Valuation of Assets in German Start-Up Balance
According to German Commercial Code and
International Financial Accounting Standards
Once a founder complies with their commitment to initial contribution in the form of contribution in kind, a question arises about valuation of this in-kind contribution. Given the principle of continuity in fiscal statements between initial balance sheet and future annual statements, valuation of such in-kind contributions needs to refer to provisions of commercial law. However, §§ 242 and 253 of German Commercial Code (HGB) only provide general guidelines to refer in the measurement of in-kind contributions at enterprise formation to acquisition costs, which gives rise to the term of notional acquisition cost. With the regulation gap this leaves, the in-kind contributions can essentially be measured freely under common provisions. The values notional acquisition cost may assume range from fair value as maximum limit to the lower issue price of the shares subscribed as far as hidden reserves have been created.
The author undertakes a comparison of the aims in financial reporting to HGB and IFRS respectively in as far as relevant to valuation of the in-kind contributions, explores the different views on the scope of notional acquisition cost and extracts from the aims of financial reporting to the core question about the essential allowability of hidden reserves in initial balance sheet the key decision making criterion to refer to in valuation of the in-kind contributions. The descriptive exploration of the different views in existing sources as to the scope of notional acquisition costs and the comparative analysis of pertinent provisions of HGB and IFRS respectively give rise to the author’s conclusion and requirement to valuate the in-kind contributions at fair value.
Key words: valuation of assets, in-kind contribution, contribution in kind, German enterprise formation, notional acquisition cost, acquisition cost principle, financial reporting aims, hidden reserves
The German lawmaker does not clearly emphasise either the profit or loss quantification function or the information function of financial statements; the HGB-compliant (HGB = German Commercial Code) financial reporting provisions pursue both the targets. In contrast the aims in financial reporting to IFRS are exclusively identifiable with the information function.
As in-kind contributions amount to separate acquisitions, the valuation rates in the initial balance sheet can be defined without reference to historical costs of the contributor. The legal definition of acquisition cost is provided in § 255 I HGB. Under the acquisition cost principle, first an asset is measurable at its acquisition cost and secondly, acquisition cost amounts to absolute maximum limit that must never be exceeded (highest-value principle). The measurement at acquisition cost is meant to facilitate treatment of the purchases generally with no effect on profit and loss. This is achieved through the principle of relevance of value provided in return, i.e., the asset received is measured at the value the acquirer needs to provide to obtain it. Prerequisite to applicability of this principle is financial accounting-relevant comparability between the value received and the value provided in return.