|
|
|
|
|
|
|
Texts belong to their owners and are placed on a site for acquaintance. |
The Adoption of International A number of major German firms have begun to adopt international accounting standards that reveal far more about their financial performance than hitherto. This represents a major shift away from inscrutable German accounting standards that often hid as much about a company's financial performance as they revealed. The change has been driven by a recognition that German capital markets are too narrow and illiquid to satisfy the future funding requirements of many major German companies. These corporations are realizing that it is in their best interests to get a listing on the New York Stock Exchange (NYSE), the world's largest capital market, as a prelude to issuing equity and raising debt through the New York market. Historically, German firms have almost never resorted to international capital markets to raise additional equity. Their view was that bank debt was adequate. However, the German market for debt has become expensive, while the possibility of raising additional equity in Germany has been limited by the relatively small and illiquid nature of the German equity market. The move among German firms to raise equity on international capital markets began in the early 1990s when a number of major German firms, including Daimler-Benz, Siemens, and Volkswagen, discretely applied to the US Securities and Exchange Commission (SEC) for a listing. The SEC, however, was not particularly responsive. In the SEC's view, German accounting standards were not comparable to those in the United States and did not provide sufficient information to investors. Among the SEC's objections was the German practice of not disclosing the size of a company's financial reserves and pension fund commitments, as well as the more liberal policy for writing down goodwill in Germany, which tended to overstate a firm's financial performance relative to that which would be reported under US accounting rules. After the initial rebuff from the SEC, this group of firms fell apart quite rapidly. However, Daimler-Benz announced in 1993 that it had reached an agreement with the SEC and would soon have a listing on the NYSE. To achieve this, Daimler-Benz had to issue two sets of accounts, one that adhered to German standards and another that adhered to US generally accepted accounting principles (GAAP). When Daimler-Benz reported its 1994 financial results, the impact of using different accounting standards was readily apparent. Under German rules, Daimler-Benz reported a profit of over $100 million, but under GAAP, the company reported a $1 billion loss! Following the lead of Daimler-Benz, several other German firms have announced that they are willing to adopt international accounting standards. International accounting standards are being devised by a London-based committee of leading accountants that was established in 1973. Since 1987, the International Accounting Standards Committee (IASC) has been attempting to harmonize accounting rules that historically have varied significantly from country to country. The international standards are more forthcoming about financial performance than the German rules. However, they still fall short of the GAAP, primarily because they allow for a looser treatment of goodwill. In March 1995, the pharmaceutical company Schering AG became the first German firm to shift completely to international standards. It was quickly followed by two other major German firms, Bayer AG and Hoechst AG. In 1997, Hoechst became the second German firm to list its shares on the NYSE. To support its listing, Hoechst issued two sets of accounts, one in accordance with IASC principles and one in accordance with GAAP. Under the IASC principles, Hoechst reported profits of $1.2 billion in 1995, and $1.4 billion in 1996. Under the more restrictive GAAP, it lost $40 million in 1995, and $708 million in 1996! Despite the fact that adhering to GAAP apparently reduces the reported profit of German firms, others seem willing to follow to gain access to the US capital market. For example, Allianz, a large German insurance company, recently adopted IASC principles as a prelude to seeking a listing on the NYSE. Allianz believes such a listing will help it finance acquisitions of other firms in the large US insurance market. Under the IASC principles, Allianz became the first German insurance company to reveal the size of its "hidden reserves"--defined as the difference between the book value of its assets and their current market value. Since insurance companies generally invest the proceeds from insurance premiums in financial assets, such as stocks, and since the value of these assets tends to appreciate as the stock market rises, their market value can be substantial. However, their market value also fluctuates sharply with the value of the stock market, which is why German companies have preferred to keep them secret. In early 1998, the value of Allianz's hidden assets stood at $56.1 billion, but as the company pointed out, a sharp fall in the value of the stock market would cause a comparable fall in the assets. Nevertheless, because US insurance companies always reveal the market value of such assets, Allianz must do so if it is to list its stock on the NYSE. Source: P. Gumbel and G. Steinmetz, "German Firms Shift to More Open Accounting," The Wall Street Journal, March 15, 1995, p. C1; "Daimler-Benz: A Capital Suggestion," The Economist, April 9, 1994, p. 69; L. Berton, "All Accountants May Soon Speak the Same Language," The Wall Street Journal, August 29, 1995, p. A15; R. Atkins, "Allianz Plans to Seek New York Listing," Financial Times, May 29, 1998, p. 30; and G. Meek, "Accountants Gather Round Different Standards," Financial Times, March 20, 1998, p. 12. |
|
|
Introduction >>
|
||