Influenced by the International Financial Reporting Standards, the “Gesetz zur Modernisierung des Bilanzrechts (BilMoG)“ brought significant changes to German GAAP. The modifications pertain to (commercial) financial statements for fiscal years beginning after December 31, 2009 and affect pension accounting in particular.
The new rules lead to a more realistic valuation of pension liabilities and similar obligations (partial retirement, working time accounts). For instance, future changes in wage/price levels have to be accounted for and an officially determined discount rate (derived from average market yields) has to be used. Although no particular valuation method is stipulated, companies have to disclose the method employed in the notes to the financial statements. These modifications caused significant increases in pension liabilities in some instances. To mitigate this effect, the law allows for distributing the difference amount over the next 15 fiscal years. Furthermore, BilMoG allows for a simplified valuation for pension promises that are linked to the performance of certain securities or liability insurance contracts. Such liabilities are valued at the fair value of the underlying assets, provided a (discounted) minimum value is exceeded.
Assets designated to fund pension obligations (‘plan assets’) are valued at fair value which can lead to increased volatility in earnings. Plan assets have to be netted with the corresponding liabilities for accounting purposes, if they are legally separated from the company. Both a fiduciary deposit within the scope of a ‘contractual trust arrangements (CTA)’ as well as the pledge of securities or insurance contracts is eligible for creating plan assets under German GAAP. The resulting difference amount is either shown as a liability/accrual (if pension liabilities exceed the plan assets) or as capitalized item (if plan assets exceed the pension liabilities). In case of pension promises that are linked to the performance of certain securities or liability insurance contracts this usually leads to a complete offset. Companies can use the creation of plan assets in order to counteract the negative implications on financial indicators (like the equity ratio) resulting from the more realistic valuation of pension liabilities.
BilMoG caused major changes in pension accounting, most of which lead to adverse consequences for companies. To compensate, they can either create plan assets or they can transfer the pension liabilities to a pension fund.
Autor: Prof. Dr. Dietmar Wellisch, Steuer- und Rentenberater, Hamburg, Hannover
IIFS – International Tax Institute der Universität Hamburg
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