Equity (finance)

Equity is the portion of an estate that remains after deducting all of its liabilities. The term is in business management, capital markets and in the real estate financing is important. The relative proportion of the total assets is called the equity ratio. The German Bundesbank uses the terms "own resources" and " foreign agent" within the meaning of equity and debt.

Equity - company law and accounting

The equity of a company is to be distinguished from its debt (see § 266 Paragraph 3 of the German Commercial Code). Equity are received by the company agents (including the income, regardless of whether it is paid or not) are to be regarded as benefits of the shareholders. Equity represents the proportion of the owners of a company that adheres to the Company's creditors. If there is no equity, it is debt, but also a corporate shareholder may occur as debt creditors.

The differences between equity and liabilities be recognized by the best in insolvency proceedings: Residual equity, which should raise a shareholder, may be required as a power in the mass by the administrator (see § 171 subsection 2 of the German Commercial Code). The situation is different when it comes to the credit of a shareholder to the company or to the debt of a non- shareholder. Here the lender may cancel the loan outstanding ( § 490 paragraph 1 of the German Civil Code). If the credit already granted, takes the claim for repayment as part insolvency claim on the insolvency proceedings. Own capital posits loans were treated until October 31, 2008 in insolvency proceedings as equity. With the MoMiG is the question of whether the loan is equity replacement or not, however, become obsolete (cf. § 135 para 1 Insolvency Act ).

A composition according to HGB

According to § 266 paragraph 3 HGB A, equity divided with a separate financial statements in

  • Subscribed capital
  • Capital reserve
  • Retained earnings statutory reserves
  • Reserves for own shares
  • Statutory reserves
  • Other retained earnings

For partnerships without a natural person as direct or indirect general partner ( § 264a HGB ), eg at a GmbH & Co. KG, the provisions of § 264c paragraph 2 and 4 of the HGB apply where, in particular the " subscribed capital " through the " capital shares of the shareholders " shall be replaced.

In consolidated financial statements minority shares (shares of fully consolidated subsidiaries that are not owned by the parent company) are shown separately ( § 307 paragraph 1 HGB ).

A composition according to IAS / IFRS

In accordance with IAS 32.11 is an equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities. As an exception, but under certain circumstances, such financial instruments classified as financial liabilities instead (cf. IAS 32.16 ).

According to the statement of changes in equity within equity in accordance with IAS 1.108 can be divided as follows:

  • Components of equity ( excluding non-controlling interests): Subscribed capital
  • Reserves
  • Accumulated balance of other comprehensive income of reklassifizierbaren (ie profit / loss statement transferable ) items from: currency differences
  • Available-for- sale financial assets
  • Cash flow - Hedges
  • Revaluation reserves arising from the fair value measurement of property, plant and equipment ( IAS 36.31 et seq )
  • Revaluation reserves arising from the fair value measurement of intangible assets (IAS 38.75 et seq )
  • Cumulative balance of performance- neutral valuation for defined-benefit plans ( IAS 19:57 (d))

Special features for identification in the context of German company law

In addition to the outline requirements of different accounting principles (especially according to HGB and IFRS) are the rules for the respective types of companies to consider:

  • In a limited liability company may be called for additional contributions of the shareholders are shown separately in the capital reserves be shown ( § 42 para 2 Limited Liability Companies Act ).
  • In stock corporations and partnerships limited by shares may make further subdivisions in the balance sheet (see § 152 AktG, § 278 para 3 of the AktG, § 286 para 2 AktG).

Business Administration

In business accounting, equity is a part of the liability side of the balance sheet. Debt and equity financing together form the external financing. Of the internal financing is to be distinguished, which can be done in particular by proceeds from the sales process. However, the internal financing may also have a negative balance, as far as one takes into account the sales process allocable payments such as tax, materials, interest rate and wage payments.

Reserves, provisions and allowances ( and write-ups ) are not directly affect cash flow, since they will merely represent transfers. However, provisions indicate that is to be expected with a cash outflow. Also show impairments potential lower deposits ( depreciation of assets) or by higher receipts ( write-ups of assets). The supply of capital is also an increase in the carrying capacity for risks for operation in addition to the supply of cash or assets. The higher the equity of an operation is, the more losses he can accept, without going into bankruptcy.

Capital market

Unlike a lender an equity investor usually receives no fixed payment returns (interest) and there is no maturity date. A special case are the equity participation certificates, apply to both.

In the event of liquidation of debt capital priority service, then the equity investors. If, after all debts have no realizable assets more, as equity holders get nothing. For these reasons, the equity investors face a significantly greater risk than the lenders. A shareholder of a corporation or a shareholder of a GmbH is liable with its capital share, the partners in a partnership ( GbR, partnership, limited partnership ) in addition to his private fortune. It is therefore his expected return provided with a risk premium that compensates him for this risk-taking. The average returns on the capital market, consisting of the dividend yield and the price rate of change of the security, are therefore higher than the average interest rate on risk-free bonds in most cases. Without risk premium of shareholders generally will not be willing to bear the entrepreneurial risk, which represents an investment of equity.

Real Estate Financing

In the real estate financing are referred to as equity those funds available to the owner himself available, cash, savings accounts, fixed deposits, securities, building society deposits and existing real estate. In a broader sense, relatives loans, company loans and government grants are expected to own funds. For example in developer projects, it is common that specialized investment companies to join the specially established for a particular project partnerships as a limited partner and provide in the form of guarantees equity, so that further financing with debt is only made possible.