Effects of various valuations of notional costs of acquisition

Contents

1 Introduction

2 Base case

3 Criteria to judge case studies

4 Case study 1: fair value as notional acquisition costs

5 Case study 2: historical acquisition costs as notional acquisition costs

6 Case study 3: going-concern value as notional acquisition costs

7 Case study 4: Book value as notional acquisition costs

8 Case study 5: Face value as notional acquisition costs

9 Summary of the results of the case studies

1 Introduction

The current economic crisis shows that the valuation of assets is an important subject for our global economy because reserves help a company to better withstand a crisis. The valuation of assets should therefore be perfected as soon as a company is established. How non-cash contributions are valued in the start-up balance sheet has long-term consequences for future balance sheets and profit and loss accounts.

There is a loophole in the valuation of non-cash contributions in Germany as the §§ 242 I, 253 I, 255 I HGB (German Commercial Code) are only to be applied by analogy. When comparing this with international standards on the other hand, the valuation of non-cash contributions on company start-up is clearly regulated in other countries; for example in Austria by codification of the fair value in § 202 UGB (Austrian Commercial Code) and in the IFRS reporting system by the principle of fair value. Due to the German loophole, there is an ongoing controversial discussion in academic literature on the valuation of non-cash contributions. This leads to a need to investigate the effects of various valuations of notional costs of acquisition in more detail by using case studies with the aim of ascertaining whether there should be a uniform perspective and accordingly an ideal valuation.

2 Base case

In the base case, the company founder makes a non-cash contribution in the form of e.g. a machine as at 31.12.2014. He supposedly purchased this for EUR 55K in 2013.

As it is a machine, it can be assumed that it will be allocated to fixed assets in the start-up balance sheet. To calculate the fair market value, I therefore believe we should take the value from the purchasing market.^[1] The upper limit of acquisition costs in the start-up balance sheet is determined by the fair value,^[2] which is why in the base case this has the highest value at EUR 60K.

The attributable market value should also be derived from the purchasing market due to the allocation to fixed assets. This refers to either a marketable circumstance (mark-to-market) or, if a market price cannot be determined for the machine, to a market-comparative value. The replacement costs of the machine will supposedly also amount to EUR 60K in 2014. As the term attributable market value includes the replacement value or the values derived from it,^[3] there is no need to further differentiate between the fair value and an attributable market value which is why the term fair value will now be used for reasons of simplicity.

The lower attributable value corresponds to the legal tax term, going-concern value. To better differentiate between the "attributable value" and the "lower attributable value", the term going-concern value shall be used for the latter. The going-concern value assumption for capital goods subject to wear and tear assumes acquisition costs reduced by straight-line depreciation. The going-concern value is supposedly EUR 50K in 2014.

The value derived from the historical acquisition costs of the subscriber is reduced - in contrast to the going-concern value - by degressive depreciation. The acquisition costs carried on in this way are referred to as "book value" in the following discussion and amount to EUR 45K.

The face value of the shares, which is the value to be used for notional acquisition costs according to prevailing opinion^[4] amounts to EUR 40K. Due to the ban on below-par issues, the face value always represents the lower limit of the valuation.

In summary, the base case can be represented as follows:

- fair value: 60
- historical acquisition costs: 55
- going-concern value: 50
- book value: 45
- face value: 40

3 Criteria to judge case studies

The effects of individual notional acquisition costs are assessed below using case studies with the help of standard criteria. In my view, such criteria should consider or include:

- avoiding hidden reserves in the start-up balance sheet
- objectification of valuation
- practical efforts for the founder to determine the notional acquisition costs^[5]
- share capital of the start-up company in the year of the investment contribution and in the following year
- information content for external users
- compliance with the creditor protection principle according to the HGB

The criterion compliance with the creditor protection principle according to the HGB will however be briefly explained below. The aim of the creditor protection principle is to help the creditor to protect himself from developments relating to unjustifiable increases in risks.^[6]

There is no legal definition, the creditor protection principle is rather a vague legal term and individual legal regulations guarantee the implementation of this principle.^[7] The commercial balance sheet in particular serves as a protection for creditors and is imposed by company law.^[8] The commercial balance sheet in turn is to be prepared according to the principles of proper accounting. Many principles of proper accounting were not legally regulated for a long time, only with the implementation of the 4th EC Directive of the BiRiLiG were a large number of previously non-codified regulations included in the HGB and numerous standards were thus created at the same time.^[9]

The following principles of proper accounting are therefore to be found in §§ 238 ff. HGB:

- Principle of clarity and clearness, § 243 II
- Principle of completeness, § 246 I
- Principle of balance sheet consistency, § 252 I no. 1
- Principle of cut-off date (§ 242 I/II, § 252 I no. 5
- Ban on set-off, § 246 II
- Going-concern principle, § 252 I no. 2
- Principle of individual valuation, § 252 I no. 3
- Principle of prudence:
- Imparity principle, § 252 I no. 4 1. HS
- Realisation principle, § 252 I no. 4 2. HS
- Lower of cost or market principle, § 253 II/III
- Accrual principle, § 252 I no. 5
- Consistency of valuation, § 252 I no. 6
- Historical cost principle, § 253 I

The profit from the balance sheet corresponds to the surplus of assets over liabilities. It also represents the upper limit of distributions to ensure the liable equity capital remains untouched. Accordingly, profits can only be removed if they are not required to cover and preserve equity and outside capital.^[10] The HGB generally applies more and higher regulations to such companies for reasons of creditor protection in which at least one partner is not fully liable as a natural person for the creditors.^[11]

[...]

^[1] Cf. Schiller, Andreas, Gründungsrechnungslegung, Wiesbaden 1990, p.169.

^[2] Cf. Schulze zur Wiesche, Dieter, Sacheinlagen in Kapitalgesellschaften, insbesondere GmbH, in: GmbHR, 15.01.1988, p.31-36, Cologne, 1988, p.33; Freericks, Wolfgang, Gründungsbilanz, in: HWR, published by Klaus Chmielewicz amongst others, 3rd edition, Stuttgart 1993, p.851-859, p.856; Sarx, Manfred, DStR, 24.05.1991, p.692-695, Munich 1991, p.694.

^[3] Cf. Vormbaum, Herbert, HWR, published by Erich Kosiol and others, 2nd edition, p.1539-S.1547, Stuttgart 1981, p.1539ff.

^[4] Cf. Adler, Hans and Walther Düring and Kurt Schmaltz, Rechnungslegung und Prüfung der Unternehmen, 6th edition, Stuttgart 1995, Part 1, §255 point no.96; Hast, Karl, Grundsätze ordnungsmäßiger Bilanzierung für Anlagegegenstände, 2nd edition, Leipzig 1935, p.68; Heinen, Edmund, Handelsbilanzen, 12th edition, Wiesbaden 1986, p.485; Groh, Manfred, Anschaffungskosten aus Sacheinlagen, in: FR, 23.09.1990, p.528-531, Cologne 1990, p.528; Angermayer, Birgit, Die Prüfung von Sacheinlagen im neuen Umwandlungsrecht, in: WPg, 15.10.1995, p.681-S.691, Düsseldorf 1995, p.681; Bayer, Walter, Stammkapital, Geschäftsanteil, in: GmbH-Gesetz, published by Marcus Lutter amongst others, 17th edition, Cologne 2009, §5 point no.27.

^[5] Cf.: Pfitzer, Norbert und Sebastian Höfner und Peter Lauer und Vanesa Wassong, Informationsnutzen versus Informationskosten der externen Rechnungslegung, in: DStR, 14 February 2014, p.345-350 and 21 February 2014, p.384-387, Munich 2014.

^[6] Cf. Thole, Christoph, Gläubigerschutz durch Insolvenzrecht, Tübingen 2010, p. 12.

^[7] Cf. Solmecke, Henrik, Auswirkungen des BilMoG auf die handelsrechtlichen GoB, Düsseldorf 2009, p. 2.

^[8] Cf. Winnefeld, Robert, Bilanzhandbuch, Handels- und Steuerbilanz – Rechtsformspezifisches Bilanzrecht – Bilanzielle Sonderfragen – Sonderbilanzen – IAS/US-GAAP, 4th edition, Munich 2006, p. 21.

^[9] Cf. Morck, Winfried, Kommentierung zu § 243, in: Handelsgesetzbuch Kommentar, p.506-508, edited by Ingo Koller, Wulf-Henning Roth and Winfried Morck, 7th edition, Munich 2011, point no. 1f.

^[10] Cf. Winnefeld, Robert, Bilanzhandbuch, Handels- und Steuerbilanz – Rechtsformspezifisches Bilanzrecht – Bilanzielle Sonderfragen – Sonderbilanzen – IAS/US-GAAP, 4th edition, Munich 2006 p. 21.

^[11] Cf. Schildbach, Thomas and Thomas Stobbe and Geritt Brösel, Der handelsrechtliche Jahresabschluss, 10th edition, Sternenfels 2013, p. 119.