Financial Asset Accounting According to German Commercial Code

Quick Guide on financial asset accounting according to German Commercial Code

Understanding the intricacies of the Handelsgesetzbuch (HGB) or German Commercial Code, particularly regarding the accounting for intangible fixed assets, is crucial. This article aims to provide an in-depth explanation of the process, highlighting key aspects such as recognition, measurement, depreciation, and disclosure.

Recognition of Intangible Fixed Assets

Under the HGB, intangible fixed assets include assets without physical substance, which are intended for long-term use in the business, and are controlled by the company. They typically include patents, software, licenses, trademarks, and goodwill.

Since a change in the law in 2009, self-created intangible assets can also be capitalised, in deviation from the previous legal situation. Capitalisation is an option and not an obligation.
There are selective exceptions, for example for self-created brands or customer lists, for which capitalisation has remained prohibited.
Development costs can in principle also be activated under certain conditions. We will comment on this in a separate note.

It should be noted that the capitalisation of self-created intangible assets in the case of limited companies is coupled with a dividend block. The maximum dividend is reduced by the book value of the capitalised intangible assets (less deferred taxes). Corresponding information must be provided in the notes.

Measurement of Intangible Fixed Assets

Intangible fixed assets are initially measured at their acquisition cost. This includes the purchase price and any directly attributable costs of preparing the asset for its intended use.
Self-created intangible fixed assets are initially measured at their production cost.

Goodwill is a special case; it represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. It is recognized as an asset and amortized over its useful life.

Depreciation of Intangible Fixed Assets

Intangible assets are subject to amortization under the HGB. Depreciation refers to the systematic allocation of the depreciable amount of an asset over its useful life.

While tax law provides some general guidelines, the useful life of an intangible asset under the HGB should reflect the period over which the company expects to derive economic benefits from the asset. The company should review the useful life and amortization method at least at every year-end and adjust them if necessary.

Unlike some other accounting standards, the HGB mandates amortization of goodwill. Goodwill arising from a business combination must be systematically amortized over its predicted useful life. If the expected useful life cannot be reliably estimated, the HGB requires a maximum depreciation period of 10 years.

Impairment of Intangible Fixed Assets

The HGB follows the lower of cost or market principle. If the market value of an intangible asset falls below its book value (cost less accumulated depreciation), an impairment loss must be recognized to write down the asset to its lower market value.

Impairment losses are recognized in the income statement and reduce the carrying amount of the asset in the balance sheet. If the reasons for the impairment cease to exist in the future, the impairment loss must be reversed up to the original cost less accumulated depreciation . This does not apply to goodwill acquired; here the lower value must be retained.

Disposal of Intangible Fixed Assets

When an intangible fixed asset is sold, it is derecognized from the balance sheet. Any difference between the book value and the disposal proceeds is recognized as a gain or loss in the income statement.

Disclosure of Intangible Fixed Assets

Under the HGB, companies are required to provide detailed disclosures about their intangible fixed assets in the notes to the financial statements. This includes information on their nature, acquisition/production cost, accumulated amortization, carrying amount, and changes during the year.

In conclusion, intangible fixed asset accounting under the HGB requires a meticulous and conservative approach. It emphasizes the principles of prudence and transparency, requiring companies to regularly review and adjust the carrying amounts of their assets. Understanding these requirements is key to maintaining financial compliance and accurate representation of the company's financial position. As always, given the complexities involved, this guide should be supplemented with advice from experts knowledgeable in German accounting standards.