3.2Income statement
For all companies, the Commercial Code does not prescribe any rules for the income statement except that it must include all income and expenses from the period (§ 242 sect. 2 and § 246 sect. 1). In particular, no minimum structure is required, but the GAAP must be applied.
For corporations there are more detailed rules:
–The income statement must be prepared in vertical format, i.e. all items are in lines: income is added, expenses are deducted; an account format is unacceptable (§ 275 sect. 1).200
–The income statement can be prepared according to either a total-cost format or cost-of-sales format (see below); the formats may not be mixed.
The two formats look as follows:201
Tab. 3.21: Formats for income statement.
a This is the literal translation; even if the Commercial Code uses the term costs here, expenses are meant (in general the use of the terms expenses and costs is not completely consistent in the legal text).
b The legal structure requires a separate reporting of taxes, which do not depend on profit; a widespread practice is reporting them as other operating expenses (apart from taxes that relate directly to sales revenue and must be deducted from sales revenue (§ 277 sect. 1)); see Beck’scher Bilanzkommentar, § 275, no. 167.
The formats have the following features:202
–Changeininventory
A change in inventory is reported as a separate line item in the total-cost format (no. 2), whereas it is netted with production costs in the cost-of-sales format (no. 2).
This adjustment is necessary if produced amounts do not match the sold amounts. In this situation two possible solutions exist:
–adjustment of income: total-cost format
–adjustment of expense: cost-of-sales format.
Depending on how the inventory changed, this can be an income or an expense:
–inventory increased →income,
–inventory decreased →expense.
–The total-cost format is structured according to the kind of expense (e.g. material expenses, personnel expenses, depreciation), whereas the cost-of-sales format is structured according to the functional areas in which the costs occur (production costs, distribution costs, administration costs).
–After the operating income and expenses, the two formats are identical; net profit/loss is identical, i.e. the formats are only a different form of presenting the information but do not lead to a different result.
–Extraordinary items are not reported in the income statement but must be reported in the notes (§ 285 no. 31).
–For any line item, the previous year’s figure must be reported. Blank lines may be neglected.
Important differences to IFRS
IAS 1 does not require a specific format or structure of the income statement but requires certain minimum information (IAS 1.81–82A).
In addition, the income statement must be enlarged to a statement of comprehensive income including any changes in OCI that reflect changes in the value of assets or liabilities but that are not classified as income or expenses and directly posted to equity (IAS 1.82A).203
3.3Notes
3.3.1Overview
Notes must be prepared only by corporations (§ 264 sect. 1).
The central content of the notes is defined in §§ 284 and 285, but many other regulations of the Commercial Code require information in the notes, if applicable. In addition, laws for specific legal forms (e.g. Aktiengesetz for stock companies) require additional information; the explanations here are focused on the Commercial Code.
The notes serve several purposes:204
–Interpretation
The notes need to give information that allows the user to interpret the financial statements, i.e. to understand how the information in the financial statements was prepared and what conclusions can be drawn therefrom.
Example
§ 284 sect. 2 no. 1 requires a description of the recognition and measurement methods applied to the balance sheet and income statement.
–Correction
If the financial statements do not provide a true and fair view, even if the legal rules and GAAP were applied, additional information must be given to enable a true and fair view. This may occur only in very rare circumstances.205
–Relief
Some information that is required in the balance sheet or in the income statement can be given in the notes, i.e. the balance sheet and income statement are relieved from that information (§ 284 sect. 1); that may improve clarity and transparency.
Example
Receivables reported as “other assets” that come into legal existence after the closing date must be reported separately if material (§ 268 sect. 4). This can be done in the balance sheet, for example “trade receivables €X million, which came into legal existence after the closing date, €Y million”, or the information “which came...” is transposed to the notes.
In the notes, additional information must be given.
(a)Details on balance sheet or income statement
This can be more detailed information about the balance sheet or income statement.
Example
§ 285 no. 4 requires splitting up the sales revenue by business unit and by geographical markets served.
(b)Additional information not related to balance sheet or income statement
Additional information that itself is not part of the financial statements is included to give users of the financial statements a wider picture of the company.
Example
§ 285 no. 7 requires reporting the average number of employees split into relevant groups.
Requirements that are only relevant to specific industries are neglected here.
3.3.2General information (§ 284)
Tab. 3.22: General information in notes.
| § 264 sect. 1a | Name and location of company, company register in which company is registered and registration number. |
| § 264 sect. 2 | Additional information for financial statements that are compliant with the legal rules and GAAP if they do not provide a true and fair view to provide a true and fair view. |
| § 265 sect. 1 | Description of any changes in naming or structure of financial statements and reasons for changes. |
| § 265 sect. 4 | If the company is active in different industries and must apply different structures in the financial statements: Description of necessary additions to structure to comply with requirements for all industries. |
| § 284 sect. 2 no. 1 | Description of recognition and measurement methods for all items of balance sheet and income statement. |
| § 284 sect. 2 no. 2 | Description of any changes in recognition and measurement methods and reasons for changes; effects on financial or performance situation must be reported separately. |
| § 284 sect. 2 no. 4 | Information about whether borrowing costs are included in the definition of production costs. |
3.3.3Additional information about balance sheet and income statement206
Tab. 3.23: Additional information about balance sheet and income statement.
| General | |
| § 265 sect. 3 | If a transaction should be reported in several balance sheet items: The balance sheet item in which it is reported as well as the balance sheet items in which it should be reported |
| § 265 sect. 7 no. 2 | Splitting up of items in balance sheet or income statement that were reported only aggregated for clarity |
| § 265 sect. 2 | Description and explanation of previous year’s figures that are not comparable with the current year or of adjusted previous year’s figures |
| § 285 no. 33 | Description of material subsequent events that were not included in the balance sheet or the income statement and their financial consequences |
Tab. 3.24: Additional information on balance sheet.
| Balance sheet | |
| § 284 sect. 3 | Development of non-current assets from opening balance to closing balance for all items (for details see Chapter 3.1.3.3). |
| § 285 no. 13 | Explanation of useful lives used to amortize goodwill. |
| § 285 no. 22 | If internally generated, non-current, intangible assets are recognized: Total amount of research and development costs and the portion that is recognized as asset. |
| § 285 no. 18 | For non-current financial instruments that were not impaired because of only a temporary decrease in value: – book value and fair value of assets, – reasons to classify decrease in value as temporary. |
| § 285 no. 19 | For each category of financial instruments not measured at fair value: |
| –category and amount, | |
| –fair value, if it can be derived reliably, including the method used, | |
| –book value and balance sheet item in which it is recognized, | |
| –reasons why a fair value cannot be derived.a | |
| § 285 no. 25 | If plan assets are deducted from pension provisions: |
| § 285 no. 20a | –Acquisition costs and fair values of the assets, settlement amount of provision and any netted income and expenses, |
| –methods and assumptions for measurement of fair value. | |
| § 268 sect. 4 | The amount, if a material portion of “other assets” comes into legal existence after the closing date. |
| § 284 sect. 2 no. 3 | If group measurement or cost formulas are used: The difference between the applied measurement and a measurement based on the last market value, if the difference is substantial. |
| § 268 sect. 6 | The amount of a disagio recognized as deferred expense. |
| § 285 no. 23 | If hedge accounting is used: |
| –description of valuation units, | |
| –description of hedged risks, | |
| –description of transactions expected with high probability. For details see Chapter 3.1.10.3. | |
| § 285 no. 29 | If deferred taxes are recognized: The differences causing the deferred taxes and the applicable tax rates.b |
| § 268 sect. 1 | If equity is reported with partial use of profits: The different components of “retained earnings”. |
| § 285 no. 28 | If a profit distribution restriction exists: |
| –the total amount of restricted profit, | |
| –the split based on various reasons. | |
| § 285 no. 34 | Proposal as to how the profit should be used or the decision about how the profit is used. |
| § 268 sect. 5 | For each category of debt and payables and the total:c |
| § 285 no. 1 | –portion with remaining term of less than 1 year, |
| and 2 | –portion with remaining term between 1 and less than 5 years, |
| –portion with remaining term of 5 years or more, | |
| –portion collateralized and description of collateral. | |
| For details see Chapter 3.1.8. | |
| § 285 no. 12 | Splitting up and description of “other provisions”, if material. |
| § 285 no. 24 | If pension provisions exist: |
| –actuarial calculation methods, | |
| –assumptions for calculation, such as interest rate, salary trends, mortality probabilities. | |
| § 285 no. 15a | If any profit participation certificates, convertible bonds, option bonds, options or similar securities or rights exist: |
| –volume of these financial instruments and | |
| –claims on company they involve. |
a Further reading: IDW RH HFA 1.005 “Anhangangaben nach § 285 Nr. 18 und 19 zu bestimmten Finanzinstrumenten” – Disclosures according to § 285 nos. 18 and 19 on specific financial instruments.
b In § 285 no. 30 a deferred tax liability and changes to the previous year need to be reported. Due to changes in the structure of the balance, this is obsolete; Beck’scher Bilanzkommentar, § 285, nos. 845–847.
c Concerning the aggregation of these requirements, see Beck’scher Bilanzkommentar, § 268, nos. 35–39.
Tab. 3.25: Additional information about income statement.
| Income statement | |
| § 285 no. 4 | Splitting up of sales revenue according to |
| –different industries/business units, | |
| –geographical markets, | |
| if material differences exist. | |
| § 285 no. 8 | If cost-of-sales method is used: |
| –splitting up of material expenses according to total-cost format, | |
| –splitting up of personnel expenses according to total-cost format. | |
| § 285 no. 31 | Amount and kind of extraordinary income or expenses, if material. |
| § 285 no. 32 | Amount and kind of income or expenses related to prior periods, if material. |
| § 277 sect. 3 | Impairment of non-current assets. |
| § 285 no. 17 | Remuneration of auditors: |
| –total amount, | |
| –portion for auditing of financial statements, | |
| –portion for tax consulting, | |
| –portion for other services, | |
| if not included in consolidated notes.a | |
a Further reading: IDW RS HFA 36 and ERS HFA 36 “Anhangangaben nach §§ 285 Nr. 17, 314 Abs. 1 Nr. 9 über das Abschlussprüferhonorar” – Disclosures according to §§ 285 no. 17, 314 sect. 1 no. 9 on the remuneration of auditors – current and draft version.
3.3.4Additional information not related to balance sheet or income statement
Tab. 3.26: Additional information not included in balance sheet or income statement.
| Transactions not included in financial statements | |
| § 285 no. 3 | For transactions not included in financial statements: |
| –kind and purpose of transactions, | |
| –risks and chances of transactions, | |
| if the risks and rewards are material and their disclosure is necessary to provide a true and fair view.a | |
| § 285 no. 3a | Total amount of other financial obligationsb not included in balance sheet and not contingent liabilities, if material. |
| Obligations for retirement benefits and to affiliated or associated companies must be reported separately. | |
| § 268 sect. 7 | Description and amounts of contingent liabilities: |
| –total amount, | |
| –for each category and in relation to retirement benefits separately. | |
| § 285 no. 27 | For contingent liabilities: |
| Reasons why a claim of contingent liability is not probable. | |
| Additional information | |
| § 285 no. 7 | Number of employees: |
| –total average in reporting period, | |
| –split up into relevant groups. | |
a Further reading: IDW RS HFA 32 “Anhangangaben nach §§ 285 Nr. 3, 314 Abs. 1 Nr. 2 HGB zu nicht in der Bilanz enthaltenen Geschäften” – Disclosure according to §§ 285 no. 2, 314 sect. 1 no. 2 on transactions not included in balance sheet.
b These are typically pending transactions, e.g. orders of assets (that are not fulfilled by both parties and for which no future loss is expected).
Tab. 3.27: Additional information about affiliated companies and participations.
| Affiliated companies and participations | |
| § 285 no. 11 | For participations: |
| –name and location of company, | |
| –equity and net profit as of last available financial statements, | |
| –share of equity reflected by participation. | |
| § 285 no. 11a | Name and location of companies whose general partner the reporting entity is. |
| § 285 no. 11b | For capital-market-oriented companies: Any share in a large corporation that exceeds 5% of voting rights. |
| § 285 no. 14 | Name and location of parent company of reporting entity that prepares the consolidated financial statements with the largest consolidation scope and the place where these consolidated financial statements can be accessed. |
| § 285 no. 14a | Name and location of parent company of reporting entity that prepares the consolidated financial statements with the smallest consolidation scope and the place where these consolidated financial statements can be accessed. |
| § 285 no. 15 | If the company is a partnership whose general partners are only corporations with limited liability: Name, location and equity of corporations that are general partners. |
Tab. 3.28: Additional information on corporate governance.
| Governance | |
| § 285 no. 9 | For members of executive board, supervisory board or similar bodies of governance:a – total salary split up into its different components, – the total salary split up into its different components for former members, – advance payments or loans granted. |
| § 285 no. 10 | For members of executive board and supervisory board: – first name and last name, – profession, – in case of a listed company: membership on boards of other companies, – chairman and deputies of supervisory board and chairman of executive board, if it exists. |
| § 285 no. 16 | For stock companies: That the declaration of conformity with the German Corporate Governance Code was given and where it is available for the public. |
| § 285 no. 21 | Any transactions with related parties (persons or companies) that are not agreed on or performed by the parties of the transaction under market conditions, if material; 100% subsidiaries that are included in a consolidated financial statement may be excluded. The transactions may be aggregated if separate reporting is not necessary to assess the consequences for the financial position.b |
a This is a fairly complex and detailed requirement; for an overview it is simplified here. For full details, see Beck’scher Bilanzkommentar, § 285, nos. 245–341.
b Further reading: IDW RS HFA 33 “Anhangsangaben nach §§ 285 Nr. 21, 314 Abs. 1 Nr. 13 zu Geschäften mit nahe stehenden Unternehmen und Personen” – Disclosures according to §§ 285 no. 21, 314 sect. 1 no. 13 about transactions with related parties.
3.4Cash flow statement
3.4.1Purpose and methods
The Commercial Code requires a cash flow statement for consolidated financial statements (§ 297 sect. 1).
If a company is capital market oriented (§ 264d and § 2 sect. 6 WpHG) and does not prepare consolidated financial statements, it must supplement its financial statements with a cash flow statement (§ 264 sect. 1).
The purpose of the cash flow statement is to present and explain the changes in cash and cash equivalents by cash inflows and cash outflows; it is intended to furnish information about how the cash flows were generated and the extent to which the company will be able to generate future cash flows to cover its financial needs. In contrast to the other financial statements, the cash flow statement focuses on cash movements, not on income and expenses.
What follows is an overview of the interdependencies of the cash flow statement, balance sheet and income statement207:
The income statement is a subledger of equity and the net result (here a profit, i.e. income is larger than expense) changes equity (in this example there are no external changes in equity, i.e. capital is increased or decreased by shareholders).208
The cash flow statement explains the changes in cash and cash equivalents (in the figure just cash for short). If the cash flow statement is prepared according to the direct method (see below), it is a subledger to cash and cash equivalents because the detailed accounting information is used. If the indirect method is used (which is much more common), it is derived from the income statement and balance sheet.
The Commercial Code does not prescribe a specific method or structure of the cash flow statement. The German accounting standard 21 (DRS 21) details the legal requirement and is best practice in preparing a cash flow statement.209
Two methods are possible:
–Direct method
Each recorded transaction, i.e. each accounting entry, is analysed for its cash effects, and the cash flows are categorized.
–Indirect method
Cash flows are calculated by eliminating non-cash transactions from the income statement and by comparing balance sheet items. That means (in a simplified version):
Net result
| + | Expenses that are not a cash outflow |
| e.g. depreciation, amortization or impairment, increase in provisions | |
| − | Income that is not a cash inflow |
| e.g. reversal of impairment, reversal of unused provisions | |
| − | Increases in assets or decreases in liabilities (assumption of cash outflow) |
| + | Decreases in assets or increases in liabilities (assumption of cash inflow). |
| According to DRS 21.25, the indirect method can be used to determine cash flow from operating activities; the direct method must be used for cash flows from investing and financing activities. | |
3.4.2Structure of cash flow statement
The basic structure of a cash flow statement is as follows210:
| Cash flow from operating activities | |
| + | Cash flow from investing activities |
| + | Cash flow from financing activities |
| = | Cash-flow-based changes in cash and cash equivalents |
| ± | Changes in cash and cash equivalents due to exchange rate, measurement |
| or consolidation scope changes | |
| + | Cash and cash equivalents at beginning of period |
| = | Cash and cash equivalents at end of period |
Cash inflows are reported with a plus sign (+), cash outflows with a minus sign (-).
The detailed structure using the indirect method is as follows:211
Tab. 3.29: Detailed structure of cash flow statement using indirect method (DRS 21).
| 1. | +/− | Net profit/loss |
| 2. | +/− | Depreciation/amortization/impairment of non-current assets and reversal of impairment |
| 3. | +/− | Increase/decrease in provisions |
| 4. | +/− | Other non-cash-relevant expenses/income |
| 5. | −/+ | Increase/decrease in inventories, trade receivables and other assets not related to investment or financing activities |
| 6. | +/− | Increase/decrease in trade payables and other liabilities not related to investment or financing activities |
| 7. | −/+ | Profit/loss from sale of non-current assets |
| 8. | +/− | Interest expenses/income |
| 9. | − | Other income from participations |
| 10. | +/− | Extraordinary expenses/income |
| 11. | +/− | Income tax expense/income |
| 12. | + | Cash inflows related to extraordinary income |
| 13. | − | Cash outflows related to extraordinary expenses |
| 14. | −/+ | Income tax payments/refunds |
| 15. | = | Cash flow from operating activities (sum of items 1 to 14) |
| 16. | + | Cash inflows from disposal of intangible non-current assets |
| 17. | − | Cash outflows for investment in intangible non-current assets |
| 18. | + | Cash inflows from disposal of tangible non-current assets |
| 19. | − | Cash outflows for investment in tangible non-current assets |
| 20. | + | Cash inflows from disposal of financial non-current assets |
| 21. | − | Cash outflows for investment in financial non-current assets |
| 22. | + | Cash inflows from disposals out of consolidation scope |
| 23. | − | Cash outflows for additions to consolidation scope |
| 24. | + | Cash inflows from short-term financial investments |
| 25. | − | Cash outflows for short-term financial investments |
| 26. | + | Cash inflows related to extraordinary income |
| 27. | − | Cash outflows related to extraordinary expenses |
| 28. | + | Received interest |
| 29. | + | Received dividends |
| 30. | = | Cash flow from investment activities (sum of items 16 to 29) |
| 31. | + | Cash inflows from capital increases by shareholders of parent company |
| 32. | + | Cash inflows from capital increases by other shareholders |
| 33. | − | Cash outflows for capital decreases to shareholders of parent company |
| 34. | − | Cash outflows for capital decreases to other shareholders |
| 35. | + | Cash inflows from issuance of bonds or taking out of loans |
| 36. | − | Cash outflows for repayment of bonds or loans |
| 37. | + | Cash inflows from received grants or subsidies |
| 38. | + | Cash inflows related to extraordinary income |
| 39. | − | Cash outflows related to extraordinary expenses |
| 40. | − | Paid interest |
| 41. | − | Dividends paid to shareholders of parent company |
| 42. | − | Dividends paid to other shareholders |
| 43. | = | Cash flow from financing activities (sum of items 31 to 42) |
| 44. | = | Cash-flow-based changes of cash and cash equivalents (sum of items 15, 30, 43) |
| 45. | +/− | Changes in cash and cash equivalents due to exchange rate or measurement differences |
| 46. | +/− | Changes in cash can cash equivalents due to changes in consolidation scope |
| 47. | + | Cash and cash equivalents at beginning of period |
| 48. | = | Cash and cash equivalents at end of period (sum of items 44 to 47) |
If the direct method is used, the items of the operating cash flow change; all others are identical; therefore, only items of operating cash flow are listed:212
Tab. 3.30: Structure of cash flow from operating activities using direct method (DRS 21).
| 1. | + | Cash inflows from customers from sale of products and services |
| 2. | − | Cash outflows to suppliers and employees |
| 3. | + | Other cash inflows not related to investment or financing activities |
| 4. | − | Other cash outflows not related to investment or financing activities |
| 5. | + | Cash inflows related to extraordinary income |
| 6. | − | Cash outflows related to extraordinary expenses |
| 7. | −/+ | Income tax payments/refunds |
| 8. | = | Cash flow from operating activities (sum of items 1 to 7) |
Important differences to IFRS and German tax law
German tax law does not require a cash flow statement.
DRS 21 requires that received interest and dividends be presented within the cash flow from investment activities and that paid interest and dividends be presented within the cash flow from financing activities (DRS 21.44 and 21.48). IAS 7 requires a classification of received and paid interest and dividends as being from operating, investment or financing activities; this may result in differences.
3.5Management report
3.5.1Purpose and principles
Corporations are required to prepare a management report (§ 264 sect. 1) in addition to the financial statements, meaning the management report is not part of the financial statements.
The general rule is that the management report should give a true and fair view of the state of the company; this true and fair view is not limited by the GAAP, in contrast to the financial statements; therefore, prospective information may be included. Primarily the management report should give an overall assessment of the company, including three perspectives:
The management report should give a balanced and comprehensive analysis of the course of business and the current situation of the company; depending on the complexity of the business, financial indicators should be included and linked to the financial statements (§ 289 sect. 1).
Large corporations must give, in addition to the financial indicators, non-financial indicators, e.g. about environmental or social topics, if this is relevant for an understanding of the course of business or the current situation (§ 289 sect. 3).214
DRS 20 defines the following principles for a consolidated management report, which nevertheless can be applied to an individual management report as well (on the proposed structure, see below)215:
Tab. 3.31: Principles of management reports according to DRS 20.
| Completeness | DRS 20.12–16 | The management report must include all information relevant for a true and fair view. It must be self-contained, i.e. require no additional or supplementary information. Positive and negative aspects must be reported separately. |
| Reliability and balance | DRS 20.17–19 | Any information must be correct and verifiable; facts and opinions must be distinguished clearly. Positive and negative aspects must be reported in a balanced manner, i.e. no particular emphasis on one side. Information must be plausible, consistent and without contradiction of the financial statements. |
| Clarity and transparency | DRS 20.20–30 | The management report must be clearly separated from the financial statements and be titled “management report”. It must have a clear structure with headings identifying the following content. Content and structure should be kept uniform over time; differences must be explained. |
| Presentation of view of management | DRS 20.31 | The management report should present the view of management on the business and the company. |
| Materiality | DRS 20.32 and 33 | The management report should focus on material information. |
| Gradation of information | DRS 20.34 and 35 | Length and amount of details depend on the specific conditions, in particular the kind and size of the business and the use of capital markets. |
3.5.2Structure and content
DRS 20 provides a structure that includes all requirements of § 289. In an overview:216
Tab. 3.32: Recommended structure of management report according to DRS 20.
| Fundamentals of | DRS | This is the basis for the following information; typical sub-items |
| the company / the | 20.36–52 | are descriptions of |
| group | –the business model, | |
| –subsidiaries, | ||
| –goals and strategies, | ||
| –management system, | ||
| –research and development activities. | ||
| Business report | DRS | This is the core of the management report; typical sub-items are |
| 20.53– | descriptions of | |
| 113 | –economic and industrial conditions and developments; | |
| –the course of business within the reporting period, | ||
| –situation of company/group at closing date split into asset situation, financial situation and performance situation; | ||
| –financial and non-financial key performance indicators. | ||
| Subsequent events | DRS | Material events that happened after the closing date but are |
| 20.114 | relevant for a presentation of a true and fair view need to be reported. | |
| Forecast and report | DRS | The foreseeable development of the company/group must be |
| about chances and | 20.116– | reported along with its likelihood and risks. |
| risks | 167 | The risk management system of the company/group must be explained (only relevant for capital-market-oriented companies). |
| Internal control | DRS | The internal control system and the risk management system |
| system and risk | 20.K168– | specifically for the (group) accounting process must be |
| management | K178 | described. |
| system of | Relevant only for capital-market-oriented companies. | |
| accounting process | ||
| Risk report about | DRS | The risks of the use of financial instruments must be reported |
| the use of financial | 20.179– | separately with the sub-items: |
| instruments | 187 | –kind of risks (price, default, liquidity risks), |
| –risk management goals and methods and use of hedge accounting. | ||
| Share capital and control | DRS 20.K188– K223 | Capital-market-oriented companies must give additional information, e.g. about share capital, any additional rights or limitations on rights of shareholders, prospects that the executive board will issue new shares or acquire the company’s own shares, material contracts with change-of-control clauses. |
| Declaration about corporate | DRS 20.K224– | Capital-market-oriented stock companies must prepare a declaration about corporate governance, which must include |
| governance | K231c | –compliance with German Corporate Governance Code, |
| § 289a | –relevant information about management practices exceeding legal requirements, | |
| –description of working procedures of executive and supervisory board and their committees, | ||
| –required goals to increase quota of women on executive and supervisory boards, if goals were met and, if not, the reasons why. | ||
| Assurance of legal representatives | DRS 20.K232– K235 | For capital-market-oriented companies, legal representatives must provide assurance that the management report is prepared with the best of their knowledge to provide a true and fair view. |
3.5.3Upcoming extended CSR reporting
The reporting within the management report about non-financial topics, e.g. environmental or social issues, was very limited: in § 289 sect. 3 it was required that non-financial indicators be reported by large corporations if they are relevant for the course of business and the current situation. No further details were specified.217
Directive 2014/95/EU of the EU218 requires extended reporting about topics of corporate social responsibility by large companies. The directive needed to be transferred into national law by the member states until 6 December 2016. The federal parliament of Germany accepted a proposed legal draft on 9 March 2017.219
The proposed changes require a so-called non-financial declaration by certain companies.220 Companies that
–are large corporations according to § 267,
–are capital market oriented according to § 264d and
–employ more than 500 people on average,
must provide a non-financial declaration with individual financial statements; it may be included in the management report.
If consolidated financial statements need to be prepared, a non-financial declaration must be added as well (or included in the group management report).
The non-financial declaration needs to include the following aspects:
–environmental aspects,
e.g. emission of greenhouse gases, use of water, air pollution, use of renewable and non-renewable energy, protection of biological diversity;
–employee interests,
e.g. measures to ensure gender equality, to execute agreements of International Labour Organization, respect rights of employees;
–social interests,
e.g. information about dialogue on local or regional level to protect and develop communities;
–respectforhumanrights,
e.g. how violations of human rights can be avoided;
–avoidance of corruption and bribery,
e.g. information about measures to avoid corruption and bribery.
The company must provide information on the aforementioned aspects to the extent that it is relevant to understand the course of the business, the current situation and the effects of the business on these aspects, i.e. the reporting includes two perspectives:
–aspects relevant to understanding the business and
–effects of business on these aspects.
The latter represents a substantial increase in reporting requirements. The information must include for each aspect
–the concepts and control processes used,
–the results of these concepts and control processes,
–material risks for the company itself that will very likely have a severe negative impact on the aforementioned aspects,
–material risks of the company’s own business relations, products or services that will very likely have a severe negative impact on these aspects,
–the most important non-financial indicators relevant for the business,
–as much as necessary for understanding, references to values in the financial statements and further explanations.
No specific methodology is required, but accepted frameworks, e.g. Global Compact, OECD guidelines, German Sustainability Codex, may be used.
Required information may be neglected
–if it might harm the company based on reasonable commercial judgement and
–if its omission does not inhibit a true and fair view of the course of business, the current situation and effects on the business.
Important differences to German tax law and IFRS
German tax law and IFRS do not require a management report.