Should you use the Danish Financial Statements Act, GAAP or IFRS in Denmark?

Should you use the Danish Financial Statements Act, GAAP or IFRS in Denmark?

Accounting standards can be simplified to a basic principle: standardising accounting methods and practices.

These accounting standards are updated frequently by their governing bodies.

When submitting an annual report in Denmark, a Danish company must choose between applying:

The Danish Financial Statements Act;
GAAP;
IFRS.

These accounting standards help accountants, investors, and other key stakeholders regulate accounting processes and maintain financial documents.

Accounting standards are important because they help create clarity and transparency in how companies report their financial information.

They are also vital in decision-making for both investors and companies because they help make reporting uniform so that any entity can understand the data.

To learn about your options with regard to maintaining your accounting records, preparing financial statements, and ensuring compliance with relevant accounting principles, refer to the Danish Bookkeeping Act.

Having said these, it is an important decision for companies in Denmark to employ the appropriate accounting standards.

The selection of a certain standard has far-reaching implications for their financial reporting, transparency, and ability to attract investors.

The chosen accounting standards can affect the credibility and comparability of financial statements and determine how financial transactions and events are recognised, measured, and presented.

Clearly, the choice of accounting standards can significantly influence companies’ access to capital markets, cross-border investments, and overall competitiveness.

This is why companies must also be precise in terms of their procedures that may influence their financial reporting and compliance.

Companies in Denmark can adopt one of the several accounting standards, each having its own set of principles, rules, and disclosure requirements.

Even if you choose to use IFRS or GAAP, you still will need to observe the rules in The Danish Financial Statements Act, to make sure that you are fully compliant.

Requirements for Your Annual Report in Denmark

Generally, the rules are as follows:

Non-Public Traded Companies

Companies in Denmark that are non-public traded companies, have the option to choose between applying the Danish Financial Statements Act, GAAP or IFRS.

Applying the Danish Financial Statements Act, GAAP or IFRS, depends on the size of the company, international exposure, and the preferences of its stakeholders.

Smaller companies in Denmark typically use the Danish Financial Statements Act due to its simpler requirements and lower cost of compliance compared to GAAP and IFRS.

Larger companies or those with significant international operations or ambitions often choose to prepare their financial statements according to IFRS to facilitate comparisons with international competitors, or in preparation for potential future public offerings.

The Danish Financial Statements Act is structured to accommodate companies of various sizes, and have different requirements for small, medium-sized, and large companies.

The Danish Financial Statements Act provides a framework that is more accessible for local businesses, while still offering the option for those that are looking towards international markets or have foreign investors to use IFRS.

Publicly Traded Companies

Companies in Denmark that are publicly traded are required to prepare their annual reports in accordance with IFRS.

This requirement ensures consistency and comparability for investors across different markets. The consistency enhances the comparability of financial statements across different companies and industries, which in turn makes it easier for investors to analyse and compare investment opportunities. Another good reason for using the IFRS is that it facilitates cross-border investments. The utilisation of the IFRS by publicly traded Danish companies aligns their financial reporting with international standards, thus facilitating cross-border investments and capital flows, as Denmark is an open economy.

The Danish Financial Statements Act

The Danish Financial Statements Act is a comprehensive set of accounting rules and regulations that govern the preparation and presentation of financial statements for companies that operate in Denmark.

When the Danish Financial Statements Act was introduced, it was pretty much aligned with the existing IFRS accounting standards at the time, but today IFRS has developed a lot, and there is a larger gap between the Danish Financial Statements Act and IFRS than in the past.

The Danish Financial Statements Act divides companies into 4 categories: A, B, C or D

Small businesses (sole proprietors) would normally be in category A, and the largest publicly traded companies in category D.

The higher the category, the higher reporting requirements.

Businesses in category A are not required to submit their annual reports to the Danish Business Authority.

The Danish Financial Statements Act provides guidance on various aspects of financial reporting tailored to the Danish business environment.

The Danish Financial Statements Act can accommodate companies of various sizes and has different requirements for small, medium-sized, and large companies.

This tiered approach allows for a more balanced application of accounting standards because it recognises the diverse needs and resources of businesses.

While tailored to Danish businesses, the Danish Financial Statements Act may also impose regulatory complexities and compliance burdens, particularly for larger companies with complex operations.

The Danish Financial Statements Act offers a comprehensive set of accounting standards and reporting requirements for Danish companies.

For simplicity, we will abbreviate the Danish Financial Statements Act to “DFSA” in this blog.

Key features

Reporting formats: The DFSA requires the mandatory formats and contents for financial statements, including the balance sheet, income statement, and notes to the accounts;

Measurement principles: The DFSA offers supervision on the measurement and recognition of assets, liabilities, income, and expenses, ensuring consistent and accurate financial reporting;

Disclosure requirements: Companies must fulfil specific disclosure requirements outlined in the DFSA, to ensure transparency and provide stakeholders with relevant information for decision-making;

Audit and assurance: The DFSA outlines the requirements for auditing and assurance services, to ensure the reliability and accuracy of financial statements;

Segment reporting: The DFSA mandates segment reporting for larger companies, providing stakeholders with insights into the performance of different business sectors.

Benefits and Disadvantages of Using the DFSA For Annual Reporting

As a business owner in Denmark, it’s important to evaluate the advantages and disadvantages of using the DFSA for your annual reporting:

Benefits

Local relevance: The DFSA is tailored to the Danish business environment, accounting for local practices and customs, making it highly relevant for Danish companies;

Familiarity for stakeholders: Danish investors, lenders, and other stakeholders are familiar with the DFSA, enabling easier understanding and analysis of financial statements prepared under these standards;

Lower compliance costs: Compared to IFRS and GAAP, the DFSA generally has simpler requirements, resulting in lower compliance costs for smaller companies.

Disadvantages

Limited global comparability: While widely accepted in Denmark, the DFSA may not be as widely recognised internationally, making it more challenging to compare financial statements with international competitors or facilitate cross-border transactions;

Potential for future growth limitations: Using the DFSA may not provide the same level of credibility and comparability as IFRS or GAAP, especially if your company plans to seek financing from international investors or expand globally;

Lack of flexibility for complex transactions: The DFSA may not provide comprehensive guidance for complex transactions or specialised industries, potentially limiting its applicability for larger or more diversified companies.

The International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) developed the IFRS.

These standards promote transparency, comparability, and high-quality financial reporting across borders.

The IFRS takes a principle-based approach, which gives way to professional judgment in applying standards rather than providing detailed rules.

The IFRS is widely adopted in 140 jurisdictions globally, and this worldwide acceptance enhances the credibility and acceptability of financial statements prepared under this accounting standard.

Adhering to the IFRS can help ensure that Danish companies’ financial statements are comparable with those of their international counterparts and competitors, regardless of their geographic location.

Also, adopting the IFRS at an early stage can help private companies position themselves for future growth opportunities like potential public offerings.

The downside is, that transitioning to IFRS may involve significant implementation costs, including training, system upgrades, and adjustments to internal processes and controls, particularly for companies with complex operations.

Benefits and Disadvantages of Adopting IFRS for Annual Reporting in Denmark

When considering IFRS for your annual reporting in Denmark, it’s essential to weigh the benefits and challenges:

Benefits

Global comparability: IFRS is recognised and accepted in over 140 jurisdictions, allowing for unified comparisons with international companies and facilitating cross-border investments and partnerships;

Access to international capital markets: Using IFRS can simplify the process and increase your credibility with global stakeholders, especially if your company plans to seek out financing from international investors or list on foreign stock exchanges;

Strong disclosure requirements: IFRS is known for its strong disclosure requirements and emphasis on transparency, which can increase investor confidence in your financial statements;

Facilitating international expansion: By adopting IFRS, your company can better align its financial reporting with international standards, making it easier to communicate financial information to a wider audience and facilitate potential expansion into global markets.

Disadvantages

Complexity and compliance costs: Implementing IFRS typically involves higher compliance costs compared to the Danish Financial Statements Act and GAAP due to its comprehensive nature and rigorous reporting requirements;

Potential for inconsistent application: While IFRS aims to promote global standards, there may be variations in interpretation and application across different jurisdictions, which could lead to inconsistencies in financial reporting;

Ongoing updates and changes: IFRS is an evolving set of standards, with frequent updates and revisions. Keeping up with these changes can be resource-intensive and may require ongoing training and implementation efforts.

Generally Accepted Accounting Principles (GAAP)

GAAP is a set of widely accepted accounting standards, conventions, and rules that govern preparing and presenting financial statements.

Its comprehensive framework serves as a benchmark for financial reporting.

Essentially, GAAP is more detailed and prescriptive than IFRS.

In Denmark, there are two main forms of GAAP: Danish and US.

The Danish GAAP follows a more rules-based approach, which provides detailed guidance on the application of accounting principles specifically for Danish companies.

US GAAP, however, can be more complex and prescriptive compared to other accounting standards, requiring companies to adhere to detailed rules and guidelines, which may increase the cost and complexity of compliance.

It’s important to note that GAAP is not a universal set of standards, and variations exist across different countries and jurisdictions.

In Denmark, the following variations of GAAP may be applicable:

Danish GAAP

This variation is based on the Danish Financial Statements Act and incorporates certain elements of IFRS also.

It is an accepted accounting framework in Denmark, particularly for non-public companies.

US GAAP

The Generally Accepted Accounting Principles developed and adopted in the United States are also recognised and used by some Danish companies, especially those with operations or subsidiaries in the US.

Benefits and Disadvantages of Utilising GAAP For Annual Reporting in Denmark

When considering GAAP for your annual reporting in Denmark, it’s essential to weigh the Benefits and Disadvantages:

Benefits

Global recognition: While not as widely adopted as IFRS, GAAP is recognised and accepted in many countries, allowing for comparability with companies that follow similar standards;

Comprehensive framework: GAAP offers a detailed set of guidelines and principles covering various aspects of financial reporting, providing a strong framework for companies with complex operations or transactions;

Credibility and transparency: GAAP is known for its rigorous standards and emphasis on transparency, which can enhance the credibility of your financial statements.

Disadvantages

Limited local relevance: GAAP may not be as tailored to the specific needs and practices of the Danish business environment as the Danish Financial Statements Act;

Higher compliance costs: Adhering to the comprehensive GAAP framework typically involves higher compliance costs compared to the Danish Financial Statements Act, but lower than IFRS;

Potential for inconsistencies: With variations in GAAP across different countries, there may be challenges in ensuring consistency and comparability, especially for companies with international operations.

Considerations

The choice of accounting framework for your annual report is a vital decision that can have significant consequences for your financial reporting, stakeholder relationships, and future growth prospects.

While the Danish Financial Statements Act, GAAP, and IFRS each have their qualities, it’s important to carefully evaluate the factors influencing this choice and select the most suitable framework that aligns with your company’s needs and goals.

Nature and size of your business

If you own a smaller, locally focused company, the Danish Financial Statements Act may be the most appropriate option due to its simplicity and lower compliance costs. However, if you operate a larger company with significant international operations or plans for expansion, the global recognition and comparability offered by GAAP or IFRS may be more beneficial.

Stakeholder expectations and preferences

Consider the preferences and requirements of your stakeholders, including investors, lenders, and business partners. If your stakeholders are primarily domestic and familiar with the Danish Financial Statements Act, adhering to these local standards may be the most practical choice.

However, if you have international stakeholders or aspirations for global expansion, adopting GAAP or IFRS can enhance comparability and facilitate cross-border transactions.

Legal and regulatory requirements

If your company is publicly traded in Denmark, you are legally required to use IFRS for your annual reports.

Non-publicly traded companies have greater flexibility in choosing between the Danish Financial Statements Act, GAAP, or IFRS, but should carefully review and understand the relevant legal and regulatory requirements to ensure compliance.

Future growth plans

If you plan to seek financing from international investors, list on foreign stock exchanges, or expand your business globally, using IFRS can simplify the process and increase your credibility with global stakeholders.

Guidance on Selecting the Most Suitable Framework

Guiding business owners in Denmark in selecting the appropriate accounting standards based on their specific circumstances – here are our recommendations:

For most non-public companies in Denmark, we recommend using the Danish Financial Statements Act for your annual reports.

As a locally developed framework, it is well-suited for the Danish business environment, offers simplicity and lower compliance costs, and is the most common practice among non-public companies in Denmark.

If you own a larger non-public company with significant international operations or plans for expansion, we recommend considering IFRS or GAAP.

IFRS is the globally recognised set of accounting standards, facilitating comparisons with international competitors and potential investors.

GAAP, while not as widely adopted as IFRS, also offers a comprehensive framework and may be a suitable option for companies with operations in countries where GAAP is more prevalent.

If you plan to take your company public in the near future or seek financing from international investors, we strongly recommend adopting IFRS early.

This will ensure compliance with regulatory requirements for publicly traded companies and enhance credibility with global stakeholders.

Remember, the choice of accounting framework is not a one-size-fits-all decision.

It requires careful deliberation of your company’s specific conditions, stakeholder expectations, and future aspirations.

Following these recommendations and weighing the factors influencing your choice can help you select the accounting framework that best positions your company for success in the evolving business endeavour.

Our recommendation

Our recommendation is to use the Danish Financial Statements Act for the majority of our clients, since this is by far the most common in Denmark.

Don’t hesitate to reach out to us to learn more about accounting standards in Denmark and identify which one works best for you.

You can schedule a meeting with us here

(This blog was updated last time: 16.5.2024)

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