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Inhaltsverzeichnis

Inhaltsverzeichnis

A. Sit­u­a­tion with­out Hedging

a) Real­ized gains and losses

Real­ized gains and loss­es can result from sales or oth­er activ­i­ties with­in the finan­cial year. 

The activ­i­ties must have been com­plet­ed, invoiced and paid in for­eign currency.

In this case, the gains and loss­es are just booked into the accounts “oth­er oper­at­ing income” and “oth­er oper­at­ing expens­es”, no oth­er book­ings must be made and there is no correction/adjustment for tax purposes.

b) Unre­al­ized gains and loss­es: Account­ing in HGB

Unre­al­ized cur­ren­cy trans­la­tion gains or loss­es can only result from the con­ver­sion of bal­ance sheet items on the bal­ance sheet date in accor­dance with sec­tion 256a HGB

Nor­mal­ly in this case, activ­i­ties have been com­plet­ed (and invoiced, but actu­al­ly the com­ple­tion is rel­e­vant) in for­eign cur­ren­cy, but not paid.

So there are receiv­ables and payables in for­eign currency.

Accord­ing to sec­tion 256a HGB, fol­low­ing disct­inc­tion has to be made:

  • long term assets and lia­bil­i­ties in for­eign cur­ren­cies (term > 1 year):  to be con­vert­ed at the mean spot exchange rate on the report­ing date. But it is for­bid­den for such long term items to go above the his­tor­i­cal acqui­si­tion cost due to the cur­ren­cy con­ver­sion only. 

Exam­ple: a long term asset with a his­tor­i­cal acqui­si­tion cost of 100 EUR (after his­tor­i­cal con­ver­sion) may not be account­ed with 120 EUR after con­ver­sion at year end.If after con­ver­sion the val­ue is below the his­tor­i­cal acqui­si­tion cost, it must be account­ed with the low­er val­ue (for the above exam­ple, a val­ue of 90 EUR would be accounted).

For lia­bil­i­ties, the exam­ple would be the oth­er way around (from 100 EUR to 120 EUR is OK, from 100 EUR to 90 EUR not allowed).

  • short term assets and lia­bil­i­ties in for­eign cur­ren­cies (term < 1 year):  to be con­vert­ed at the mean spot exchange rate on the report­ing date. In con­trary to the long term assets and lia­bil­i­ties, there is no above men­tioned restric­tion for short term assets and liabilities.

So for the exam­ple above, the short term asset would be account­ed with 120 EUR and the unre­al­ized gain 20 EUR would result from this.

  • If the val­ue is below the his­tor­i­cal acqui­si­tion cost, the account­ing with the low­er val­ue must be made (no dif­fer­ence between long term and short term).

So to sum it up, unre­al­ized gains and loss­es can only result from:

  • cur­ren­cy trans­la­tion of assets or lia­bil­i­ties on bal­ance sheet date, if their val­ue is below the his­tor­i­cal value
  • cur­ren­cy trans­la­tion of short term assets or lia­bil­i­ties on bal­ance sheet date, if their val­ue is above the his­tor­i­cal value

c) Unre­al­ized gains and loss­es: tax law

Basi­cal­ly, the above men­tioned method from HGB is also rel­e­vant for the tax bal­ance sheet.

But two addi­tion­al con­se­quences must be considered:

  • If the val­ue after con­ver­sion goes below the his­tor­i­cal val­ues, which would result in unre­al­ized loss (and reduce the tax­es), the low­er val­ue may be booked in the tax bal­ance sheet if this is a per­ma­nent impair­ment (sec­tion 6 sub­sec­tion 1 Nr. 2 EStG). 

This is an option in tax law.

If the impair­ment is not per­ma­nent, the low­er val­ue may not be booked.

A per­ma­nent impair­ment is nor­mal­ly accept­ed by the tax author­i­ties, if the val­ue is still at the same lev­el or even low­er on the date of the prepa­ra­tion of finan­cial statements.

  • If the val­ue after con­ver­sion is high­er than the his­tor­i­cal val­ues, which would result in unre­al­ized gain (and increase the tax­es), the high­er val­ue may not be booked in tax bal­ance sheet. The his­tor­i­cal cost of asset or lia­bil­i­ty is the high­est pos­si­ble val­ue in the tax bal­ance sheet (§ 6 para 1 Nr. 2 EStG). So if a gain results from cur­ren­cy con­ver­sion of short term items in HGB (see b) ), the gain must be elim­i­nat­ed in the tax bal­ance sheet.

So to sum it up, a sit­u­a­tion with­out hedg­ing is quite com­fort­able for tax purposes.

1) If there are unre­al­ized loss­es from cur­ren­cy trans­la­tion of short term assets or lia­bilites, they must be booked in HGB, and they may be booked in tax bal­ance sheet if they are per­ma­nent, so the tax­es could decrease from unre­al­ized cur­ren­cy losses.

2) If there are unre­al­ized gains from cur­ren­cy trans­la­tion of short term assets or lia­bilites, they must be booked in HGB, but they may not be booked in tax bal­ance sheet, so the tax­es do not increase from unre­al­ized cur­ren­cy gains.

B. Sit­u­a­tion with Hedging

a) Real­ized gains and losses

No dif­fer­ence to the sit­u­a­tion with­out Hedg­ing, see A.a)

b) Unre­al­ized gains and loss­es: Account­ing in HGB

Accord­ing to sec­tion 254 HGB (hedge account­ing) if assets, debts, pend­ing trans­ac­tions or trans­ac­tions (=under­ly­ing con­tracts) that are expect­ed with a high degree of prob­a­bil­i­ty are com­bined with finan­cial instru­ments to com­pen­sate for oppos­ing changes in val­ue or cash flows from the occur­rence of com­pa­ra­ble risks (=hegding trans­ac­tion), the changes in val­ue of both under­ly­ing and the hedg­ing trans­ac­tion must be offset.

Hedg­ing of cur­ren­cy risk nor­mal­ly means that there should be a sep­a­rate deriv­a­tive con­tract (for­ward or future con­tract) to hedge the under­ly­ing asset or liability.

In case of hedge account­ing accord­ing to sec­tion 254 HGB, the nor­mal cur­ren­cy trans­la­tion rule of sec­tion 256a HGB is not rel­e­vant. All gains and loss­es of an effec­tive hedge are record­ed, no mat­ter whether long-term or short-term, and net­ted in bal­ance sheet and in the P&L state­ment. But if the hedge is par­tial­ly not effec­tive, the hedge account­ing may not be used for the not effec­tive part.

Please note:

An exten­sive doc­u­men­ta­tion is required for hedge accounting.

Accord­ing to IDW RS HFA 35 (a manda­to­ry state­ment from the Insti­tute of Ger­man Auditors)

the doc­u­men­ta­tion must show that the hedg­ing instru­ment is objec­tive­ly suit­able for hedg­ing the spec­i­fied risk

at the time the hedg­ing rela­tion­ship is estab­lished and dur­ing its exis­tence and that it is there­fore like­ly to be (prospec­tive­ly) effective. 

The doc­u­men­ta­tion must there­fore include the fol­low­ing infor­ma­tion in addi­tion to the clear dec­la­ra­tion of intent by the bal­anc­ing party:

1. Type of risk to be hedged as well as goals (includ­ing the planned hedg­ing peri­od) and strat­e­gy (s) of the account­ing par­ty with regard to the hedg­ing of the risk

2. Iden­ti­fi­ca­tion and descrip­tion of the under­ly­ing transaction

3. Iden­ti­fi­ca­tion and descrip­tion of the finan­cial instru­ment used as a hedg­ing instru­ment, includ­ing its suit­abil­i­ty for effec­tive­ly hedg­ing the risk

4. sep­a­rate inven­to­ry man­age­ment of the under­ly­ing trans­ac­tion and the hedg­ing instrument

5. Infor­ma­tion on the prospec­tive effec­tive­ness of the hedg­ing relationship

6. Method (s) of prospec­tive assess­ment of the effec­tive­ness of the hedg­ing relationship

7. Method (s) for cal­cu­lat­ing the amount of pre­vi­ous inef­fec­tive­ness based on the hedged risk. 

c) Unre­al­ized gains and loss­es: tax law

Accord­ing to § 5 Abs. para 1a sen­tece 2 + para 4a sen­tence 2 EStG, the hedge account­ing from the HGB finan­cial state­ment must be tak­en over into the tax bal­ance sheet and tax P&L.

So to sum it up, a sit­u­a­tion with hedg­ing is not very com­fort­able for tax purposes.

Loss­es AND gains which are net­ted in HGB due to hedge account­ing are tak­en over into the tax bal­ance sheet and P&L.            

With­out hedg­ing, such net­ting would not take place and gains would not be tak­en over into the tax bal­ance sheet (see above under A.)

Fur­ther­more, con­sid­er the cost of doc­u­men­ta­tion due to hedge accounting.

C. Deferred taxes

The tem­po­rary dif­fer­ences between account­ing of gains and loss­es from cur­ren­cy trans­la­tion between HGB and tax bal­ance sheet will nor­mal­ly lead to deferred taxes. 

Cur­ren­cy trans­la­tion gains, which have to be account­ed in Ger­man GAAP (HGB) bal­ance sheet, but may not be shown in the tax bal­ance sheet, increase the HGB equi­ty com­pared to tax equi­ty and there­fore result in deferred tax liabilities.

Cur­ren­cy trans­la­tion loss­es, which have to be account­ed in Ger­man GAAP (HGB) bal­ance sheet, but may only be shown in the tax bal­ance sheet if they are per­ma­nent, in case of non-per­ma­nent loss­es decrease only the HGB equi­ty com­pared to tax equi­ty and there­fore result in deferred tax assets.

A big or mid­dle-sized incor­po­rat­ed com­pa­ny must con­sid­er deferred tax lia­bil­i­ties and has an option to show deferred tax assets. 

A small-sized incor­po­rat­ed com­pa­ny may con­sid­er deferred tax­es (option).

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