Improving Creditor Protection Through IFRS Reporting and Solvency Tests

26 Pages Posted: 19 Oct 2006

See all articles by Bernhard Pellens

Bernhard Pellens

University of Bochum

Thorsten Sellhorn

Ludwig-Maximilians-Universitaet (LMU) Munich

Date Written: October 2006


Accounting-based capital maintenance is a traditional feature of the Continental-European system of creditor protection, serving as a correlative of the limited liability enjoyed by shareholders of corporations. Due to recent developments at the EU regulatory level, this system has come under intense scrutiny. While capital maintenance and distribution rules are presently tied to individual financial statements prepared under the prudent German accounting rules, recent developments suggest that International Financial Reporting Standards (IFRS) may be finding their way into this traditional system. Since conservative capital maintenance is not the primary objective of these rules, opponents assert that their introduction into German individual accounts may weaken creditor protection. We discuss how creditor protection and accounting rules should interact in the future, proposing a new system primarily for the benefit of corporations preparing (consolidated) financial statements according to IFRS, i.e. for public parent companies to which the IAS Regulation applies directly, and other firms that apply IFRS under national law. Under that system, existing capital maintenance rules would be based on IFRS accounts. In addition, creditor protection would be enhanced by a supplemental, liquidity-oriented, forward-looking solvency test to be conducted prior to each intended distribution.

Keywords: capital maintenance, solvency test, creditor protection, EU, IFRS

JEL Classification: K22, M41, M44, M47, G34, G35

Suggested Citation

Pellens, Bernhard and Sellhorn, Thorsten, Improving Creditor Protection Through IFRS Reporting and Solvency Tests (October 2006). Available at SSRN: or

Bernhard Pellens

University of Bochum ( email )

Universitätsstraße 150
Bochum, NRW 44780

Thorsten Sellhorn (Contact Author)

Ludwig-Maximilians-Universitaet (LMU) Munich ( email )

Ludwigstr. 28 RG IV
Munich, Bavaria 80539
+49(0)89-21806264 (Phone)
+49(0)89-21806327 (Fax)


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