German GAAP currently include no specific accounting rules for derivative and hedging but require, on principle, the application of the general lower of cost or market rule to a derivative and to a hedged item. There is a controversy about the extent to which hedge accounting might be allowed with the ruling majority restricting this to effective micro hedges.10 Because of the favorable tax implications of this approach, German companies are not too uncomfortable with this situation. However, a considerable number of the largest German companies voluntarily disclose information about their use of derivatives in their annual reports along the lines of the recommendations of the FASB or the IASC.  Still only occasionally, but increasingly, they report about an extended use of hedge accounting for their more advanced macro or portfolio hedging approaches.

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The current accounting treatment of derivatives in both countries does materially affect the behavior of a majority of firms. The accounting treatment alters the desired use of derivatives at 59.5% of the US firms and at 51.1% of the German firms. Of the 66 US companies whose derivative decisions are affected by the accounting treatment, 68.2% forego to choose certain types of derivative instruments, 53.0% reduce the amount hedged, and 37.9% alter the timing of the hedge. In comparison, of the 48 German firms whose derivative decisions are affected by the accounting treatment, less respond by reducing the amounts hedged (29.2%) than by choosing other hedging instruments (60.4%) or altering the timing of the hedges (58.4%). This indicates a greater concern with year-end results consistent with our discussion in the preceding section. We will come back to this argument soon.