Valuation of Fixed Assets under German Commercial Law (HGB)

General Principles of Valuation for Fixed Assets (§ 253 HGB)

The valuation of fixed assets in Germany is governed by § 253 of the Handelsgesetzbuch (HGB). These regulations define how assets must be recorded at acquisition and in subsequent years.

According to § 253 (1) HGB, assets must be valued at a maximum of their acquisition or production costs, reduced by depreciation as specified in paragraphs 3 to 5. Paragraph 3 states that for fixed assets with a limited useful life, acquisition or production costs must be reduced by systematic (planned) depreciation. This plan must distribute the costs across the financial years in which the asset can likely be used. Independent of whether a fixed asset has a limited useful life, extraordinary (unplanned) depreciation must be performed if a permanent impairment of value is expected, in order to record the asset at the lower fair value (beizulegender Wert) at the balance sheet date. For financial assets, extraordinary depreciation may also be performed even if the impairment is not expected to be permanent.

Paragraph 5 HGB establishes the requirement for value recovery (Zuschreibungspflicht). If the reasons for a previous extraordinary depreciation no longer exist, the lower valuation must not be maintained; however, a lower valuation for acquired goodwill must be maintained. Valuation of fixed assets follows the "Modified Lower of Cost or Market Principle" (gemildertes Niederstwertprinzip), meaning that in cases of temporary impairment, the lower comparison value is not always recorded. Depreciation recorded on December 31 represents the loss in value and constitutes an expense (Aufwand) that reduces company profit.

Systematic Classification of Valuation for Fixed Assets

The valuation approach depends on whether an asset is tangible (Sachanlagevermögen) or financial (Finanzanlagevermögen), and whether it is subject to wear and tear (depreciable).

For Tangible Fixed Assets (Sachanlagevermögen):

• Depreciable Assets: These undergo linear depreciation in the year of acquisition, calculated precisely by the month. If there is a likely permanent impairment, the fair value (beizulegender Wert) must be recorded via extraordinary depreciation. If the impairment is only temporary, the fair value must not be recorded; no extraordinary depreciation occurs, and the regular book value (Regelwert) is maintained.
• Non-depreciable Assets: In the case of expected permanent impairment, the fair value must be recorded. If the impairment is temporary, the regular value is maintained.

For Financial Assets (Finanzanlagevermögen):

• In the case of permanent impairment, the fair value must be recorded.
• In the case of temporary impairment, there is a right of choice (Wahlrecht): the company may choose to record either the fair value or the regular book value.

In all cases where the reason for impairment disappears (Wegfall der Wertminderung), there is a mandatory write-back (Zuschreibungspflicht/Wertaufholungsgebot) up to the limit of the historical acquisition cost (Anschaffungswertprinzip - AKP).

Calculation of Acquisition Costs (Anschaffungskosten)

Acquisition costs (AK) are always determined as net amounts. When purchasing assets like machinery (immovable, depreciable) or vehicles (movable, depreciable), the following calculation schema is used:

1. List Purchase Price (Listeneinkaufspreis - LEP): $100\,\%$
2. Deduct Supplier Discount (Liefererrabatt - LR): (e.g., $10\,\%$ of LEP)
3. Equals Target Purchase Price (Zieleinkaufspreis - ZEP): $90\,\%$
4. Deduct Supplier Cash Discount (Liefererskonto - LSK): (e.g., $2\,\%$ of ZEP)
5. Equals Cash Purchase Price (Bareinkaufspreis - BEP): Total after discount.
6. Add Ancillary Acquisition Costs (Anschaffungsnebenkosten - ANK): (e.g., transport, installation).
7. Equals Acquisition Costs (Anschaffungskosten - AK): Total net amount capitalized.

Specific rules apply to which ancillary costs (ANK) must be capitalized:

• Mandatory Capitalization: Transfer costs (Überführungskosten), license plates (Kfz-Schilder), registration fees (Zulassungsgebühren), freight (Fracht), packaging (Verpackung), cartage (Rollgeld), foundations (Fundament), installation (Installation), and test runs (Probelauf).
• Prohibited from Capitalization: Training costs (Anlernkosten), ongoing expenses (laufende Aufwendungen), operating supplies like the first tank of fuel (Betriebsstoffe/1. Tankfüllung), scrap production (Ausschussproduktion), insurance costs (Versicherungskosten), and financing costs (Finanzierungskosten).

Formulas and Methodology for Depreciation

Depreciation is calculated linearly and with monthly precision. The basic formulas are as follows:

• Depreciation Amount per Year: $\text{Depreciation Amount} = \frac{\text{Acquisition or Production Costs}}{\text{Useful Life}}$

• Depreciation Rate ($\%$): $\text{Depreciation Rate} = \frac{100}{\text{Useful Life}}$

• Monthly Depreciation Amount ($\text{EUR/Month}$): $\text{Depreciation Amount in EUR/Month} = \frac{\text{AK}}{\text{Useful Life (ND)} \times 12\,\text{Months}}$

To solve valuation problems, the "5-Step Method" (5-Schritt-Methode) is applied:

1. Determine the position in the balance sheet (e.g., movable depreciable fixed asset).
2. Calculate the regular book value (Regelwert) and compare it to the fair value (beizulegender Wert).
3. Determine the change in value (impairment amount).
4. Justify the valuation approach (e.g., modified lower of cost or market principle).
5. Determine the final balance sheet value (Bilanzansatz).

Case Study: Movable Depreciable Asset (Company Car)

Example Scenario: Unternehmer AG purchased a new small company car on August 23, 2017, for acquisition costs of $36,000.00\,\text{EUR}$. The useful life (Nutzungsdauer) is fixed at 6 years ($72$ months). In 2018, the car was involved in a non-fault traffic accident. After repairs and an expert appraisal, the fair value (beizulegender Wert) as of December 31, 2018, was determined to be $18,000.00\,\text{EUR}$.

Step-by-Step Solution via the 5-Step Method:

1. Position in the Balance Sheet: Movable depreciable fixed asset.

2. Calculation of Regular Book Value vs. Fair Value:

• Acquisition Cost (23.08.2017): $36,000.00\,\text{EUR}$
• Scheduled Depreciation 2017 (for 5 months): $\frac{36,000.00 \times 5}{6 \times 12} = 2,500.00\,\text{EUR}$
• Book Value (31.12.2017): $36,000.00 - 2,500.00 = 33,500.00\,\text{EUR}$
• Scheduled Depreciation 2018 (for 12 months): $\frac{36,000.00 \times 12}{6 \times 12} = 6,000.00\,\text{EUR}$
• Regular Book Value (Regelwert) (31.12.2018): $33,500.00 - 6,000.00 = 27,500.00\,\text{EUR}$
• Fair Value (beizulegender Wert): $18,000.00\,\text{EUR}$

1. Determine Value Change: Impairment = Regular Book Value - Fair Value: $27,500.00\,\text{EUR} - 18,000.00\,\text{EUR} = 9,500.00\,\text{EUR}$ There is a value reduction of $9,500.00\,\text{EUR}$.

2. Justification of Valuation: This is a case of value reduction. Because this is a depreciable tangible asset and the impairment is permanent (due to the accident), the modified lower of cost or market principle applies. The lower fair value must be recorded.

3. Final Balance Sheet Valuation: Balance sheet value on 31.12.2018: $18,000.00\,\text{EUR}$ (Fair Value).

Note: If the impairment had been only temporary, the regular book value of $27,500.00\,\text{EUR}$ would have been recorded instead, due to the modified lower of cost or market principle and the historical cost principle.