IFRS plus a solvency test can be used for distribution purposes - KPMG capital maintenance study on behalf of the European Commission
Berlin, 01.02.08. A study conducted by KPMG Germany on behalf of the European Commission has shown that IFRS accounts can generally be used for distribution purposes. However, in particular situations the application of IFRS could result in excessive distributions that may endanger the going concern of a company - specifically in cases where fair value measurements are used. Therefore safeguards are required. KPMG Germany has elaborated an array of options on how the current capital regime could be adjusted. The primary goal is to facilitate the companies' use of IFRS accounts for distribution purposes. These alternatives range from a very limited partial reform using a solvency test/fiduciary duty element for distributions up to a full scale reform including abolishing the concept of legal capital. It is now a matter for the EU institutions to decide on a potential reform in this regard.
KPMG Germany board member, Dr. Wienand Schruff states: "This study can also be viewed as another building block in the quest for the internationalisation of accounting for public companies. The more we move away from using financial statements for distribution and taxation purposes, as is still the case in many EU Member States, the easier we will have an unprejudiced discussion about the fair presentation of economic transactions in financial accounting."
In the course of the study project carried out over a period of one year, KPMG Germany conducted a legal and economic analysis of the existing capital maintenance regimes in five EU Member States (France, Germany, Poland, Sweden, United Kingdom) as well as those of four non-EU countries (USA, Canada, Australia, New Zealand). Furthermore, four other models found in academic literature were examined that present alternatives to the EU capital regime set forth in the 2nd EU Company Law Directive. In this context, KPMG Germany conducted interviews with high-ranking representatives of companies of different sizes in the nine EU and non-EU countries, complemented by the results of a questionnaire sent to CFOs in more than 3,500 companies in these countries.
The study showed the following results:
- Costs do not play a decisive factor in judging whether a certain capital regime in the EU framework is more favourable than the capital regimes in other non-EU countries. The non-EU jurisdictions typically rely on additional solvency tests and mostly neglect the concept of a minimum legal capital. The incremental compliance costs under the existing EU and non-EU frameworks are rather marginal in comparison to the overall financial position of the companies interviewed in these nine countries.
- Alternative models found in academic literature keep many burdensome aspects of regulation still in place. In general, these models lack the necessary level of detail, however, to be ultimately judged from a cost perspective.
- The IFRS analysis showed that 17 of 27 EU Member States allow for IFRS accounts to be used for determining distributable profits. Eight of these 17 EU Member States require modifications to the IFRS accounting for profits when determining distributable profits.
http://ec.europa.eu/internal_market/company/capital/index_de.htm
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