Valuation of Securities in Fixed Assets under HGB

Definition and Characteristics of Securities in Fixed Assets

Securities categorized under fixed assets are instruments used by a company for long-term investment purposes. The primary strategic goals for holding these securities include establishing a closer economic relationship with another enterprise over the long term or exercising economic influence over that company. According to the transcript, if the ownership stake in another company is at least $20\%$, it is formally classified as a participation (Beteiligung).

Because financial fixed assets are inherently non-depreciable in nature, they are not subject to planned or scheduled depreciation (planmäßige Abschreibung). However, they are subject to unscheduled depreciation (außerplanmäßige Abschreibung) based on specific valuation triggers and legal requirements under the German Commercial Code (Handelsgesetzbuch - HGB).

Legal Basis: HGB § 253 - Initial and Subsequent Valuation

Under § 253 (3) of the HGB, valuation rules are defined regardless of whether the use of an asset is limited by time. For fixed assets, unscheduled depreciation must be performed if a permanent impairment (voraussichtlich dauernde Wertminderung) is expected. This is done to set the asset at the lower value that should be assigned to it on the balance sheet date (Abschlussstichtag).

In the specific case of financial assets (Finanzanlagen), the law allows for more flexibility: unscheduled depreciation may also be performed even if the impairment is expected to be temporary (voraussichtlich nicht dauernde Wertminderung).

The Mixed Lower of Cost or Market Principle

When the fair value (beizulegender Wert, abbreviated as bzW) is lower than the book value (Regelwert, abbreviated as RW), the mixed lower of cost or market principle (gemildertes Niederstwertprinzip) applies. This principle dictates different actions based on the expected duration of the value loss:

If there is a permanent impairment (dauerhafte Wertminderung), the company is required by law to apply the lower fair value in the balance sheet through an unscheduled depreciation. This is a mandatory requirement.

If there is a temporary impairment (vorübergehende Wertminderung), the company is permitted but not required to balance at the lower fair value. Choosing to perform an unscheduled depreciation in this scenario is an accounting option.

Financial strategy plays a role here: if a company aims to show lower profits (geringer Gewinnausweis), it may choose to perform unscheduled depreciation even for temporary losses to reduce profit and, consequently, lower the tax burden.

The 5-Step Method for Valuation

To determine the correct balance sheet valuation for securities in fixed assets, the 5-Step Method (5-Schritt Methode) is employed:

Step 1: Determine the position in the balance sheet. In this context, it is identified as financial fixed assets (Finanzanlagevermögen).

Step 2: Determine and compare the Rule Value (Regelwert - RW) and the Fair Value (beizulegender Wert - bzW).

Step 3: Calculate the change in value. This is the difference between the current book value and the newly assessed market or fair value.

Step 4: Justify the valuation. This involves analyzing whether the impairment is permanent or temporary and applying the relevant legal principles (e.g., mandatory vs. optional depreciation).

Step 5: Determine the final balance sheet value (Bilanzansatz). This is the amount that will ultimately appear on the balance sheet at the closing date.

Case Study: Unscheduled Depreciation of Securities

In 2016, UNTERNEHMER AG acquired securities of AKTIEN AG as a long-term investment. The acquisition costs (Anschaffungskosten) were $150.000,00\,€$, which was the value recorded on the balance sheet as of 31.12.2016. Due to global turbulence in the raw materials market in 2017, the value of these securities dropped to $80.000,00\,€$ by 31.12.2017. Economic forecasts indicated that a recovery of the raw materials market was not in sight for 2018.

Applying the 5-Step Method for 31.12.2017:

1. Position: Financial fixed assets (Finanzanlagevermögen).

2. Comparison: Rule Value (RW) = $150.000,00\,€$. Fair Value (bzW) = $80.000,00\,€$. Result: $80.000,00\,€ < 150.000,00\,€$.

3. Value change: There is a value reduction (Wertherabsetzung) of $150.000,00\,€ - 80.000,00\,€ = 70.000,00\,€$.

4. Justification: Since the statement "recovery… is not in sight" implies the impairment is permanent, the company must apply the lower fair value in accordance with the mandatory rules for permanent impairment.

5. Final Valuation: The balance sheet value on 31.12.2017 is $80.000,00\,€$ (the fair value).

Case Study: Reversal of Impairment (Zuschreibung)

Following the previous example, UNTERNEHMER AG held the AKTIEN AG securities at a value of $80.000,00\,€$ as of 31.12.2017. In 2018, the raw material market stabilized, and prices rose steadily. By 31.12.2018, the fair value of the securities package was determined to be $180.000,00\,€$.

Applying the 5-Step Method for 31.12.2018:

1. Position: Non-depreciable financial fixed assets.

2. Comparison: Previous balance sheet value = $80.000,00\,€$. New Fair Value (bzW) = $180.000,00\,€$.

3. Value change: This represents a potential value increase (Werterhöhung) or reversal of impairment (Zuschreibung) of $180.000,00\,€ - 80.000,00\,€ = 100.000,00\,€$.

4. Justification: Since the reason for the original impairment has disappeared, a write-up (reversal of impairment) is required. However, the acquisition cost principle (Anschaffungswertprinzip) limits the write-up. An asset cannot be valued higher than its original historical acquisition cost. Therefore, the maximum value it can be written up to is the original Rule Value (RW) of $150.000,00\,€$.

5. Final Valuation: The balance sheet value on 31.12.2018 is $150.000,00\,€$ (the original Rule Value), despite the market value being higher ($180.000,00\,€$).