Hidden asset

Hidden reserves or reserves is in accounting for the name not reflected in the balance sheet components of equity of companies that can be created by either an undervaluation of assets and by an overstatement of liabilities. The opposite - that the fair value of assets is less than their book values ​​- also called hidden charges.

General

Not all operational processes are reflected to the outside observer (creditor, shareholder / partner, competitor, supplier, credit institutions, financial office) in the published financial statements of a company. These include the hidden reserves as one of the most significant off-balance sheet areas. Their formation is regularly attributed to assessment and / or balance sheet issues. Assessed if assets compared to their actual value for purposes of reporting low or liability is valued accordingly higher, so there is an undervaluation of assets or overvaluation of liabilities ( Review ). If assets are eligible for recognition at a capitalization option not shown or fictitious liabilities are illegally included in the balance, it is questions of the balance sheet.

Germany

Formation

Recognised assets can change their value over time compared to their acquisition or production costs. Then the question arises whether and to what extent these changes in value are to be implemented in the balance sheet. Central evaluation rule for this is § 253 HGB, in which the lower of cost is codified. This measurement principle is again core for the creation of hidden reserves.

Hidden reserves may result from

  • Undervaluation of assets in fixed and current assets: The legal definition of production costs in § 255 paragraph 2 HGB granted certain margin of discretion because a " reasonable portion" of the material and production overheads and administrative costs and occupational retirement provision may be included in the calculation. Failure to do so will automatically result in a lower reported profit or loss higher card.
  • Overvaluation of liabilities: Are contingent liabilities recognized higher in the provisions as later turns out, then this earnings is shown unfavorable. A typical example is litigation provisions, because it can be uncertain whether a process is lost and the amount then is subject to compensation.
  • Non-recognition of capitalized assets: For reasons of economy, the legislature, to enable low-value items only with a reminder value permitted (§ 6 paragraph 2 Income Tax Act), so created hidden reserves of their actual acquisition or production costs.
  • ( § 249 paragraph 3 HGB ) disappeared

Except for the non- allowable approach fictitious liabilities all other etiologies are commercial and tax law expressly permitted in Germany, but in some cases restricted by law. The statutory discretion in the valuation of the assets and liabilities only form the basis for the emergence of hidden reserves, because the actual value at the balance sheet date for the commercial law review is not always prevail.

Undervaluation means against assets that at the lower of acquisition or production costs which are to be used or a lower value at the balance sheet date. Overvaluation in debt means that especially in uncertain items such as depreciation, provisions and impairment losses in case of doubt, a higher value may be accepted.

Species

The creation of hidden reserves by the decisions of business happening

  • Inevitably, in particular by fluctuations in price or monetary values ​​by inflation / deflation, which may not be included under the law, because the tax nominal value principle applies in Germany;
  • By exploiting explicit discretion in valuation rules;
  • Due to estimation error, including depreciation, write-downs or provisions;
  • Due to arbitrary formation, in which the law conceded discretion of "reasonable business judgment " is left.

Forced silence reserves ( so-called legal unrealized gains ) arising from the use of and compliance with statutory accounting rules. The acquisition or production costs represent the upper limit of the valuation of assets ( § 253 paragraph 1 HGB ). If the replacement cost is higher than this acquisition or production costs, these higher values ​​may not be recognized. Force the strict lower in current assets and the moderate lower of the assets the company to choose lower valuations for their assets items: without exception, the strict lower when mitigated only if the impairment should be a permanent.

Silence discretion reserves caused by the the reporting entity statutorily granted discretion to be able to exploit differences in the values ​​due to accounting and valuation options. These include the option to capitalize derivative intangible assets, which - partly restricted - choice of depreciation methods, the calculation of production costs, the retention option for a lower valuation or valuation of assets to the allowable valuation limit. Become a capitalization option rights not exercised, hidden reserves arising because of the effective capacity is higher than the record shows.

Silence estimate reserves caused by the imperfect foresight in considering future impacts on the amounts (in particular the mistake too short estimated useful lives when calculating depreciation or mistaken undervaluation doubtful accounts ). , - Calculated on the useful life - depreciation amounts to highly rated and thus undervalued the articles through the short to estimate the useful lives of assets that are Provisions or allowances are to be highly valued and therefore overstated.

Silence arbitrariness reserves caused by deliberate crossing of commercial law granted discretions (about the arbitrary overvaluation of accruals ), the unauthorized non-capitalization capitalization managed assets which are not held -like passivation of fictitious debts or the legally-mandated complementary undervaluation ( § 253 para 4 HGB).

Resolution

Resulting unrealized gains usually do not remain permanently exist, but are resolved through various events, factors and causes again. Exceptionally durable existing remaining hidden reserves are in real estate or investments that are not sold. Here it is, exceptionally, to hidden reserves through sale-and- leaseback transactions in the tangible and intangible fixed assets. The resolution shall otherwise be either automatically by the company sales process ( when selling undervalued assets or the passage of time when using depreciated assets ) by the deliberate resolution of overvalued liabilities and the allowable increase in the valuation of undervalued assets or the transition to regular review.

Follow

Consequence of the creation of hidden reserves is that the income and equity appear smaller or losses are higher than corresponds to the reality on the balance sheet date. The influence of the gain by hidden reserves affects the dividend policy and therefore unfolds repercussions on the financial statements. The reported profit is problematic as a measure, because for shareholders and other outsiders can not be seen whether and to what extent the net income in this amount was actually achieved or is classified as a manipulated variable by formation or release of hidden reserves. Excessive creation of hidden reserves against the principles of the balance of truth and balance clarity while permissible hidden reserves correspond to the prudent person principle and the principle enshrined in commercial law creditor protection.

Except for the exceptions described is a temporary shift profits, because the resolution of these reserves a final profit is realized; sometimes existing operational losses are covered and not recognized by the conscious resolution.

Wertaufholungsgebote reduce hidden reserves

The without replacement abolition of § § 154, 155 AktG in May 2009 shows as well as the entrepreneurial scope for hidden reserves can be changed by changing the laws. As part of the Accounting Law Modernization Act (BilMoG ) is a public limited liability companies, granted retention option has been removed. Since then, it is no longer possible to from asset impairments or write-downs on property, plant - ( § 154 paragraph 2 sentence 2 AktG old version ) and working capital ( § 155 para 4 AktG old version ) resulting lower value approach also then maintain, if the reasons for the write-down or write-down no longer exist. In § 253, paragraph 5 HGB now is a reverse write-downs included, but by forming a Wertaufholungsrücklage the distribution of profits attribution is prevented by a distribution block ( § 58 para 2 AktG). This are the ways to form or maintain hidden reserves, has been limited.

That requirement of raising of assets, liabilities compared to the carrying amount of the previous year at Fort case, the reason for a previous write-down is quite form -independent and applies to sole traders, partnerships, corporations and cooperatives. The existing corporations for revaluation was the German Commercial Code, the revised version of § 253, paragraph 5 of the HGB and elimination of § 280 extended to all legal forms and abolished the unequal treatment of individual legal forms. Exempted from the obligation of the reversal remains only the goodwill value ( § 253, paragraph 5, sentence 2 HGB); here continues to be a reversal of impairment.

Means of accounting policy

Reason for the discrepancy between the actual and the reported success is primarily the formation and release of hidden reserves. Existing hidden reserves are as compensation opportunity for economic fluctuations available to offset operating losses by dissolution in whole or in part. They therefore contribute to a more continuous economic development of businesses and support the policy of dividend continuity. With good earnings situation they are formed, their resolution preserves the disclosed reserves for losses, which are otherwise provided for the coverage of losses. By realization of hidden reserves can result in gains that contribute to the increase in the general reserves and thus to self-financing or prevent a loss card. With hidden reserves may eventually also a tax deferral effect be connected if their education at a higher level of tax is carried out as their resolution ( final tax savings).

Switzerland

In Switzerland, all kinds of hidden reserves are legally compliant and common. Most Swiss audit firms consider the hidden reserves in any form as important for the accounting policy of private limited companies, in particular in order to keep the tax burden low.

For listed companies, the obligation to account for at least according to the accounting and reporting recommendations. Although these standards can continue to the formation of hidden reserves, but write to disclose their net release in the Appendix. However, for the listing on the main panel of the Swiss Exchange an accounting according to IAS / IFRS or U.S. GAAP requirement, which no longer breastfeeding intention reserves may be formed in such companies.

Prior to the revision of the authorization rules for Swiss Exchange was gang in Swiss joint-stock companies and would write off, for example, all properties within 1 CHF. Thus millions of dollars have been withheld to the shareholders in such companies to some extent. This practice is now permitted only in non- listed companies.

USA

In Anglo-Saxon countries, the hidden reserves are largely unknown; exists in U.S. companies even more the tendency to expel excessive profits. The considerable differences in the scope of hidden reserves in the HGB financial statements and U.S. GAAP financial statements showed the listing of Daimler shares on the NYSE accounted for with the concomitant obligation, in accordance with U.S. GAAP. There, the equity suddenly was 40 % more than under HGB.

IFRS

The IFRS accounting fulfilled exclusively an information function. Bankruptcy protection or careful design payment are not goals of IFRS accounting. The information function can only be fulfilled if the financial position of the reporting entity is mapped as possible without distortion. For this reason, the deliberate laying of hidden reserves is expressly prohibited. Nevertheless, force or enable many specific provisions of the IFRS, the laying of hidden reserves. Examples include the German lower of largely corresponding lower of cost when inventories (IAS 2) or the measurement requirements in IAS 16, IAS 38, IAS 39 and IAS 40, which allow accounting to historical cost for large parts of the fixed assets ( as an alternative to Fair - value accounting ) or forced in some cases. Also IFRS balance sheets thus have hidden reserves, the scope of a rule likely to be lower than in the HGB balance sheets.

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