When you are at the helm of a company's finances, understanding the distinct accounting principles and requirements of every jurisdiction your business operates in is vital. For those involved in activities within Germany, this means becoming familiar with the "Handelsgesetzbuch" (HGB), or German Commercial Code. This article aims to provide an overview of tangible fixed asset accounting under the HGB.
Defining Fixed Assets under the HGB
The HGB defines fixed assets as long-term assets intended for continual use in business operations. They encompass tangible and intangible assets, as well as financial investments.
Tangible assets include land, buildings, technical equipment, machinery, and other physical assets. Intangible assets, on the other hand, comprise goodwill, patents, licenses, and software. Financial assets consist of shares, bonds, and other securities owned by the company.
Recognition of Tangible Assets
Under the HGB, tangible assets are initially recognized at their acquisition or production cost. This cost includes all expenses directly attributable to bringing the asset to its working condition for use. Interest on borrowed capital is generally not part of the production costs. However, there is an option to include the interest on borrowings for the asset accrued during the period of production in the cost of production.
Depreciation of Tangible Assets
Depreciation refers to the systematic allocation of the depreciable amount of an asset over its useful life. The depreciation method is generally freely selectable and is at the judgement of the management. The preferred method is straight-line depreciation, which means the depreciable amount is evenly distributed over the asset's life. Alternatively, the also possible declining balance method depreciates a higher proportion of the acquisition cost at the beginning than towards the end of the useful life. If the asset is physically separable, the component approach under HGB is also permissible, following the international accounting. Here, the planned depreciations are to be determined separately for the individual components within a depreciation plan. A further option is the performance-based depreciation. Examples of this are the hours of use of machines or the kilometers driven by trucks.
Assets with a limited useful life must be depreciated, while assets with an indefinite useful life, such as land, are not subject to depreciation.
Impairment of Tangible Assets
If an tangible asset is expected to provide lower future benefits than initially expected, it may need to be impaired. HGB follows the lower of cost or market principle, implying that if the market value of an asset falls below its book value, an impairment loss must be recognized. If the reasons for the impairment cease to exist in the future, the impairment loss can be reversed up to the amount of the original cost. Valuation above acquisition or production cost is not permitted in the context of the impairment test.
Tax law differences to the commercial law must be observed.
Disposal of Tangible Assets
When a tangible asset is retired or sold, it is removed from the balance sheet. Any difference between the book value and the disposal proceeds is recognized as a gain or loss in the profit and loss account.
Tangible Asset Disclosures
HGB requires businesses to provide an appendix to the annual accounts with detailed disclosures about their fixed assets. This appendix includes the nature and form of the assets, , acquisition or production costs, accumulated depreciation, and net book value.
Tangible asset accounting under the German Commercial Code embraces the principles of conservatism, prudence, and clarity. While it shares some similarities with other accounting standards like the IFRS or US GAAP, it also has its unique nuances. The methodical, detailed, and transparent approach required by the HGB reflects the stringent and meticulous nature of German business practice. Familiarizing oneself with these procedures is crucial for foreign CFOs to ensure financial compliance in the German business environment.
This article presents a broad overview, and each topic can be a subject of a more detailed discussion considering the specific nature and complexity of your operations in Germany. Therefore, it is recommended to work with an expert in German accounting to address the unique aspects of your business.
As always, due to the complex nature of these issues, this article should be used as a starting point rather than a substitute for professional advice.