Critical accounting policy

Accounting policies are all measures of the reporting entities in the use of identity, outline and explanation of voting rights (formal accounting policy ) and in the use of valuation options, discretions and grooming transactions (tangible accounting policy ).

Orientations of the accounting policy

Depending on the objectives of the company, a distinction between a conservative and progressive accounting policy. An accounting policy is described as conservative, which represents the results of operations and financial position of the company tends to be bad. With a progressive accounting policy, the financial position of the reporting entities will, however, tend to be shown to be good.

Opportunities and motives of balance sheet policy measures

Permanently and systematically but can by accounting policy only stock sizes of the financial statements, that is, the assets and liabilities, and thus for example, the balance sheet equity of the company are affected. The change in size of the financial statements, ie income and expenses, can be, however do not affect permanently and systematically accounting policy. With balance sheet policies can therefore allow "only" take on the origination date of the relevant income and expenses influence. However, under a tax point of balance sheet policy measures can be used so that the company's profits, which the basis of assessment of income tax or income tax form, as late as possible or apply as evenly as possible over time (earnings smoothing). The subsequent seizures of profits causes an interest-free deferment of tax payments by the Company and earnings smoothing effect at progressive tax rates, a reduction of the tax burden. In addition to the state but also other stakeholders addressed accounting policy measures, such as banks. While companies in relation to government agencies usually have incentives to pursue a conservative accounting policy as possible, this does not apply in relation to banks. Here firms have incentives to their income and asset position as well as possible to represent, so as to affect the risk-based loan terms ( lines of credit, interest rates, to the secu-rity and external guarantees) to their advantage.

In turn, banks, rating agencies are therefore trying for credit risk analysis (rating) to recognize the accounting policy of the company and to counteract, by so prepare the financial information of the company ( clean up ), that certain accounting policy to be neutralized, for example by the activation and passivation of balance sheet lease assets and liabilities and the splitting of the leasing fees in notional interest and depreciation components. Since a precise quantification of the balance politically motivated asset and income distortions is not possible, remains essentially just a checklist -like examination of whether and how of ( potentially problematic ) valuation options has been exercised, as the company ausschöpfte its discretion or what grooming measures it carried out.

Approaches to accounting policy

Presentation and explanation of voting rights

In the presence of identification or explanation voting rights, it is up to the reporting entities, certain quantitative or qualitative information, such as to the exact composition of " Other operating income " disclosed in the notes to the accounts or not. The use of disclosure and explanation of voting rights can be ascertained objectively. Incentives to conceal such detailed information, companies have, for example, then when seen otherwise could be that a substantial portion of the proceeds from presumably non-recurring sources of revenue earned in the past stems, such as income from the disposal of assets or the depreciation of adjustments.

Outline voting rights

Outline voting rights grant the reporting entities with an opportunity either to record certain assets and liabilities separately on the asset and liability side of the balance sheet or open themselves from certain passive and active positions. In an "open dismissal " is not only the balance but also the subtrahend and minuend specify. The open deposition leads - compared to the active and passive range of detection - a shortening of the total assets and thus, at a constant equity to a (apparent) improve the capital structure. For example, have the company on the franchise, either perform payments received on the liabilities side of the balance sheet under liabilities - or this separate disclosure of inventories ( see § 268 ( 5) HGB). The use of structure choice rights can be ascertained objectively. Also may be waived as part of a structure balance sheet or in the definition of balance sheet ratios of the format specified by the reporting entities.

Recognition and measurement options

In the presence of valuation options of the balancing end between different valuation methods may choose, for example, in assessing the manufacturing cost of finished and unfinished goods ( § 255, paragraph 2 and 3 of the HGB ), the evaluation of material consumption and inventories by the choice of the assumed consumption tracking method ( FIFO, LIFO, ...). Common in the valuation of fixed assets consist voting rights with respect to the use of linear or geometric- degressive depreciation or there are special tax depreciation allowances. A special case of measurement options are the choice rights approach - where the company has the option, in principle, be put certain items with a value of zero euros, for example, active, deferred taxes or low-value items. Extraordinarily large choice rights ( and discretion ) are also in the evaluation of business or goodwill, arising when a company acquires shares of another company and the purchase price the mounted ( pro rata ) exceeds the balance sheet net assets of the acquired company. The corresponding rules also differ considerably, not only between the different accounting standards but are also subject to significant changes over time (which is an indication of the fundamental theoretical problems of identifying the "correct value " of this asset is ). The depreciation rules rich (t ) s by an immediate and complete write-off, a distributed on up to a maximum of 10, 15, 20 or 40 years amortization up to a total absence of depreciation, but then with annual impairment testing (also known as "future income cosmetic enhancement ") and then, if necessary, be carried out in impairment losses. The use of valuation options must be documented in the notes to the annual financial statements and can be stated thus objectively. An accurate and accrual quantify the performance and financial implications but with reasonable effort usually not possible for an outsider.

Discretions

Since the legal requirements are often not regulated to the last detail, companies often have discretion. This concerns for example the determination of whether a " likely permanent impairment " of a property is present, how many years is " expected useful life " of a building, whether "reasonable provisions" were formed or whether " non valuable claims" were written. The evaluation of discretion is very subjective.

Grooming transactions

Balance politically motivated grooming transactions again denote economically neutral to harmful acts of the company, who are elected by management of the company, to affect the " balance sheet appearance " of the company targeted. Examples include the postponement or bringing forward repair or marketing activities, research or investment projects to be borne by the expense of the current period or expel possible low or high benefit future periods. The facts also designs the sell and rent back, of fixed assets ( sale-and -lease-back ) is counted to be lifted especially if in the sale of hidden reserves. To an outsider, it might be possible but only in exceptional cases, to classify certain measures of the company as a pure balance sheet politically motivated.

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