Landeskreditbank Baden-Württemberg - L-Bank

which often are special purposes entities, in which a parent does not have a controlling voting interest but the
parent absorbs the majority of the VIE’s expected losses or residual returns must also be consolidated. The equity
method of accounting is generally required for investments where the parent company has more than 20% of the
voting rights or if factors indicate that significant influence exists.
Receivables (loans) and liabilities
Under German GAAP, receivables (loans) and liabilities are classified according to the period after which
the obligor thereof may, or may be required to, repay in full such receivables or liabilities. The Regulation on the
Accounting Principles applied to Credit Institutions and Financial Services Institutions
(Rechnungslegungsverordnung für Kreditinstitute und Finanzdienstleistungsinstitute), together with Section 340
et seq. German Commercial Code (Handelsgesetzbuch), which mainly comprise German GAAP for credit
institutions, requires that a bank classifies receivables and liabilities on its balance sheet into short-term assets
and liabilities that are payable on demand (täglich fällig) and other assets and liabilities.
Under U.S. GAAP, financial institutions do not present so classified balance sheets.
Property and equipment
Under German GAAP, property and equipment are reported at acquisition or manufacturing cost, as
applicable, and reduced by scheduled depreciation in accordance with their estimated economic useful life. In
practice, depreciation is carried out on the basis of the depreciation tables issued by the Federal Ministry of
Finance. Based on the modified lower of cost or market principle, any expected permanent impairment of
property and equipment results in additional depreciation. This additional depreciation is reversed when the
reason for the impairment no longer exists.
U.S. GAAP requires that property and equipment be carried at cost less scheduled depreciation in
accordance with the estimated economic useful life of the asset. U.S. GAAP requires that assets be reviewed for
impairment. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, an impairment loss is recognized. Such impairment losses shall not be reversed.
Investment securities
Under German GAAP, investment securities are defined in Section 7 of the Regulation on Accounting by
Credit Institutions and Financial Services Institutions (Verordnung über die Rechnungslegung der Kreditinstitute
und Finanzdienstleistungsinstitute); in the balance sheet they are disclosed under “Notes and other interestbearing
securities” and “shares and other non interest-bearing securities.” In disclosing income and expenses, a
distinction is made between securities held in trading portfolios (Handelsbestand) and those held as liquidity
reserves in the liquidity portfolio (Liquiditätsreserve) (securities which are neither treated as fixed assets nor held
for trading purposes). In both cases the securities are carried as current assets and are valued, for each type of
security separately, at the lower of cost or market value at the balance sheet date and included in income.
Under U.S. GAAP, investments in equity and debt securities are classified into the categories trading,
available-for-sale or held-to-maturity (for debt securities only). Debt securities held to maturity are carried at
amortized cost. Held to maturity and available for sale securities are subject to (other-than-temporary)
impairment tests. Trading and available-for-sale securities are recorded at fair value and changes of trading
securities in fair value are included in the income statement. Changes in the fair value of available-for-sale
securities are included in other comprehensive income, a separate component of equity, unless a decline in fair
value is deemed to be other-than-temporary. If the decline is other-than-temporary the loss is included in the
income statement.
Provision for loan losses
Under German GAAP credit institutions are permitted to create loss risk provisions that, in accordance with
German law, are not disclosed.
82