The strict lowest value principle
- Depreciation obligation – temporary and permanent depreciation
If the assets are included in current assets, the strict lower-of-cost-or-market principle applies: Even in the event of temporary depreciation, unscheduled depreciation and the lowest values must be used. The unscheduled depreciation must therefore be applied in order to reduce the value of the assets in the current assets accordingly. The rule here is the three possible valuation approaches: acquisition / production costs (AHK), stock exchange / market price to be considered on the balance sheet date and the asset to be valued at the lowest value.
Exception: financial assets
Only financial assets are treated differently, here is where
- in the case of permanent impairment, the obligation to depreciate and
- the right to choose in the event of temporary depreciation .
The decisive factor for an unscheduled depreciation is therefore the expected duration of the impairment.
Temporary and permanent depreciation
According to topbbacolleges, the taxpayer must determine and explain the likely permanent decrease in value. In addition, the requirement to increase the value applies, so that it must be proven that and by how much the corresponding partial value continues to move below the upper valuation limit. Accordingly, there is an expected permanent impairment if:
- the value of the asset in question will not reach its upper valuation limit within a substantial part of the probable length of stay within the company,
- the impairment is due to a special occasion, such as technical progress or disasters.
If value-enhancing findings arise by the date of the preparation of the trade balance, these must be incorporated. Otherwise, the point in time is decisive for the tax balance sheet.
Depreciation and write-up – the requirement to increase the value
Despite all due care, it is possible that an impairment posted as permanent turns out to be unfounded. If the reasons for the stated impairment no longer exist, a write-up, i.e. an increase in the book value of the relevant assets, must be carried out accordingly.
In the case of depreciable assets, the ongoing production and acquisition costs minus the scheduled depreciation rates,
in the case of non-depreciable assets, the ongoing acquisition and manufacturing costs apply as the upper valuation limit.
Exceptions to this are only to be found in the derivative good or company value, namely a retention requirement here.
- It may only be attributed if it was previously written off.
- The maximum limit for a write-up is always the amortized acquisition and production costs.
Summary: Depreciation obligation, prohibition or right to choose?
Scheduled and unscheduled depreciation examples
Initial situation: The company buys a special machine worth € 100,000 and writes off € 10,000 annually.
Scheduled depreciation of the purchased machine
| Scheduled depreciation | |
| Acquisition / production costs | € 100,000 |
| Depreciation in the first year (t = 1): | € 10,000 |
| Book value to be applied on the balance sheet date: | € 90,000 |
Extraordinary depreciation of fixed assets
Option 1: In the event of temporary impairment – depreciation option
The above-mentioned special machine was purchased for processing the orders of a certain customer A. However, this customer will only place orders with the company again in one of the coming fiscal years. It is a temporary decrease in value of, for example, € 20,000. The company can now decide whether to make use of its depreciation option or just continue to write off using the straight-line method.
| Extraordinary depreciation in the event of temporary impairment | ||
| Suffrage | Write off unscheduled | Do not write off unscheduled |
| Acquisition / production costs | € 100,000 | € 100,000 |
| Depreciation in the first year (t = 1): | -10,000 € | -10,000 € |
| Depreciation (t = 2) | -10,000 € | -10,000 € |
| Extraordinary depreciation (t = 2) | – € 20,000 | – |
| Book value to be applied on the balance sheet date | € 60,000 | € 80,000 |
Write-ups in the event of temporary depreciation – write-up requirement
The company has made use of its option and has made an unscheduled write-off. In the following year (t = 3), customer A resumes the business relationship and places recurring orders with the company.
The original reason for depreciation and thus also the depreciation does not apply and there is a write-up requirement.
| Write-up after recovery | ||
| Suffrage | Unscheduled depreciation | Not unscheduled depreciation |
| Book value applied (t = 3) | € 60,000 | € 80,000 |
| Attribution (recovery of value from t = 2): | + € 20,000 | – |
| Depreciation (t = 3) | -10,000 € | -10,000 € |
| Book value to be applied on the balance sheet date | € 70,000 | € 70,000 |
Option 2:
In the event of permanent impairment – depreciation
Due to an irreparable defect in the year of purchase, the above-mentioned special machine can only be used to a limited extent and has therefore permanently lost its value. The loss in value is estimated at € 30,000.
| Extraordinary write-down in the event of permanent impairment | ||
| Acquisition / production costs | € 100,000 | |
| Depreciation (t = 1): | -10,000 € | |
| Extraordinary depreciation (t = 1) | – € 30,000 | |
| Book value to be applied on the balance sheet date | € 60,000 | |
