During the coronavirus crisis, extraordinary depreciation is gaining importance, as many businesses are experiencing unintended revenue losses due to a lack of customers. One example would be a clothing store where, due to the ongoing pandemic, the winter merchandise purchased could only be sold to a limited extent. Rising temperatures contribute to winter clothing no longer being purchased, causing it to lose value. Extraordinary depreciation now serves to reflect the permanent loss in value of these purchased goods as of the balance sheet date. The pandemic can be regarded as an extraordinary event in this context.
Valuation of an Asset
Before extraordinary depreciation can be applied, the value of the asset must first be determined. To this end, when producing or acquiring an asset, the entrepreneur identifies the relevant acquisition costs (e.g. transport costs, insurance of the goods, etc.) or production costs (e.g. materials, occupancy costs, etc.). This process can also be described as initial measurement. At the end of the financial year, a subsequent measurement of the asset is then carried out, in which the final value of the asset to be recognised in the balance sheet can be determined.
Distinction Between Commercial and Tax Law
First, a distinction in terminology is made between commercial law and tax law. Extraordinary depreciation (§ 253 Abs. 3 Satz 3 HGB; § 253 Abs. 4 HGB) is referred to in tax law as going-concern value write-downs (Teilwertabschreibung, § 6 Abs. 1 Nr. 1 Satz 2 EStG). Fundamentally, however, both terms describe the same set of facts. A clear distinction does exist with regard to their respective application to fixed assets (e.g. machinery, real estate, vehicle fleet, etc.) and current assets (e.g. merchandise, finished products, raw materials, consumables and supplies, etc.).
This difference is illustrated in the following table:
Situation
Treatment under commercial law
Treatment under tax law
Fixed asset without permanent impairment
Prohibition of extraordinary depreciation (exception for financial assets)
No going-concern value write-down
Fixed asset with permanent impairment
Extraordinary depreciation is mandatory
Option to apply going-concern value write-down
Current asset without permanent impairment
Extraordinary depreciation is mandatory
No going-concern value write-down
Current asset with permanent impairment
Extraordinary depreciation is mandatory
Option to apply going-concern value write-down
New Developments Regarding Extraordinary Depreciation During the Pandemic
As a result of the coronavirus pandemic, several important practical points have emerged in relation to extraordinary depreciation and going-concern value write-downs. These can now also be recognised within the financial year, allowing a loss to be claimed in advance. This makes it easier for businesses to apply for tax deferrals and to obtain tax relief. In addition, the retail sector (e.g. clothing stores) is to receive particular support by being able to claim extraordinary depreciation arising from losses in value as eligible fixed costs. As a result, losses in the value of merchandise can be reimbursed through the Überbrückungshilfe III (Bridging Aid III) programme.
Frequently asked questions
Frequently asked questions
When are extraordinary write-downs relevant during the coronavirus pandemic?
Extraordinary write-downs have become more important during the pandemic, as many businesses are facing lost revenue and inventory value losses due to missing customers. A typical example is seasonal goods in retail (e.g., winter clothing) that could not be sold because of lockdowns and have permanently lost value. The pandemic qualifies as an extraordinary event that justifies a corresponding write-down at the balance sheet date.
How do extraordinary depreciation and going-concern value write-downs differ?
Under German commercial law, the term used is extraordinary depreciation (§ 253 Abs. 3 Satz 3 and Abs. 4 HGB), while tax law refers to the going-concern value write-down (Teilwertabschreibung, § 6 Abs. 1 Nr. 1 Satz 2 EStG). Both concepts address the same underlying issue: a loss in value of an asset. Differences arise, however, in their specific application to fixed and current assets, as well as in whether they are mandatory, optional, or prohibited.
What obligations and elective rights apply to permanent impairment of fixed assets?
Under German commercial law, a permanent impairment of fixed assets triggers a mandatory extraordinary write-down. Under tax law, by contrast, a write-down to going-concern value (Teilwertabschreibung) is elective. If the impairment is not permanent, an extraordinary write-down is generally prohibited under commercial law (exception: financial assets) and not permitted for tax purposes.
How must current assets be written down in the event of impairment?
Under German commercial law, the strict lower-of-cost-or-market principle requires an extraordinary write-down on current assets in every case of impairment, regardless of whether it is permanent. For tax purposes, a write-down to going-concern value (Teilwertabschreibung) is only permissible in the event of a permanent impairment, and even then only as an option. Without a permanent impairment, no Teilwertabschreibung may be recognized for tax purposes.
What relief measures exist for extraordinary depreciation during the Corona pandemic?
During the pandemic, extraordinary depreciation and write-downs to going-concern value may be recorded during the year, allowing losses to be claimed early and facilitating deferral applications. In addition, retailers can recognize losses in value through extraordinary depreciation as eligible fixed costs under Bridging Aid III (Überbrückungshilfe III) and obtain reimbursement accordingly.