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New Disclosure Requirements for Related Parties in Accordance with ISA (E-DE) 550?

IDW once again requires disclosures beyond those required under the German Commercial Code

 In the version of IDW Auditing Standard 270, the Institute of Public Auditors in Germany, or IDW, recently required companies whose existence is in jeopardy to make disclosures in the notes to their financial statements which are not required under the German Commercial Code. Now, in its International Standard on Auditing ISA (E-DE) 550, ISW once again plans to require companies to make disclosures concerning transactions with related parties which are not required by the German Commercial Code.

1. Corporations and Limited Liability Partnerships

ISA (E-DE) 550 requires corporations and limited-liability partnerships to make disclosures in the notes to their financial statements in order to ensure an accurate overall presentation. For example, reporting the sale of a property to a controlling shareholder at a price which does not equal the market value of the property as profit and loss may not conform to an accurate overall presentation. Rather, it is necessary to disclose the transaction with the related party.

The German Commercial Code also requires companies to make disclosures in the notes to their financial statements, i.e. at the very least transactions with related parties which were not at arm’s length terms, including statements concerning the nature of the relationship and the value of the transactions. The following exemptions apply for this requirement:

  • While companies have the option of disclosing all transactions, they are not required to break them down into transactions at arm’s length terms and those which are not at arm’s length terms. If all transactions are at arm’s length terms, a disclosure is not required.
  • Transactions with consolidated companies which are wholly owned by the parent company need not be disclosed.
  • Small and very small companies are not required to disclose these transactions, and medium-sized companies are only required to do so under certain conditions.

But these exemptions would be moot if ISA (E-DE) 550 nevertheless required a second disclosure in the notes in order to ensure an accurate overall presentation, i.e. if the exemptions provided for by lawmakers in the Commercial Code were to be regarded potentially as a reason why the financial statements fail to convey a true and fair view of the company’s financial, earnings and liquidity position.

2. Other Merchants

For other merchants, ISA (E-DE) 550 requires disclosures in the notes in order to ensure that the financial statements are not misleading. While the Standard qualifies this requirement by noting that it is “extremely rare” for financial statements to be misleading, it also states that financial statements are considered misleading if the company earns a significant percentage of its revenues from related parties and fails to disclose this fact. Companies are required to disclose how much of their revenues were earned from related parties, regardless of whether the transaction was executed at arm’s length terms or not. The German Commercial Code requires no disclosure whatsoever for other merchants: the rules for all merchants recognize no related parties!

3. Conclusion

To paraphrase Friedrich von Schiller, IDW’s will is its happiness! IDW should be advised to declare that ISA (E-DE) 550 does not require any new disclosures: that would make us all happy!

Mark Schüttler, MOORE STEPHENS Westfalen AG


Schüttler, Neue Angabepflichten zu Nahestehenden nach ISA (E-DE) 550? – IDW verlangt erneut über das HGB hinausgehende Angaben, NWB WP Praxis 2019, Vol. 1, p. 9.


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