Introduction VGU 2018

Orientation Accounting (OBRW)
Prof. Dr. Marius Gros

University of Bremen
mgros@wiwi.uni-bremen.de
© Prof. Dr. Marius Gros Slide 1

Schedule
FA&BA2017 Schedule (from 17.09.2018 to 28.09.2018)
OBRW
Time Monday Tuesday Wednesday Thursday Friday

17.09.2018 18.09.2018 19.09.2018 20.09.2018 21.09.2018
9.00 - 10.30 German Class Lecture Lecture German Class
10.30 - 12.00 German Class Lecture Lecture German Class
12.00 - 13.00 LUNCH
13.00 - 14.30 Lecture Exercise Exercise Lecture
14.30 - 16.00 Lecture Lecture Exercise Lecture
Time Monday Tuesday Wednesday Thursday Friday

24.09.2018 25.09.2018 26.09.2018 27.09.2018 28.09.2018
9.00 - 10.30 German Class Exercise Exercise German Class Buffer
10.30 - 12.00 German Class Lecture Lecture German Class Buffer
12.00 - 13.00 LUNCH
13.00 - 14.30 Exercise Lecture Exercise Lecture
14.30 - 16.00 Exercise Exercise Exercise
Please note: Schedule may change according to course progress. Moreover,

we will also solve a lot of exercises also during the lectures!

Preface

Preface

Introduction to Accounting
1. Basics
2. Financial Reporting – The Case of

Germany
3. International Financial Reporting

Standards (IFRS)

1. Basics
What is accounting?
The purpose of accounting:

(1) to identify, record, and communicate the economic events of an
(2) organization to
(3) interested users.

1. Basics
(1) Which Organizations prepare Accounting Data (in Germany)?
• Capital companies (Kapitalgesellschaften), for example:

• Share corporations (private or public) (Aktiengesellschaft (AktG))
• Limited liability company (Gesellschaft mit beschränkter Haftung (GmbH))
• Societas Europaea (Europäische Gesellschaft (SE))
• Partnerships (Personengesellschaften)
• Sole Proprietorships (Einzelunternehmem)
• (some) Associations
• (some) Public sector companies

1. Basics
(2) What is an Economic Event?
Definition: Transactions relevant to the business of an organization

that can be expressed in monetary units.
(monetary unit assumption)
Examples:
• Sale of goods
• Purchase of inventory, machinery, plant, equipment, land
• Payment of wages to employees
• Issuance of bonds
• Payment of bills
1. Basics
(3) Who uses Accounting Data? (Interested Users?)
Internal Users External Users
Human Taxing
Resources Authorities
Labor
Unions
Finance
Management Customers
Creditors
Marketing Regulatory
Agencies
Investors

1. Basics
What are External Users using Accounting Data for?
Basis for economic decisions of external users, for example:
• Investors: sell, hold or buy stock of company
• Banks: providing loan to company
• Suppliers: decision to deliver on account
Dividend distribution (under German law, additional company law regulations apply)
Taxable income (under German law, additional tax law regulations apply)

1. Basics
What kind of Accounting Data exists?
Accounting Data
Internal Accounting External Accounting

(=internal users)
(=external users)
(Management
Accounting/Controlling) (GAAP)
§§ 238 I (1), 242 HGB § 290 I HGB
Single Consolidated
No (explicit) legal requirements Financial Financial
Statements Statements
1. Basics
Who is responsible for Financial Statements (in Germany)?
Board of Management Auditor

Responsible for External Audit, e.g.
preparation (§ 91 I AktG) KPMG, PWC, E&Y
(§ 316 HGB)
Financial
Statements
(according to
German GAAP and/or IFRS)
Supervisory Board and Enforcement

Audit committee Additional Audit
Audit und Approval (§ 171 I AktG) (FREP, BaFin)
(§ 342b HGB, § 37o WpHG)

1. Basics
What are Generally Accepted Accounting Principles (GAAP)?
A set of accounting principles, standards and procedures that companies use to

prepare their financial statements.
• In Germany, GAAP usually refers to HGB (German Commerical Code)
• In US, GAAP usually refers to US GAAP
• In Vietnam, GAAP usually refers to VAS
• Also, other sets of (international) GAAP exist:
 IFRS (International Financial Reporting Standards)

1. Basics
What is the difference between various

Generally Accepted Accounting Principles (GAAP)?
Basic Difference
• Rule based (US GAAP) vs. Principle based (IFRS)

vs. Principles only (HGB (=German GAAP))
Differences in recognition and measurement
• historical cost principle (HGB) vs. fair value approach (IFRS)

• HGB inherits more conservatism and prudence
Differences in revenue recognition
• completed contract method (HGB) vs. percentage-of-completion method (IFRS)
Presentation (form) and elements of financial statements
• balance sheet classification
• Management report

1. Basics
What do different Generally Accepted Accounting Principles

(different local GAAPs) have in common?
German GAAP
(HGB)
US GAAP IFRS
Bookkeeping
(recording = record keeping)
(e.g. double-entry accounting system)
UK GAAP Cambodian
GAAP
Vietnamese
GAAP (VAS)

1. Basics
Definition: Bookkeeping
• Bookkeeping is a system that helps a company to record and classify business financial
transactions
• Bookkeeping's objective is to record and summarize these financial transactions into a

usable form that provides financial information about a business.
Technique for Bookkeeping: Double-entry accounting system
• A set of rules for recording financial information in a financial accounting system

1. Basics

Germany

Standards (IFRS)

2. Financial Reporting – The Case of Germany
(German) Commercial Law and

IFRS (EU-IAS Directive) „German GAAP“ (German) Tax Law
AktG EStG
IFRS/ IAS
GmbHG KStG
IFRIC / SIC UStG,

GenG
GewStG
PublG BewertungsG
Framework
HGB Abgabenordnung
Fair Presentation
(Overriding Principle) and common GAAP EU-Laws

Obligation to prepare financial statements: Differentiation between Single / Separate

financial statement and consolidated financial statement
Single / Separate financial statement Consolidated financial statement
EU Regulation German Law EU Regulation German Law
Accounting Directive
Accounting Directive (2013/34/EU)
(2013/34/EU) § 290 ff. HGB
The annual accounts of § 238 ff. HGB Obligation to prepare a
companies with the consolidated financial Obligation to prepare a
legal form statement for a parent consolidated financial
Obligation to prepare
AG; KGaA; GmbH; a single / separate undertaking, if a statement for a parent
OHG; KG financial statement for controlling influence undertaking, if a
must be published in a merchant on a subsidary exists controlling influence
accordance with on a subsidary exists
Directive 68/151/EEC IAS Regulation

Which accounting standards are applied by German companies for

their single and consolidated financial statement?
Non-capital-market-oriented Capital-market-oriented
companies companies
Single / Separate Consolidated financial Single / Separate Consolidated financial

financial statement statement financial statement statement
HGB (German-GAAP) HGB (German-GAAP)

(IFRS option for HGB (German-GAAP) (IFRS option for
IFRS
informational IFRS option informational
purpose only) purpose only)
Basis for Basis for Basis for Basis for

determining Informational determining Informational
dividend dividend
Tax Income purpose Tax Income purpose
distribution distribution
(additional set (additional set
of tax law of tax law
regulations regulations
applies) applies)

Daimler AG
 Consolidated financial Statement and
 Single / Separate financial statement
Share: 100% Share: 100% Share: 89,29% Share: 100%

Smart France SAS Mercedes-Benz Mitsubishi Fuso
Daimler Financial
Truck and Bus
Asia GmbH Services AG
Corporation
 Single / Separate  Single / Separate  Single / Separate
 Single / Separate
financial statement financial statement financial statement
financial statement
+ tax statements (in principle on entity level, but national regulations apply)

Further Reporting requirements
Ad-hoc Releses („continuous reporting“) (according to capital market law)
Source:
www.daimler.de

Further Reporting requirements
Cross Listing
The listing of a company on more than one (foreign) stock exchanges.
The company in question must meet addition requirements

(e.g. former listing of Deutsche Bank at New York Stock Exchange, or listings of
Chinese entities at Frankfurt Stock exchange)
Source:
www.deutsche-bank.de

(German/European) Reporting requirements in sum
• Single/separate Financial Statements (required by company law)
• Consolidated Financial Statements (required by (group) company law)
• Semi-Annual Reports (required by capital market law)
• Quarterly Reports not required anymore since 2016, however, stock

exchanges may require some quarterly information as a prerequisite to be
listed in certain markets segments/standards
• Ad-hoc Releases (required by capital market law)
• Reports required by foreign regulation (Delisting (May 2010) and

Deregistration (June 2010) in US / Japan requirements expired in June 2017)
• Reports for Tax Purposes (not publicly available, for tax authorities only)
Example Volkswagen: Availability of financial statements on website

Example Volkswagen: Availability of financial statements on website

Example Volkswagen: “Normal” news and Ad hoc-Releases on the website

Example Volkswagen: Examples of Ad-hoc Releases (good news and bad news)

1. Basics

Germany

Standards (IFRS)

3. International Financial Reporting Standards (IFRS)
Why IFRS?
• IFRS are intended to be a uniform accounting/reporting language
More comparability
• Investors don’t need to waste time, money and effort to reconcile financial information as
they compare similar companies all over the world
A uniform accounting language can add value (by saving cost)

Who
Who develops
develops IFRS?
IFRS?
Monitoring Board
of public capital market authorities
appoints, report to
monitors
Trustees of the IFRS Foundation

(Governance)
22 Trustees
oversee, review
effectiveness,
appoint inform informs
appoint and
finance
Standard-setting
IFRS Advisory Council
International Accounting Standards
Board (IASB)
(IFRS / IFRS for SME)
currently 16 members
provides strategic
advice IFRS Interpretations Committee
(IFRIC)
(IFRICs) 14 members
SME Implementation Group
Operations
Education Initiatives, IFRS Taxonomy (XBRL), Content Services
Source: http://www.ifrs.org/The+organisation/How+we+are+structured.htm


The Use of IFRS in Consolidated Financial Statements
Countries with mandatory use of IFRS

for capital market oriented and not
capital market oriented companies
Countries with mandatory or optional
use for designated companies
Source: iasplus (2010)

The Use of IFRS in Single Financial Statements
Countries with mandatory use of IFRS

for capital market oriented and not
capital market oriented companies
Countries with mandatory or optional
use for designated companies
Source: iasplus (2010)

IAS / IFRS issued by the IASB
IAS 1 Presentation of Financial Statements IAS 36 Impairment of Assets
IAS 2 Inventories IAS 37 Provisions, contingent liabilities and contingent assets
IAS 7 Satements of Cash Flows IAS 38 Intangible assets
IAS 8 Accounting policies, changes in accounting estimates and errors IAS 39 Financial instruments: recognition and measurement
IAS 10 Events after the Reporting Period IAS 40 Investment property
IAS 11 Construction Contracts IAS 41 Agriculture
IAS 12 Income Taxes IFRS 1 First-time adoption of international financial reporting standards
IAS 16 Property, plant and equipment IFRS 2 Share-based payment
IAS 17 Leases IFRS 3 Business combinations
IAS 18 Revenue IFRS 4 Insurance contracts
IAS 19 Employee benefits IFRS 5 Non-current assets held for sale and discontinued operations
IAS 20 Accounting for government grants and disclosure of government assistance IFRS 6 Exploration for and evaluation of mineral resources
IAS 21 The effects of changes in foreign exchanges IFRS 7 Financial instruments: presentation
IAS 23 Borrowing Costs IFRS 8 Operating segments
IAS 24 Related Party Disclosures Financial instruments (replaces IAS 39 with effect from January 1st
IFRS 9
2013)
IAS 26 Accounting and reporting by retirement benefit plans IFRS 10 Consolidated Financial Statements
IAS 27 Separate financial statements IFRS 11 Joint Arrangements
IAS 28 Investments in associates IFRS 12 Disclosure of interests in other entities
IAS 29 Financial reporting in hyperinflationary economies IFRS 13 Fair Value measurement
IAS 32 Financial instruments: presentation IFRS 14 Regulatory Deferral Accounts
IAS 33 Earnings per share IFRS 15 Revenue Recognition
IAS 34 Interim financial reporting IFRS 16 Leases
IFRS 17 Insurance contracts


Endorsement Process
IASB
Publication of Standards
and Interpretations
Endorsement- For example review

of consistency
Process with EU directive 2013/34/EU
IFRS as applicable
European law

Endorsement Status
of IFRS
Source:
EU endorsement
status report,
Position as of
Aug 15th 2018

Endorsement Status
of IFRS
Source:
EU endorsement
status report,
Position as at
Aug 15th 2018

Decision to adopt IFRS in the EU and Enforcement

Rationale for the Implementation of an Enforcement System:
• Worldwide accounting scandals (Enron, Worldcom, Parmalat); Downfall of Arthur
Andersen
• Accounting scandals in Germany (Balsam/Procedo 1994, Flowtex 2000, Comroad 2002,
Bankgesellschaft Berlin 2002)
 Without proper enforcement only “rules on paper”
Consequences:
• European accounting framework of (former) 4th and 7th directive was not longer
considered efficient
• The need for high quality accounting standards, a more effective enforcement of
accounting standards and oversight bodies on audit firms was asserted
• In Europe, the EU and its members agreed on tightening regulation on transparency,
accounting and auditing
• Regulation [EC] No 1606/2002 (IAS-Regulation): requires capital market oriented
companies to apply IFRS for their consolidated financial statements.
• Objective: Improvement of comparability and quality of financial statements of publicly
traded firms across the EU
Enforcement - Framework in Europe

IAS-Regulation
Recital 16 of IAS regulation requires member states to take appropriate measures to ensure
compliance with international accounting standards
 IAS regulation offers some areas of discretion
Committee of European Securities Regulators (CESR)/ European Securities and Markets

Authority (ESMA) - guidance (currently non-binding)
• CESR Standard No. 1 on Financial Information – Enforcement of Standards on Financial
Information in Europe [2003]: Principles of organization/design of enforcement systems
within the EU
• Standard No. 2 on Financial Information – Coordination of Enforcement Activities [2004]:
Cooperation on an European level; European Enforcers Coordination Sessions
• ESMA guidelines replace CESR Standards. Still non-binding.
• EECS database with extracts of decisions taken by national enforcers aims to increase
convergence amongst national enforcement activities, but neither approves nor rejects
decisions taken by national enforcers
• Self assessment of CESR standards shows no full compliance of national enforcement
institutions
 European regulation resulted in different transition approaches among member states

Enforcement – Private Enforcement Body
• Applied e.g. in United Kingdom, Ireland, (Switzerland)

• Enforcement actions und public availability of enforcement
Private Enforcement results differs between countries:
Body
e.g. restatement in UK and Ireland, public error
announcements in Switzerland (Berger 2010)
Financial
Statements of
publicly traded
companies

Enforcement – Enforcement Authority
• Applied e.g. in France, Italy, Spain, Netherland, Denmark

(and USA)
Enforcement • Enforcement actions und public availability of enforcement
Authority results differs between countries
• e.g. in France no detailed statistics on enforcement results
are available, in Italy only few information are available, while
in the Netherlands recommendations by AMV become public
(Berger 2010)
Financial
Statements of
publicly traded
companies

Enforcement – Implementation in Germany

German two-tier structured system (since 2005):
• Financial Reporting Enforcement Panel (FREP) as a private body
on the first level
• No sanctioning power
BaFin (Enforcement
Authority) • Voluntary cooperation to foster self-regulation
• In case of error finding, company has to agree with the error
and its disclosure
• Federal Financial Supervisory Authority (BaFin) as a federal agency
on the second level
FREP • Comes into play if company refuses cooperation or a result of
(Private FREP’s investigations is not accepted
Enforcement • Sanctioning/executive power
Body) • In case of error finding, BaFin orders company to publish an
error announcement
 “Name and shame”-mechanism
Financial
Statements of Enforcement investigation process
publicly traded • Random, incident-based and on BaFin’s demand investigations
companies • Frequency of investigations: In general, after an investigation
companies are excluded from the random sample for 4 to 10 years
Enforcement Findings in Germany
• Completed examinations in the first 10 years since the introduction of the FREP/BaFin
enforcement mechanism:
Investigation
Random Incident-based
Year due to BaFin's Total
investigation investigation
demand
2005 4 3 0 7
2006 98 10 1 109
2007 118 15 2 135
2008 118 19 1 138
2009 103 14 1 118
2010 106 8 4 118
2011 90 6 14 110
2012 110 2 1 113
2013 98 6 6 110
2014 99 3 2 104
2015 71 6 4 81
Total 1015 92 36 1143

Enforcement Findings in Germany: Error rates in early years
• Average error rate (i.e. erroneous financial statements) until 2012: Approx. 20%
• Even higher error rates until 2011, about 25% in early years of FREP-enforcement
• Error-prone topics: Accounting for financial instruments, income taxes, business
combinations
• FREP identifies scope and complexity of IFRS as possible explainations for high error
rates
160
examinations completed
135 138
140
No. of errors/no. of
118 118
120
109
100
80
60
40
25.9% 26.8%
19.5% 26.3%
20 17.4% 35 37
23 31
7 19
0 2 28.6%
Jul-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec
2005 2006 2007 2008 2009 2010

Enforcement Findings in Germany: Error rates in recent years

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Orientation Accounting (OBRW)

Prof. Dr. Marius Gros

© Prof. Dr. Marius Gros Slide 1

Time Monday Tuesday Wednesday Thursday Friday

9.00 - 10.30 German Class Lecture Lecture German Class

10.30 - 12.00 German Class Lecture Lecture German Class

12.00 - 13.00 LUNCH

13.00 - 14.30 Lecture Exercise Exercise Lecture

14.30 - 16.00 Lecture Lecture Exercise Lecture

Time Monday Tuesday Wednesday Thursday Friday

9.00 - 10.30 German Class Exercise Exercise German Class Buffer

10.30 - 12.00 German Class Lecture Lecture German Class Buffer

12.00 - 13.00 LUNCH

13.00 - 14.30 Exercise Lecture Exercise Lecture

14.30 - 16.00 Exercise Exercise Exercise

Please note: Schedule may change according to course progress. Moreover,

© Prof. Dr. Marius Gros Slide 2

© Prof. Dr. Marius Gros Slide 3

© Prof. Dr. Marius Gros Slide 4

2. Financial Reporting – The Case of

3. International Financial Reporting

© Prof. Dr. Marius Gros Slide 5

The purpose of accounting:

(3) interested users.

© Prof. Dr. Marius Gros Slide 6

(1) Which Organizations prepare Accounting Data (in Germany)?

• Capital companies (Kapitalgesellschaften), for example:

© Prof. Dr. Marius Gros Slide 7

(2) What is an Economic Event?

Definition: Transactions relevant to the business of an organization

• Purchase of inventory, machinery, plant, equipment, land

• Payment of wages to employees

(3) Who uses Accounting Data? (Interested Users?)

Internal Users External Users

© Prof. Dr. Marius Gros Slide 9

What are External Users using Accounting Data for?

Basis for economic decisions of external users, for example:

• Investors: sell, hold or buy stock of company

• Banks: providing loan to company

• Suppliers: decision to deliver on account

© Prof. Dr. Marius Gros Slide 10

What kind of Accounting Data exists?

Internal Accounting External Accounting

§§ 238 I (1), 242 HGB § 290 I HGB

Who is responsible for Financial Statements (in Germany)?

Board of Management Auditor

Supervisory Board and Enforcement

© Prof. Dr. Marius Gros Slide 12

What are Generally Accepted Accounting Principles (GAAP)?

A set of accounting principles, standards and procedures that companies use to

• In Germany, GAAP usually refers to HGB (German Commerical Code)

• In US, GAAP usually refers to US GAAP

• In Vietnam, GAAP usually refers to VAS

• Also, other sets of (international) GAAP exist:

 IFRS (International Financial Reporting Standards)

© Prof. Dr. Marius Gros Slide 13

What is the difference between various

• Rule based (US GAAP) vs. Principle based (IFRS)

Differences in recognition and measurement

• historical cost principle (HGB) vs. fair value approach (IFRS)

Differences in revenue recognition

• completed contract method (HGB) vs. percentage-of-completion method (IFRS)

Presentation (form) and elements of financial statements

• balance sheet classification