Extraordinary depreciation is to be applied to depreciable and non-depreciable assets if their values are permanently below the continued production or acquisition costs according to a comprehensive examination. With a view to the GoB, companies can exhaust a margin of discretion when deciding on the permanence of the impairment (moderate lower-of-cost-or-market principle).
Definition of unscheduled depreciation
In principle, both current assets according to Section 253 (4) HGB or fixed assets may be affected by an unscheduled depreciation in accordance with Section 253 (3) sentence 3 of the German Commercial Code (HGB). In the case of fixed assets, the non-scheduled depreciation must be recognized in the event of an expected permanent decrease in value – regardless of whether the useful life is limited or unlimited. In contrast to this, financial assets are treated in a special way, because here depreciation can optionally be recognized even if the impairment is unlikely to last. With regard to the non-scheduled depreciation requirement, a distinction is made according to the moderate lower value principle (which assumes permanent impairment) and the strict lower value principle for current assets.
Even if the depreciation for extraordinary economic and technical wear and tear can basically be considered for all assets, special rules apply to assets: They must be subject to straight-line depreciation, so that if necessary, the first step is to switch from the declining balance to the straight-line depreciation.
Exceptional wear and tear
A distinction is made here:
Technical aspects
The economic asset can no longer be used as intended after an extraordinary event, such as damage, an accident, due to inadequate maintenance or theft. The result: the useful life is shortened or the value is reduced.
Economic aspects
If the possibility of technical use is basically still given, but the economic asset in question is now obsolete due to technological development or only partially or not at all usable due to a change in fashion, then there is also exceptional wear and tear.
If the prerequisites are met, the unscheduled depreciation is to be applied in the assessment period in which the damage becomes known or the event in question occurs. The amount of the depreciation to be carried out is based on the reduction in the relevant value in use or the loss of substance. If the asset has been destroyed or stolen, the remaining book value must also be written off in full.
Important delimitations
However, a strict demarcation must be made here: If the asset is still of considerable value, a shortened economic useful life cannot be justified with a lower return on investment compared to the original project. Another exclusion would be, for example, the poor rentability of properties that are part of an investment portfolio.
Scheduled vs. unscheduled depreciation
When looking at depreciation, a distinction must be made between unscheduled and scheduled depreciation . These can be characterized using the following criteria:
Scheduled depreciation
- are based on a usage plan drawn up upon acquisition,
- correspond to the planned useful life,
- depict the depreciation process,
- are subject to the prescribed useful life for tax purposes.
Extraordinary depreciation
- depict unexpected losses in value,
- compensate for the difference between the lower book value and the book value so far achieved through depreciation ,
- are based on impairments that are to be determined before the actual realization and
- can be based on technical obsolescence, economic depreciation or reduced replacement costs.
Depreciation rules – lowest value principle
According to sportingology, this valuation rule for the different assets is defined in §253 HGB. On this basis, the values to be applied in bookkeeping and accounting can be derived, with the corresponding acquisition and production costs forming the basis for each valuation. For the subsequent valuation of these recognized assets, reference is made to the lowest value principle. It results from the principle of prudence and the principle of imparity and is part of the principles of proper accounting . The lower of cost or market principle provides guidelines for action in the event of a decrease in the value of assets. Various approaches based on the lower of cost or market principle are used for fixed and current assets.
The tempered lowest value principle
This principle can only be used to determine subsequent values for fixed assets. A distinction must be made between permanent and temporary impairment:
- Depreciation option – temporary impairment
As of the balance sheet date , the acquisition value and the current stock exchange or market value are compared. The purchase price is to be reduced in accordance with the scheduled depreciation. In the event of a temporary impairment in value, the company can choose between the previous book value and the current lower value. - Depreciation obligation – permanent decrease in value
However, if the decrease in value is classified as likely to be permanent, the resulting decrease in value must inevitably be recognized. For this purpose, in addition to the scheduled depreciation according to the usual useful life, unscheduled depreciation can also be applied.
