The new German accounting standard on group management reporting, GAS 20, is effective for fiscal years beginning after December 31, 2012. It replaces the existing standards GAS 15, GAS 5, GAS 5-10 and GAS 5-20. Parent companies are required to apply the new rules when preparing their group management reports for the fiscal year that will end December 31, 2013 (or, if their fiscal year differs from the calendar year, for 2013/2014). In addition, application of the standard for single-entity management reports prepared in accordance with § 289 of the German Commercial Code is recommended. There are special provisions for publicly traded companies.
For the first time ever, materiality, i.e., the notion that (group) management reports should contain material information only, has been afforded the status of a separate principle. As an example, this means that information about macroeconomic and industry trends should be presented only insofar as it is relevant to the understanding of a group’s (or individual company’s) course of business, position and expected future development. In addition, under the new principle regarding the proportionality of information, the level of detail in disclosures needs to be commensurate with the size of the reporting entity and nature of its business, in particular, and also take into account whether it taps the capital market for funding. The size and complexity of the group’s or individual company’s structure should be reflected in the management reporting, thereby bringing the group or company itself into sharper focus.
New report on economic position
The discussion of the group’s or individual company’s position and course of business, the presentation, analysis and assessment of its financial condition and results of operations, and the discussion of the macroeconomic and sector-specific environment can all be addressed in the newly established “report on the economic position.” Here, the usefulness of the management approach shines. In other words, when analyzing the group’s or individual company’s course of business and position on the basis of key figures (e.g., EBIT, EBITDA or equity ratio) and non-financial key performance indicators (e.g., those relating to customers and employees), the parameters that are used for internal steering purposes should also be included. The discussions of the course of business and position are to be combined into an overall statement, with management’s concluding the report with an opinion as to whether business was favorable or unfavorable on the whole.
Reduced forecast horizon
There’s good news when it comes to the report on expected developments. The forward-looking period has been reduced from a minimum of two years to just one year. However, any foreseeable special factors affecting the company’s or group’s business situation after this period must still be addressed.
Increased forecast specificity
On the other end of the spectrum, the greater forecast specificity that is now required is likely to meet with little favor. To comply with the new requirement, statements about expected developments must enable users to identify a positive or negative trend and must describe the intensity of the change (e.g., a sharp, significant, minor or slight increase or decrease). Mere comparisons like “we expect sales to increase” are no longer acceptable. Instead, forecasts will need to be accompanied by a value, a range of values or a descriptive comparison (e.g., “significant sales growth”).
Particular attention should be paid to a new twist. Going forward, the report on expected developments must present the most important financial and non-financial key performance indicators in a way that facilitates a comparison with actual figures in the next reporting year. The subsequent year’s report on the economic position of the company or group must include a comparison of the previous year’s forecast with actual business. In the event of significant variance, concerned readers may concurrently question the quality of the current year’s projections.
Report on opportunities and risks
Last but not least, the new rules aim to increase the meaningfulness of the report on opportunities and risks by requiring companies to discuss both items in equal measure. To improve transparency, the individual risks and opportunities can either be ranked or, as previously done, grouped into categories. The report should then summarize the group’s or company’s risk and opportunity situation. The presentation must help users see the significance of the risks and opportunities and also contain an analysis of the consequences to be expected if the risks and opportunities occur. Any post-reporting-date changes in the significance of individual risks and opportunities, including their materializing or passing, are also to be addressed in the (group) management report.
One thing is clear: The new standard will make entities focus the single-entity and group management reports they prepare for the 2013 fiscal year more squarely on the company or group and its environment. Generalizations are no longer allowed. In addition, greater importance will be attached to the report’s meaningfulness overall and to the specificity of its forecasts in particular. This is a challenge to which all companies must rise.