Why is the goodwill being written off
Goodwill amortization - different approaches
When it comes to amortization of goodwill, there is a difference between the consideration according to the German Commercial Code (HGB) and the tax law consideration. First of all, however, it is important to clarify what the goodwill represents in relation to depreciation.
What the goodwill actually is
Of course, before any amount can be written off, it must be determined. This also applies to goodwill. This shows that the exact determination of the company value is hardly possible.
The simplest formula for calculating goodwill is given by the HGB. However, the calculation of goodwill is not only based on tangible values. Often immaterial factors also play a role here, which makes the determination more of an assessment than a sustainable calculation.
Once the goodwill has finally been determined, it must be determined whether and how it can be amortized.
Depreciation of the original goodwill is not allowed
The original goodwill is understood to mean the goodwill that has been created in the course of business activity. According to German commercial and tax law, this may not be written off. This is set out in Section 248 of the German Commercial Code and Section 5 of the Income Tax Act.
The reason for the prohibition of depreciation of the original goodwill lies in the fact that it was created within the company's activities and was not acquired for sale. This means that no clearly identifiable costs that would justify depreciation can be assigned to the original goodwill.
The capitalization of the original goodwill is also expressly prohibited under the regulations of international accounting standards (IFRS).
Derivative goodwill must be taken into account when writing down
The goodwill that arises when a company is purchased is referred to as derivative goodwill. According to the German Commercial Code, the purchaser has the option of whether or not the goodwill is capitalized in depreciation.
If there is “goodwill”, i.e. if the purchase price is higher than the net asset value minus the debts, this additional amount can be written off. However, if the purchase price is lower (in this case one speaks of “badwill”), then it is up to the entrepreneur whether this is included in the balance sheet. Negative goodwill: explanation and meaning
When considering the depreciation from a tax point of view, there is no freedom of choice. In German tax law there is an obligation to capitalize derivative goodwill.
Temporal treatment of goodwill in the balance sheet
Scheduled amortization of the established goodwill is only possible if it is treated in accordance with the German Commercial Code (HGB).
If the IFRS are used as a basis, scheduled amortization of goodwill is prohibited. In this case, the goodwill is to be determined in an annual impairment test.
The possibility still available in the HGB to write off the goodwill with 25% in each subsequent year or to offset it with existing reserves has been discarded by the changes in the BilMoG.
With the new regulation according to BilMoG, the goodwill in the balance sheet must be depreciated over the useful life.
As a rule, a maximum useful life of 5 years is assumed here. A longer depreciation is possible, but this requires a written justification in the company's annual financial statements. This justification must be factual. The reference to the tax depreciation period of 15 years is not sufficient.
For more in-depth information on the topic, the article by Prof. Dr. Karlheinz Küting and Dante Stampa on the goodwill in the consolidated financial statements of German IFRS accountants.
Always pay attention to the current legal situation when amortizing goodwill
Due to the frequently changing situation and additions to German tax law, it is advisable to always seek current advice on the amortization of goodwill.
In commercial law, too, changes are to be expected from the law for the modernization of accounting law (BilMoG), which modify the procedures that have been common up to now.
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