The Differentiation Between Equity and Liability According to IFRS

Proposed Modifications of IAS 32

Following the publication of the IAS regulation 1606/2002 of the European Union, almost all capital-oriented group companies have been obliged, as of January 1., 2005, to prepare their accounts according to the IAS/IFRS accounting standards. Other types of companies are allowed to set up, on a voluntary basis, either an individual financial statement or a consolidated financial statement, according to the IAS/IFRS accounting standards. By means of the law on the reform of the German Commercial Code (Bilanzrechtsreformgesetz) of December 4., 2004, the IAS Regulation has been transposed into national legislation.

The internationalisation of business activities as well as the development of new financing possibilities increase the interest of medium-sized enterprises in applying IAS/IFRS. Medium-sized businesses do, however, often shrink away from applying international standards, due to their substantial administrative costs. For the approximately 796.000 GmbHs (limited liability companies), the 131.000 GmbH & Co KGs (limited partnerships), and for the 8.000 cooperatives, with their more than 20 million members, as well as for the 200.000 business partnerships, which are listed in the commercial register, the accounting standard IAS 32 (“Financial instruments: disclosure and presentation”) is especially a considerable barrier as far as the acceptance of the new accounting philosophy is concerned. The version published in 2004, with its strict definition of equity and liabilities, has led to a situation in which a financial instrument is a financial liability when it gives the holder the right to put it back to the issuer.

Also IFRIC 2 (“Members’ shares in co-operative entities and similar instruments”) deals with the above-mentioned problem in an insufficient manner and explicitly indicates that the repayment of a share should be made at the Fair Value principle. The current draft for a revision of IAS 32 does not permit the appropriate classification of equity and liabilities for all enterprise types.

This is the reason why the Association of German Public Sector Banks (VÖB) and the German Cooperative and Raiffeisen Confederation (DGRV) have commissioned an advisory opinion with the aim to work out amended modification proposals for equity systematics, which are independent of the legal form and are intersectoral.

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