PDF, 1.2 MB - Pfleiderer AG

3. Long-term investments
and securities classified as
current assets
4. Derivative financial
instruments
5. Costs of capital procurement
6. Stock options
7. Currency translation
consolidated financial statements notes pfleiderer ag 115
HGB requires that securities be carried at the lower of amortized cost or fair value as of the
balance sheet date. Under US GAAP, SFAS 115 rules that securities are valued by category.
Securities available for sale, i.e. securities not held for trading purposes or until maturity,
are marked to market at balance sheet date. Unrealized profits or losses are directly transferred
to equity. Where unrealized losses are other than temporary, the security is amortized.
The write-down cannot be reversed later through write-ups affecting net income.
HGB has no binding procedures for accounting and valuing derivative financial instruments,
with the effect that valuation takes account of the historical cost, realization and imparity
principles.
US GAAP, on the other hand, requires that all original and derivative financial instruments
be measured at fair value. Under certain restrictive conditions, US GAAP requires that hedging
be recognized on the balance sheet, which means that fluctuations in financial instruments
used for hedging purposes are not directly shown as expenses or income, but must be temporarily
recognized under equity. The criteria for recognition on the balance sheet include the
underlying transaction secured and the type of financial instrument involved. Where the conditions
for recognition are not fulfilled, fluctuations are shown as income or expenses in the
income statement during the period in which they occur.
Under German law, costs of capital procurement must be accounted as expenses and may not
be offset against cash inflow arising from capital increases. Under US GAAP, costs of procuring
equity, for example the issuing costs incurred for an IPO less the effect of their tax deductibility,
may be deducted from the gross amount of capital procured, thus reducing additional paidin
capital.
There is no principal legal opinion in Germany as to how stock options granted to employees
should be accounted. Under US GAAP, stock options are mainly dealt with by APB 25 and
SFAS 123. Under APB 25, stock options are treated according to their intrinsic value, whereas
in SFAS 123 they are recognized at fair value. The Company has decided to apply APB 25 for
its stock options, the intrinsic value being the difference between the exercise price and the
higher market share price at balance sheet date.
Under HGB rules, foreign currency receivables and payables not covered by forward currency
hedging are carried at the exchange rate on the date of transaction or the balance sheet date,
whichever is more unfavorable. Under US GAAP rules, SFAS 52 requires that all foreign currency
receivables and payables be translated at the exchange rate prevailing at balance sheet
date, with the potential result that unrealized profits from exchange rates can affect profits
and losses.