Accounting requirements might not have been the key factor of consideration when the decision on the relocation of business activities in the course of the Brexit was made. However with Brexit projects evolving from designing to implementation, it is necessary to assess what kinds of financial statements need to be prepared, audited and published according to German and European regulation. Furthermore it is necessary to understand the key accounting principles of German GAAP applicable for banks in order to set up a targeted structure of the balance sheet.
The answer to this question mainly depends on the targeted legal entity structure which needs to be analysed in depth.
However a bank (legal entity, e.g. a “GmbH” or an “AG”) based in Germany is generally required to prepare, have audited and publish stand-alone financial statements in accordance with German GAAP in German language. Even a German branch of a foreign bank needs to prepare a statement of assets and liabilities in accordance with German GAAP. Thus getting in touch with German GAAP and the German language is almost inevitable when relocating banking activities to Germany.
If a bank is a parent company, it also has to prepare, have audited and publish consolidated financial statements in accordance with German GAAP or voluntarily in accordance with IFRS in German language. If the parent company is a publicly traded company, it has to prepare, have audited and publish consolidated financial statements in accordance with IFRS. In the area of consolidated financial statements it is thus always possible to avoid German GAAP by applying IFRS.
Furthermore there are exemptions releasing parent companies, which are not publicly traded companies, from the obligation to prepare consolidated financial statements if these companies at the same time are subsidiaries to another ultimate parent company. However these exemptions only apply if certain criteria – which differ for ultimate parent companies located inside the EU/EEA and those located outside this areas (e.g. Switzerland or possibly a post-Brexit United Kingdom) – are met. Especially in the latter case assessing whether the parent company is released from it’s obligation to prepare consolidated financial statements is not straightforward and needs to be carefully analysed.
Once the conclusion is reached that a bank has to prepare financial statements in accordance with German GAAP, further examination of the applicable accounting principles is necessary. Accounting under German GAAP is largely characterised by the principle of prudence and the principle of protecting creditors. This is a fundamental difference to IFRS where the main focus is to provide information which is useful to investors in making economic decisions.
An example where this difference is demonstrable is the accounting for derivatives. While under IFRS derivatives are measured at fair value through p&l, under German GAAP this is only the case for derivatives which are part of the trading book. For other stand-alone derivatives a positive fair value is not allowed to be recognised, while a provision has to be recognised if the fair value is negative.
Accounting for plain vanilla loans to customers is rather an area of similarities with amortised cost being the general basis for subsequent measurement under both German GAAP and IFRS. However careful consideration is necessary whether and to what extent the impairment calculation under IFRS 9 might be used for accounting under German GAAP as well. Furthermore the accounting for fees related to credit business might differ between German GAAP and IFRS and thus the facts and circumstances of each element need to be analysed on a case-by-case basis.
The principle of prudence and the principle of protecting creditors has also led to several special rules in German GAAP, which are unknown under IFRS, e.g. there is a specific rule which allows setting up hidden reserves in the loan portfolio of a bank.
While not all areas of accounting under German GAAP are totally different form accounting under IFRS, it needs to be carefully analysed which areas are similar and which areas are different, keeping in mind the banks individual business model and the targeted balance sheet structure.
For further details on accounting requirements for banks in Germany and especially similarities and differences between German GAAP and IFRS please refer to the attached slide deck.
We recommend banks to analyse the potential necessity of preparing financial information according to German GAAP now, in order to be ready to initiate necessary changes in the reporting processes and ledgers ensuring correct accounting according to German GAAP on time!
Partner, Capital Markets Leader, PwC Germany
Tel.: +49 69 9585 2697
Senior Manager, PwC Germany
Tel.: +49 69 9585-2572
Senior Manager, PwC Germany
Tel.: +49 69 9585-2665