PDF, 3.2 MB - Pfleiderer AG

3. Derivative financial
instruments
4. Costs of rasing
capital
5. Stock options
6. Foreign currency
translation
7. Accounting for
and amortization
of goodwill
There is no binding approach under HGB to accounting for and the valuation of derivative financial
instruments, so that they are valued taking into account the historical cost, realization and
prudence principles.
US-GAAP, on the other hand, requires all original and derivative financial instruments to be measured
at fair value. Under certain restrictive conditions, US-GAAP requires that hedging be recognized
in the balance sheet, with the consequence that fluctuations in the fair value of financial
instruments used for hedging purposes are not recognized directly as expense or income, but
are deferred temporarily under equity. The criteria for recognition of hedging in the balance sheet
depend on the nature of the hedged item and the hedging instrument. If the criteria for recognition
of hedging in the balance sheet are not fulfilled, fluctuations in the fair value of derivatives
must be recognized as expense or income in the period in which they occur.
Under German law, costs of raising capital must be recognized as expense and may not be offset
against the proceeds of increases in capital. Under US-GAAP, costs of raising equity, such as
issuing costs incurred in conjunction with an initial public offering, less the related income tax
effects, are deducted from the gross proceeds of the funds raised, thus reducing the additional
paid-in capital.
No prevailing opinion has developed to date in Germany on the treatment of the issuance of
stock options to employees. Under US-GAAP, stock options are mainly dealt with in APB 25 and
SFAS 123. Under APB 25, stock options are valued in accordance with their intrinsic value and
under SFAS 123 in accordance with their fair value. The Company applies APB 25 for accounting
for stock options, in accordance with which the intrinsic value is based on the difference between
the exercise price and the higher current market price.
Whereas under HGB, non-hedged foreign currency receivables and liabilities are valued at the
exchange rate on the transaction date or the less favorable rate in each case as of the balance
sheet date, US-GAAP requires in accordance with SFAS 52 (Foreign Currency Translation) that
all foreign currency receivables and liabilities are valued at the closing rate as of the balance sheet
date, with the consequence that unrealized exchange gains are also recognized as income.
Under German commercial law, goodwill acquired for a consideration must be capitalized and
amortized over its expected useful life. If the goodwill results from first-time consolidation, it
is offset in full against equity in the year in which it arises. Goodwill must be written down, for
instance, if the future earnings situation is not expected to be positive. An impairment loss is
regarded as justified under the aspect of the prudence principle.
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