Five characteristics of development factors that help to predict low levels of transparency and disclosure in the financial statements of German listed companies

1.  Traditionally bank credit plays a major role in corporate finance

2. German accounting and financial reporting are heavily influenced by tax law

The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already ben codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements.


3. German rules allow companies to smooth income over time by using hidden reserves.


4. EU directives and the forces of globalization have influenced in German financial reporting. The 1985 Accounting Act implemented the Fourth, Seventh, & Eight Directives and transformed them into German Commercial Law. Although the EU’s Directive requires companies prepare a “true and fair view” in their financial statements, it appears extensive note disclosures are seen as a way of achieving without changing the tax-based, income smoothing approach to financial statements.

5. Since the EU decided to adopt IFRS in January 1 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects. For instance, German accounting law contains no specific rules in some areas, such as the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.