIONS

MERGER (POOLING-OF-INTERESTS) ACCOUNTINGFRS 6, effective for combinationsfirst accounted for in yearsbeginning on or after 23 December1994, introduced more restrictivequalitative criteria than the oldstandard, SSAP 23, and requiresmerger accounting to be used in therare situations of a ‘true merger’.(The old SSAP 23 rules still apply tobusiness combinations in earlierperiods.)

The qualitative criteria which areintended to restrict mergeraccounting to true merger situationsare:

� no party is portrayed as eitheracquirer or acquired;

� all parties participate inestablishing the managementstructure for the combinedentity;

� the relative sizes of thecombining entities are not sodisparate that one dominates byvirtue of size;

� no more than an immaterialproportion of the considerationreceived is represented by non-equity consideration (includingany consideration received forequity acquired in the two yearsprior to the combination); and

� no shareholder of the combinedentity retains an interest in onlypart of the combined entity.

Business combinations are usuallyaccounted for as acquisitions of onecompany by another. Mergeraccounting is sometimes permitted(see conditions below), but is rarelyadopted in practice. (§ 302 HGB)

The conditions that have to besatisfied in order for a company to beable to use merger accounting are asfollows:

� the business combination issubstantially achieved through ashare-for-share exchange;

� the shares to be eliminatedamount to at least 90% of thetotal amount of share capital;

� any cash consideration does notexceed 10% of the nominal valueof share issued.

(§ 302 (1) HGB)


To use merger accounting thequantitative criteria set out in theCompanies Act also have to be met:

� as a result of the offer, theofferor has secured at least 90%of all equity shares; and

� the fair value of anyconsideration other than equityshares does not exceed 10% ofthe nominal (par) value of theequity shares issued.

Where both sets of criteria are metFRS 6 requires merger accounting tobe used.(FRS 6)

There is a specific exemption fromthe above criteria for groupreconstructions. These businesscombinations can be accounted forby using merger accountingprovided that:

� the use of merger accounting isnot prohibited by law (seeabove);

� the ultimate shareholdersremain the same, and relativerights of each are unchanged;

� minority interests in the netassets of the group are notaffected.



Under the acquisition accountingrules, UK GAAP requires theidentifiable assets and liabilities of theacquired entity to be included in theconsolidated financial statements ofthe acquirer at their fair values at thedate of acquisition. The differencebetween these and the cost ofacquisition is recognised as goodwillor negative goodwill (see Section 2 ofthis book). The results of theacquired entity are included in theprofit and loss account of theacquiring group from the date ofacquisition.

Minority interests are recorded atfair value.(FRS 7)

At the time of the initialconsolidation there is the choice ofvaluing the assets at the value of thedate of acquisition or at the time ofthe initial consolidation (forexample, at the end of the year forwhich first consolidated accounts areprepared).

There are two acceptable variationsof the purchase method:

� the book value method; or

� the new valuation method.

Under both methods it is necessaryto determine the fair value of theassets and liabilities acquired. Underboth methods, investor’s share of thenet assets of the acquired companyadjusted for their fair value cannotexceed the cost of acquisition.

Under, the book value method,consideration paid in respect of theacquisition recorded in the parent’sown financial statements is initiallyoffset against the equity capital of thesubsidiary. The resulting differenceis first allocated to the fair values ofindividual assets or liabilities of theacquired entity (so-called “hiddenreserves”).

Residual debit difference isrecognised in the balance sheet asgoodwill. (§ 301 (1) 2 No.1 HGB).

Minority interests are shown at thepre-acquisition book value of theminority’s share of net equity of theacquired entity.(§ 307 (1) HGB)


ACQUISITION (PURCHASE) ACCOUNTING


The cost of an acquired enterprise isallocated to its assets and liabilitiesbased on their fair values that reflectthe conditions at the date ofacquisition. FRS 7 ‘Fair values inacquisition accounting’, effective forbusiness combinations inaccounting periods beginning on orafter 23 December 1995, providesrules and guidance on assigning fairvalues to specific types of assets andliabilities. (The old rules still apply totransactions entered into in earlierperiods.)

Specifically:

� monetary assets and liabilitiesshould take into account thetiming of amounts expected tobe received or paid. Where amarket value exists this wouldbe used. Where there is nomarket value, the amount willbe determined by looking at anequivalent item or bydiscounting. The unwinding ofany discount is treated asinterest;

Under the new valuation method ofaccounting, the balance sheet itemsof the subsidiary are restated to theirfair values before the actualconsolidation. (§ 301 (1) 2 No. 2 HGB).

Under the new valuation methodminority shareholders have a partialshare in hidden reserves, as opposedto the new value method when thisis not the case. (§ 307 (1) HGB)

There is currently no specificguidance in Germany in relation tothe determination of fair value of theassets and liabilities of the acquiredentities.

In August 2000, the new accountingstandard, DRS 4 “PurchaseAccounting”, was adopted.



� on consolidation the deferred taxbalance of the acquired companywill be determined on the basisof the new group, i.e. revisedwhere the new group structurechanges the amount of taxliabilities or assets expected tocrystallise in the future; anadditional provision for deferredtaxation is made for thedifference between the fair valueassigned to assets and their bookvalues only to the extent that atax liability is expected tocrystallise;

� tax benefits of losses carriedforward by an acquiredenterprise not recognised atthe acquisition date arerecognised in the profit andloss account when they give riseto a benefit;

� an intangible asset which can besold separately from theunderlying business acquired isvalued separately. If, however,an asset can be disposed of onlyas part of the revenue-earningactivity to which it contributes, itis regarded as indistinguishablefrom the goodwill relating tothat activity and is accounted foras goodwill.

(FRS 10)



Where a business is acquired whichsponsors a defined benefit pensionplan, fair values are attributed to anasset in respect of an actuarialsurplus expected to be realised incash terms, or by a reduction infuture contributions, and a liabilityin respect of a deficit.

Changes in benefits accruing to themembers of acquired schemes,whether negotiated as a condition ofthe acquisition or not, are accountedfor as a post-acquisition item.

When settlement of cashconsideration is deferred, the fairvalue of consideration is obtained bydiscounting to present value.(FRS 7 )

FRS 7 requires the cost ofacquisition to include a reasonableestimate of the fair value of anyamount of contingent considerationexpected to be payable in the future.These estimates should be reviewedand adjusted, if necessary, at eachbalance sheet date subsequent toacquisition, with consequentialcorresponding adjustments togoodwill.

Where deferred or contingentconsideration is to be satisfied by theissue of shares, there is no obligationto transfer economic benefits, andtherefore, amounts recognised arereported in the balance sheet as partof shareholders’ funds as a separatecaption representing shares to beissued.



Liabilities and provisions may onlybe established for liabilities andcontingencies which exist in theacquired company at the date ofacquisition. In particular thefollowing are treated as post-acquisition expenditure:

� changes resulting from theacquirer’s intentions or futureactions; and

� provisions or accruals for futureoperating losses or forreorganisation and integrationcosts (including closingduplicate facilities) expected tobe incurred as a result of theacquisition, whether they relatedto the acquired entity or theacquirer.

The fair value assigned to assets andliabilities acquired may be amendedwith a corresponding adjustment togoodwill until the end of the firstyear after the date of acquisition. Anysubsequent adjustments arerecognised in the profit and lossaccount.(FRS 7)



UNITED KINGDOM

The legal definition of a subsidiaryundertaking requiring consolidationincludes undertakings (corporations,partnerships and unincorporatedassociations) in which the parent(directly and with its subsidiaries’holdings):

� holds a majority of its votingrights; or

� is a member and has the right toappoint or remove directorsholding a majority of the votes ata meeting of the board ofdirectors; or

� is a member and controls alone,pursuant to an agreement withother shareholders or members,a majority of its voting rights; or

� has the right to exercise adominant influence by virtue ofits constitution or a controlcontract; or

� has a participating interest(generally a holding of 20% ormore, including convertiblesecurities and options) andactually exercises a dominantinfluence or manages theundertaking on a unified basiswith its own operations.

(CA 1985 Sec. 258)

GERMANY

All German companies which areparent companies within themeaning of § 290 HGB or whichmeet the criteria under the PublGare required to prepare consolidatedfinancial statements.

A parent company is a company thathas uniform control over anothercompany (its subsidiary).(§ 290 HGB)

Uniform control means that adomestic company has aparticipation in another entity(defined as long-term interests inshares, normally in excess of 20% ofshare capital) and exerts uniformcontrol over this entity. (§ 290 (1) HGB, § 271 (1) HGB)

A domestic company is also requiredto prepare consolidated accounts(whether it has participating interestor not) if it has the following legalrights indicating control:

� majority of the voting rights inthe subsidiary;

� the right to appoint or dismissthe majority of members of amanagement or supervisoryboard;


21. CONSOLIDATION


Consolidated accounts aremandatory for all parent companiesunless one of the following threeconditions applies:

� the UK parent claiming theexemption does not have anysecurities listed on a EU stockexchange, and the investingcompany is a wholly owned ormajority owned subsidiary of aparent incorporated in an EUmember state, which preparesaudited consolidated financialstatements in Englishcomplying with law based EUSeventh Directive, and theminority shareholders holdingmore than half the remainingshares or 5% of the total shareshave not requested groupaccounts;

(FRS 2, 1985 CA Sec. 228)

� the company and the groupheaded by it qualifies as small ormedium sized and the group isnot ineligible. Ineligible groupsfor the purposes of thisexemption are:

– a group in which any of itsmembers is a public limitedcompany;

� the right to exercise a controllinginfluence over the investeeunder a control contract or byvirtue of the Articles ofAssociation.

(§ 290 (2) HGB)

A company does not have to prepareconsolidated financial statements if:

� consolidated financialstatements which include theparent company and itssubsidiaries (subgroup) areprepared at a higher level in thegroup (§§ 291, 292 HGB);

� consolidated financialstatements which comply withIAS or US GAAP are preparedby the ultimate parent companyand it is listed (§ 292a HGB); or

� it is a small company (§ 293HGB).



– a banking institution;

– an insurance company;

– an authorised person underthe Financial Services Act1986;

� where all of the subsidiariesindividually are excluded fromconsolidation (see subsidiaryundertakings below).

A subsidiary undertaking is notconsolidated where:

� it is held solely for subsequentresale and has not beenpreviously included inconsolidation; or

� severe long-term restrictionssubstantially hinder the parentexercising control over its assetsand management;

(FRS 2 and CA 1985 Sec. 229)

In the UK there is a similarexemption in respected of asubsidiary with dissimilar activities.However, it is virtually never used inpractice as exclusion fromconsolidation on these grounds islikely to result in financialstatements of the parent not givingtrue and fair view.

In certain circumstances,subsidiaries may or must beexcluded from consolidation.

A subsidiary may be excluded where:

� significant and continuinglimitations inhibit control on along-term basis;

� the information required cannotbe obtained withoutunreasonable expense or delay;or

� where shares are held solely forresale or where subsidiaries areimmaterial.

(§296 HGB)

A subsidiary is required to beexcluded from consolidation whereits activities are dissimilar to those ofits parent and its consolidationwould result in financial statementsnot presenting a true and fair view.In practice this exemption is rarelyused.(295 HGB)



Certain specific disclosures inrespect of excluded subsidiaries arerequired, including the reason forexcluding from consolidation.(1985 CA Sch 7, FRS 2)

If subsidiaries are excluded fromconsolidation, the reason forexclusion is required to be disclosedin the notes to the accounts.



Appendices

APPENDIX I

CONSOLIDATED BALANCE SHEET – BRITISH HOLDINGS PLC

BALANCE SHEET – GERMANY COMPANY

APPENDIX II

CONSOLIDATED PROFIT AND LOSS ACCOUNT – BRITISHHOLDINGS PLC

PROFIT AND LOSS ACCOUNT – GERMAN COMPANY

APPENDIX III

CONSOLIDATED CASH FLOW STATEMENT – BRITISHHOLDINGS PLC

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NETDEBT – BRITISH HOLDINGS PLC

CASH FLOW STATEMENT – GERMAN COMPANY (INDIRECTMETHOD)

110 APPENDICES


APPENDIX I

CONSOLIDATED BALANCE SHEET – BRITISH HOLDINGS PLC31 December

NOTE 20X1 20X1 20X0 20X0£’000 £’000 £’000 £’000

FIXED ASSETSIntangible assets XX XXTangible assets XXX XXXInvestments in joint ventures:Share of gross assets XX XX Share of gross liabilities (XX) (X)

XX XX Investments in associate undertakings XX XX Other investments X XX

XX XX

XXX XXX

CURRENT ASSETSStocks XXX XXX Debtors XXX XXX Investments X X Cash at bank and in hand XX XX

XXXX XXXX

CREDITORS: amounts falling due within one yearDebenture loans XXX XXX Bank loans and overdraft XX XX Trade creditors XXX XXX Proposed dividend X X Accruals and deferred income XX XX

XXX XXX

NET CURRENT ASSETS XXX XXX

TOTAL ASSETS LESS CURRENT LIABILITIES XXX XXX

CREDITORS: amounts falling due after more than one year XX XX

PROVISIONS FOR LIABILITIES AND CHARGES XX XX

MINORITY INTERESTSEquity minority interests X XNon-equity minority interests X X

XXX XXX

CAPITAL AND RESERVESCalled up share capital XX XXShare premium account XX XXRevaluation reserve X XOther reserves X XProfit and loss account XXX XXX

SHAREHOLDERS’ FUNDS XXX XXX

Attributable to equity shareholders XX XXAttributable to non-equity shareholders XXX XXX

These financial statements were approved by the Board of Directors on [ ].Signed on behalf of the Board of Directors

APPENDIX I 111


Assets

A. Fixed assets

I. Intangible assets1. Concessions, industrial and similar

rights and assets and licences insuch rights and assets

2. Goodwill3. Payments on account

II. Tangible assets1. Land, land rights and buildings

including buildings on third partyland

2. Technical equipment andmachines

3. Other equipment, factory andoffice equipment

4. Payments on account and assetsunder construction

III. Financial assets1. Shares in affiliated enterprises

2. Loans to affiliated enterprises

3. Participations4. Loans to enterprises in which

participations are held

5. Long term investments6. Other loans

Aktivseite

A. Anlagevermögen

I. Immaterielle Vermögensgegenstände:1. Konzessionen, gewerbliche Schutz-

rechte und ähnliche Rechte undWerte sowie Lizenzen an solchenRechten und Werten

2. Geschäfts- oder Firmenwert3. geleistete Anzahlungen

II. Sachanlagen1. Grundstücke, grundstücksgleiche

Rechte und Bauten einschließlichder Bauten auf fremdenGrundstücken

2. technische Anlagen undMaschinen

3. andere Anlagen, Betriebs- undGeschäftsausstattung

4. geleistete Anzahlungen undAnlagen im Bau

III. Finanzanlagen1. Anteile an verbundenen

Unternehmen2. Ausleihungen an verbundene

Unternehmen3. Beteiligungen4. Ausleihungen an Unternehmen,

mit denen ein Beteiligungsverhält-nis besteht

5. Wertpapiere des Anlagevermögens6. sonstige Ausleihungen

112 APPENDIX I

BALANCE SHEET – GERMAN COMPANYAs of December 31


Assets

B. Current assets

I. Inventories1. Raw materials and supplies2. Work in process

3. Finished goods and merchandise4. Payments on account

II. Receivables and other assets

1. Trade receivables

2. Receivables from affiliatedenterprises

3. Receivables from enterprises inwhich participations are held

4. Other assets

III. Securities1. Shares in affiliated enterprises

2. Own shares3. Other securities

IV. Cash-in-hand, central bank balances,bank balances and cheques

C. Prepaid expenses

Aktivseite

B. Umlaufvermögen

I. Vorräte1. Roh-, Hilfs- und Betriebsstoffe2. unfertige Erzeugnisse, unfertige

Leistungen3. Fertige Erzeugnisse und Waren4. geleistete Anzahlungen

II. Forderungen und sonstigeVermögens-gegenstände1. Forderungen aus Lieferungen und

Leistungen2. Forderungen gegen verbundene

Unternehmen3. Forderungen gegen Unternehmen,

mit denen ein Beteiligungsverhält-nis besteht

4. sonstige Vermögensgegenstände

III. Wertpapiere1. Anteile an verbundenen

Unternehmen2. eigene Anteile3. sonstige Wertpapiere

IV. Kassenbestand, Bundesbankguthaben,Guthaben bei Kreditinstituten undSchecks

C. Rechnungsabgrenzungsposten

APPENDIX I 113


Equity and liabilities

A. Equity

I. Subscribed capital

II. Capital reserves

III. Revenue reserves1. Legal reserve2. Reserve for own shares3. Statutory reserves4. Other revenue reserves

IV. Retained profits/accumulated lossesbrought forward

V. Net income/net loss for the year

B. Accruals

1. Accruals for pensions and similarobligations

2. Tax accruals3. Other accruals

C. Liabilities

1. Loans, including convertible2. Liabilities to banks

3. Payments received on account oforders

4. Trade payables

5. Liabilities on bills accepted and drawn

6. Payables to affiliated enterprises

7. Payables to enterprises in whichparticipations are held

8. Other liabilities, includingtaxes, including

relating to social security andsimilar obligations

D. Deferred income

Passivseite

A. Eigenkapital

I. Gezeichnetes Kapital

II. Kapitalrücklage

III. Gewinnrücklage1. Gesetzliche Rücklage2. Rücklage für eigene Anteile3. satzungsmäßige Rücklagen4. andere Gewinnrücklagen

IV. Gewinnvortrag/Verlustvortrag

V. Jahresüberschuß/Jahresfehlbetrag

B. Rückstellungen

1. Rückstellungen für Pensionen undähnliche Verpflichtungen

2. Steuerrückstellungen3. sonstige Rückstellungen

C. Verbindlichkeiten

1. Anleihen, davon konvertibel2. Verbindlichkeiten gegenüber

Kreditinstituten3. erhaltene Anzahlungen auf

Bestellungen4. Verbindlichkeiten aus Lieferungen

und Leistungen5. Verbindlichkeiten aus der Annahme

gezogener Wechsel und derAusstellung eigener Wechsel

6. Verbindlichkeiten gegenüberverbundenen Unternehmen

7. Verbindlichkeiten gegenüberUnternehmen, mit denen einBeteiligungsverhältnis besteht

8. sonstige Verbindlichkeiten,davon aus Steuern

davon im Rahmen der sozialen Sicherheit

D. Rechnungsabgrenzungsposten

114 APPENDIX I


APPENDIX II

CONSOLIDATED PROFIT AND LOSS ACCOUNT – BRITISH HOLDINGS PLCYear ending 31 December

NOTE 20X1 20X1 20X0£'000 £'000 £'000

TURNOVERContinuing operations XXX Acquisitions XX

XXX Discontinued operations XXX Total turnover XXX XXX Less: share of joint ventures (XX) (XX)

GROUP TURNOVER XXX XXX Cost of sales (XXX) (XXX)

Gross profit XXX XXX Distribution costs (XXX) (XXX)Administrative costs (XX) (XX)

OPERATING PROFITContinuing operations XX Acquisitions X

XX Discontinued operations (XX)Less release of provision made in 19XX XX

Group operating profit XX Share of operating profit in joint ventures and associate undertakings XX Total operating profit XX XX Profit on sale of properties in continuing operations X X Provision for loss on operations to be discontinued (XX)Loss on disposal of discontinued operations (XX)Less release of provision made in 19XX XX

X

Profit on ordinary activities before interest XX XX Interest payable (XX) (XX)

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION XX XX Tax on profit on ordinary activities (XX) (X)

PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION XX XX Minority interests (X) (X)

Profit before extraordinary items XX XX Extraordinary item (X)

PROFIT FOR THE FINANCIAL YEAR XX XX Dividends paid and proposed including amounts in respect ofnon-equity shares (X) (X)Difference between non-equity finance costs and dividends (X) (X)

Profit retained, transferred to reserves XX XX

Earnings per share XXp XXpAdjustments [to be itemised and an adequate description given] Xp Xp

Adjusted earnings per share XXp XXp[Reason for calculating adjusted earnings per share]

Diluted earnings per share XXp XXp

APPENDIX II 115


Profit and loss account

1. Sales

2. Increase or decrease in of finished goodsinventories and work in process

3. Own work capitalized

4. Other operating income

5. Cost of materialsa) Cost of raw materials, consum-ables

and supplies and of purchasedmerchandise

b) Cost of purchased services

6. Personnel expensesa) Wages and salariesb) Social security and other pension costs,

including in respect of old agepensions:

7. Depreciationa) on intangible fixed assets and tangible

assets as well as on capitalized start-upand business expansion expenses

b) on current assets to the extend that itexceeds deprecation which is normalfor the company

8. Other operating expenses

9. Income from participations, of whichfrom affiliated enterprises:

10. Income from other in-vestments and longterm loans, including relating to affiliatedenterprises:

11. Other interest and similar income,including relating to affiliated enterprises

12. Amortisation of financial assets andinvestments classified as current assets

13. Interest and similar expenses, includingrelating to affiliated enterprises

Gewinn- und Verlustrechnung

1. Umsatzerlöse

2. Erhöhung oder Verminderung desBestands an fertigen und unferti-genErzeugnissen

3. andere aktivierte Eigenleistungen

4. sonstige betriebliche Erträge

5. Materialaufwanda) Aufwendungen für Roh-, Hilfs- und

Betriebsstoffe und für be-zo-geneWaren

b) Aufwendungen für bezogeneLeistungen

6. Personalaufwanda) Löhne und Gehälterb) soziale Abgaben und Aufwen-dun-gen

für Altersversorgung undUnterstützung, davon fürAltersversorgung

7. Abschreibungena) auf immaterielle Vermögens-ge-gen-

stände des Anlagever-mö-gens undSach-anlagen sowie auf aktivierteAufwendungen für die Ingang-setzungund Erweite-rung desGeschäftsbetriebs

b) auf Vermögensgegenstände desUmlaufvermögens, soweit diese die inder Kapitalgesellschaft üblichenAbschreibungen über-schreiten

8. sonstige betriebliche Aufwendungen

9. Erträge aus Beteiligungen, davon ausverbundenen Unternehmen

10. Erträge aus anderen Wertpapieren undAusleihungen des Finanz-an-lage--vermögens, davon aus verbundenenUnternehmen

11. sonstige Zinsen und ähnliche Erträge,davon aus verbundenen Unternehmen

12. Abschreibungen auf Finanzanlagen undauf Wertpapiere des Um-lauf-vermögens

13. Zinsen und ähnliche Aufwendungen,davon an verbundene Unternehmen

116 APPENDIX II

PROFIT AND LOSS ACCOUNT – GERMAN COMPANYFormat 1 – Expenses classified by their nature (Gesamtkostenverfahren)


Profit and loss account

4. Results from ordinary activities

15. Extraordinary income

16. Extraordinary expenses

17. Extraordinary results

18. Taxes on income

19. Other taxes

20. Net income/net loss for the year

Gewinn- und Verlustrechnung

14. Ergebnis der gewöhnlichenGeschäftstätigkeit

15. außerordentliche Erträge

16. außerordentliche Aufwendungen

17. außerordentliches Ergebnis

18. Steuern vom Einkommen und vom Ertrag

19. sonstige Steuern

20. Jahresüberschuß/Jahresfehlbetrag

APPENDIX II 117


1. Sales

2. Cost of sales

3. Gross profit on sales

4. Selling expenses

5. General administration expenses

6. Other operating income

7. Other operating expenses

8. Income from participations, of whichfrom affiliated enterprises:

9. Income from other investments andfinancial assets, including relating toaffiliated enterprises

10. Other interest and similar income,including relating to affiliated enterprises

11. Amortisation of financial assets andinvestments classified as current assets

12. Interest and similar expenses, includingrelating to affiliated enterprises

13. Results from ordinary activities

14. Extraordinary income

15. Extraordinary expense

16. Extraordinary results

17. Taxes on income

18. Other taxes

19. Net income/net loss for the year

1. Umsatzerlöse

2. Herstellungskosten der zur Erzie-lung derUmsatzerlöse er-brach-ten Leistungen

3. Bruttoergebnis vom Umsatz

4. Vertriebskosten

5. allgemeine Verwaltungskosten

6. sonstige betriebliche Erträge

7. sonstige betriebliche Aufwendun-gen

8. Erträge aus Beteiligungen, davon ausverbundenen Unternehmen

9. Erträge aus anderen Wertpapieren undAusleihungen des Finanz-an-lage-ver-mögens, davon aus ver-bun-denenUnternehmen

10. sonstige Zinsen und ähnliche Er-träge,davon aus verbundenen Un-ternehmen

11. Abschreibungen auf Finanzanlagen undauf Wertpapiere des Um-laufvermögens

12. Zinsen und ähnliche Auf-wendun-gen,davon an verbundene Un-ternehmen

13. Ergebnis der gewöhnlichenGeschäftstätigkeit

14. außerordentliche Erträge

15. außerordentliche Aufwendungen

16. außerordentliches Ergebnis

17. Steuern vom Einkommen und vom Ertrag

18. sonstige Steuern

19. Jahresüberschuß/Jahresfehlbetrag

118 APPENDIX II

Format 2 – Expenses classified by function (Umsatzkostenverfahren)


APPENDIX III

CONSOLIDATED CASH FLOW STATEMENT – BRITISH HOLDINGS PLCYear ended 31 December

NOTE 20X1 20X0£'000 £'000

NET CASH FLOW FROM OPERATING ACTIVITIES (NOTE[ ]) XX XX

RETURNS ON INVESTMENTS AND SERVICING OF FINANCEInterest received X X Interest paid (XX) (XX)Interest element of finance lease rentals payments (X) (X)Dividend received from associated undertaking X X

Net cash outflow from returns on investments and servicing of finance (XX) (XX)

TAXATIONUK corporation tax paid (XX) (XX)Overseas tax paid (X) (X)

Tax paid (XX) (XX)

CAPITAL EXPENDITURE AND FINANCIAL INVESTMENTPayments to acquire tangible fixed assets (XX) –Receipts from sale of tangible fixed assets XX X Payments for additions to investments (XX) (X)Receipts from sale of investments XX XX

Net cash inflow from capital expenditure and financial investment X X

ACQUISITIONS AND DISPOSALSPurchase of subsidiary undertakings (see note [ ]) (X) –Sale of business (see note [ ]) XX X

Net cash inflow from acquisitions and disposals XX X

EQUITY DIVIDENDS PAID (XX) (XXX)

MANAGEMENT OF LIQUID RESOURCESNet movement in short term deposits X XX Net purchase of short term investments (X) (X)

Net cash inflow from management of liquid resources X XX

FINANCINGIssue of ordinary share capital - XX Net repayment of loans (XX) (XX)Capital element of finance lease rental payments (X) (X)

Net cash outflow from financing (XX) (XX)

DECREASE IN CASH AND CASH EQUIVALENTS (XXX) (XX)

APPENDIX III 119


RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT – BRITISH HOLDINGS PLCYear ended 31 December

NOTE 20X1 20X0£'000 £'000

Net debt at the start of the year (XXX) (XXX)Decrease in cash (XXX) (XX)Net movements in short-term deposits X XXNet purchase of short-term investments (X) (X) Change in market value of investments (X) X Net repayments of loans XXX XX Foreign exchange effects XX X

Net debt at end of the year (XXX) (XXX)

120 APPENDIX III


CASH FLOW STATEMENT – GERMAN COMPANY (INDIRECT METHOD)

1. Net income/loss for the period (including minority interest) before extraordinary items

2. +/– Depreciation on/write-ups to fixed assets

3. +/– Increase/decrease in accruals

4. +/– Other cash outflows/inflows (e.g. depreciation on discounts capitalised)

5. –/+ Gain/loss on disposal of fixed assets

6. –/+ Increase/decrease in inventories, trade receivables and other assets not related toinvestment or financing activities

7. +/– Increase/decrease in trade payables and other liabilities not related to investment orfinancing activities

8. +/– Cash inflows and outflows from extraordinary items

9. = Cash flow from current business activities (= total 1 to 8)

10 Cash inflow from disposal of tangible assets

11. – Cash outflow from capital expenditure on tangible assets

12. + Cash inflow from disposal of tangible assets

13. – Cash outflow from investments in intangible fixed assets

14. + Cash inflow from disposal of financial assets

15. – Cash outflow from investments in financial assets

16. + Cash inflow from disposal of consolidated enterprises and other business units

17. – Cash outflow from acquisition of consolidated enterprises and other business units

18. + Cash inflow from financial investments within the scope of short-term cashmanagement

19. – Cash outflow from financial investments within the scope of short-term cashmanagement

20. = Cash flow from investment activities (= total 10 to 19)

21. Cash inflow from equity contributions (capital increases, disposal of own shares, etc.)

22. – Disbursements to owners of the enterprise and minority shareholders (dividends,acquisition of own shares, repayment of equity capital, other distributions)

23. + Cash inflow from granting of loans and raising of (finance) loans

24. – Cash outflow from repayment of loans and (finance) loans

25. = Cash flow from financing activities (= total 21 to 24)

26. Change in cash and cash equivalents (= total of 9, 20, 25)

27. +/– Changes in cash and cash equivalents on account of changes of exchange rates, to thegroup of consolidated entities and valuation-related changes

28. + Cash and cash equivalents at beginning of period

29. = Cash and cash equivalents at end of period (= total 26 to 28)

APPENDIX III 121


Liaison Resources

Deloitte Touche Tohmatsu provides audit, tax and consulting services to manycompanies operating throughout the world. In both Germany and in the UK, wehave a large group of professionals skilled at serving German subsidiaries of UKcompanies, UK subsidiaries of German companies, UK companies and Germancompanies involved in M&A activities across Europe, etc. We also havespecialised support resources available to assist German companies doingbusiness in the UK and UK companies doing business in the Germany.

122 LIAISON RESOURCES


Offices in the United Kingdom,Channel Islands and the Isle of Man

Aberdeen66 Queen’s Road, Aberdeen ABI 6YETel: 01224 325375 Fax: 01224 313611

Belfast19 Bedford Street, Belfast, Northern Ireland BT2 7EJTel: 02890 322861 Fax: 02890 234786

BirminghamColmore Gate, 2 Colmore Row, Birmingham B3 2BNTel: 0121 200 2211 Fax: 0121 236 1513

BracknellColumbia Centre, Market Street, Bracknell, Berks RG12 1PATel: 01344 54445 Fax: 01344 422681

BristolQueen Anne House, 69-71 Queen Square, Bristol BS1 4JPTel: 0117 921 1622 Fax: 0117 929 2801

CambridgeLeda House, Station Road, Cambridge CB1 2RNTel: 01223 460222 Fax: 01223 350839

CardiffBlenheim House, Fitzalan Court, Newport Road, Cardiff CF2 1TSTel: 02920 481111 Fax: 02920 482615

Crawley63 High Street, Crawley, West Sussex RH10 1BQTel: 01293 510112 Fax: 01293 533493



Edinburgh39 George Street, Edinburgh EH2 2HZTel: 0131 225 6834 Fax: 0131 225 4049

Glasgow39 St Vincent Place, Glasgow G1 2QQTel: 0141 204 2800 Fax: 0141 221 1864

Leeds10-12 East Parade, Leeds LSI 2AJTel: 0113 243 9021 Fax: 0113 244 5580

LiverpoolMartins Buildings, 4 Water Street, Liverpool L2 8UYTel: 0151 236 0941 Fax: 0151 236 2877

LondonStonecutter Court, 1 Stonecutter Street, London EC4A 4TRTel: 020 7936 3000 Fax: 020 7583 1198

Hill House, 1 Little New Street, London EC4A 3TRTel: 020 7936 3000 Fax: 020 7583 8517

Manchester201 Deansgate, Manchester M60 2ATTel: 0161 832 3555 Fax: 0161 829 3806

Milton KeynesAshton House, Silbury Boulevard, Central Milton Keynes MK9 2HGTel: 01908 666665 Fax: 01908 690510

Newcastle upon TyneGainsborough House, 34-40 Grey Street, Newcastle upon Tyne NE1 6EATel: 0191 261 4111 Fax: 0191 232 7665

Nottingham1 Woodborough Road, Nottingham NG1 3FGTel: 0115 950 0511 Fax: 0115 959 0060

SouthamptonMountbatten House, 1 Grosvenor Square, Southampton SO1 2BETel: 02380 334124 Fax: 02380 330948

124 OFFICES IN THE UNITED KINGDOM, CHANNEL ISLANDS AND THE ISLE OF MAN


St AlbansVerulam Point, Station Way, St Albans, Herts AL1 5HETel: 01727 839000 Fax: 01727 831111

JerseyP.O. Box 403, Lord Coutanche House, 66-68 Esplanade, St. Helier, Jersey,Channel IslandsTel: 01534 37770 Fax: 01534 34037

GuernseyP.O. Box 137, St. Peter’s House, Le Bordage, St. Peter Port, Guernsey, Channel Islands GY1 3HWTel: 01481 724011 Fax: 01481 711544

Isle of ManGrosvenor House, P.O. Box 250, 66/67 Athol Street, Douglas,Isle of Man IM99 1XJTel: 01624 672332 Fax: 01624 672334



Offices in Germany

Bahnstraße 16 Tel. (0211) 87 72-0140212 Düsseldorf Fax (02 11) 87 72-2 77

Schumannstraße 27 Tel. (0 69) 7 56 95-0160325 Frankfurt am Main Fax (0 69) 7 56 95-3 33

Georgstraße 52 Tel. (05 11) 30 23-030159 Hannover Fax (05 11) 30 23-1 70

Isartorplatz 1 Tel. (0 89) 2 90 36-080331 München Fax (0 89) 2 90 36-1 08/1 13

Weißenburger Straße 20 Tel. (0 60 21) 3 86 61-063739 Aschaffenburg Fax (0 60 21) 3 86 61-11

Werner-Haas-Straße 2 Tel. (08 21) 5 68 69-086153 Augsburg Fax (08 21) 5 68 69-19

Katharina-Heinroth-Ufer 1 Tel. (0 30) 2 54 68-0110787 Berlin Fax (0 30) 2 54 68-2 07

Otto-Brenner-Straße 209 Tel. (05 21) 92 76-3 1133604 Bielefeld Tel. (05 21) 92 76-3 10

Theresienstraße 29 Tel. (0351) 8 11 01-001097 Dresden Fax (0351) 8 11 01-99

Weihenstephaner Berg 4 Tel. (0 81 61) 51-1 0085354 Freising Fax (0 81 61) 51-1 25/5 55

126 OFFICES IN GERMANY


Am Kirchtor 7 Tel. (03 45) 21 99-606018 Halle/Saale Fax (03 45) 21 99-8 00

Neuer Wall 63 Tel. (0 40) 3 77 00-420354 Hamburg Fax (0 40) 3 77 00-5 11

Czernyring 22/11 Tel. (0 62 21) 1 30-569115 Heidelberg Fax (0 62 21) 1 30-6 06

Großer Brockhaus 1 Tel. (03 41) 9 92 70 0004103 Leipzig Fax (03 41) 9 92 71 00

Hasselbachplatz 3 Tel. (03 91) 5 68 73-039104 Magdeburg Fax (03 91) 5 68 73-10

Q 5, 22 Tel. (06 21) 1 59 01-068161 Mannheim Fax (06 21) 15 29 58

Willy-Brandt-Platz 20 Tel. (09 11) 2 30 74-090402 Nürnberg Fax (09 11) 2 30 74-26

Wilhelmsplatz 8 Tel. (07 11) 1 65 54-0170182 Stuttgart Fax (07 11) 1 65 54-50

OFFICES IN GERMANY 127


International Offices

Albania

Algeria

Angola

Anguilla

Argentina

Aruba

Australia

Austria

Bahamas

Bahrain

Bangladesh

Barbados

Belarus

Belgium

Belize

Bermuda

Bhutan

Bosnia &Herzegovina

Botswana

Brazil

British VirginIslands

BruneiDarussalam

Bulgaria

Cambodia

Cameroon

Canada

Cape VerdeIslands

Cayman Islands

Channel Islands

Chile

China

Colombia

Cook Islands

Costa Rica

Croatia

Cyprus

Czech Republic

Denmark

DominicanRepublic

Ecuador

Egypt

El Savador

Estonia

Finland

France

The Gambia

Gaza Strip

Germany

Ghana

Gibraltar

Greece

Greenland

Guam

Guatemala

Guyana

Honduras

Hong Kong

Hungary

Iceland

India

Indonesia

Ireland

Isle of Man

Israel

Italy

Ivory Coast

Jamaica

Japan

Jordan

Kazakstan

Kenya

Korea

Kuwait

Laos

Latvia

Lebanon

128 INTERNATIONAL OFFICES


Lesotho

Libya

Lithuania

Luxembourg

Macau

Macedonia

Madagascar

Malawi

Malaysia

Malta

Marshall Islands

Mauritania

Mauritius

Mexico

Micronesia

Moldova

Mongolia

Montenegro

Morocco

Mozambique

Myanmar

Namibia

Nepal

Netherlands

NetherlandsAntilles

New Zealand

Nicaragua

Nigeria

NorthernMariana Islands

Norway

Oman

Pakistan

Palau

Panama

Papua NewGuinea

Paraguay

Peru

Philippines

Poland

Portugal

Qatar

Romania

Russia and NewIndependentStates

San Marino

Saudi Arabia

Singapore

Slovak Republic

Slovenia

South Africa

Spain

Sri Lanka

Sudan

Sweden

Switzerland

Syria

Taiwan

Tanzania

Thailand

Trinidad &Tobago

Tunisia

Turkey

Turks & CaicosIslands

Uganda

Ukraine

United ArabEmirates

United Kingdom

United States

Uruguay

Venezuela

Vietnam

Yemen

Zambia

Zimbabwe

INTERNATIONAL OFFICES 129


Notes


Notes


Notes


This publication contains general information only and Deloitte & Touche (UK) and Deloitte &Touche GmbH Wirtschaftsprüfungsgesellschaft (Germany) are not, by means of this publication,rendering accounting, business, financial, investment, legal, tax or other professional advice orservices. This publication is not a substitute for such professional advice or services, nor should it beused as a basis for any decision or action that may affect your business or your clients’ businesses.Before making any decision or taking any action, you should consult a qualified professional advisor.Please contact any Deloitte Touche Tohmatsu firm for further information.

Neither Deloitte & Touche (UK) nor Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft(Germany) shall be responsible for any loss sustained by any person or entity who relies on thispublication.

The authors express their gratitude to all their colleagues participating in this project both inGermany and the UK. We are particularly grateful to Andy Simmonds for his technical advice andMichael Barber for his help in co-ordinating our efforts across the borders.

© Deloitte & Touche 2001. All rights reserved.

Design, typesetting and electronic film output by the Deloitte & Touche Studio, London.


EUROPEANCOMPARISON:UK&GERMANYThe main differences in UK and German accounting practice

by Adrian Crampton, Sasha Dorofeyev, Susanne Kolb and Wolfram Meyer-Hollatz

COVER 25/1/01 10:02 am Page 1

Documents

UK - IAS Plus · PDF fileSTART-UP COSTS 35 4. TANGIBLE FIXED ASSETS 37 ... governed by detailed legal regulations. The UK has a long history of wide share ownership, with not only