Individual value adjustment

As a specific allowance is referred to in Accounting an allowance that the book value of certain receivables at their lower actual value adapts.

General

There are two types of value adjustment, general value adjustment and individual value adjustment . In contrast to the general valuation allowance, with the individual valuation allowance, each individual claim is individually valued and thus the individual valuation principle of Section 252 (1) No. 3 HGB is met. The value adjustment was an indirect booking method which, in contrast to the direct method of depreciation, left the balance sheet item for the receivables unchanged and provided them with an adjustment item on the liabilities side . The disclosure of the value adjustments as an independent balance sheet item is no longer permitted in the commercial balance sheet in the HGB since January 1986.

The individual value adjustment is a preliminary stage of the depreciation of the corresponding receivable and represents an expense in the profit and loss account . The depreciation is only carried out after the actual loss of part or the entire receivable. In contrast to depreciation, the receivable remains in the books as open, but is shown in the balance sheet reduced by the value adjustment amount.

economic aspects

Individual value adjustments are required if the creditworthiness , solvency or solvency of a debtor , borrower or debtor has deteriorated and there is a risk of default on the balance sheet date .

In § 252 para. 1 no. 4 HGB is required that all foreseeable risks and losses arising before the balance sheet date must be considered. Specifically, Section 253 (4) of the German Commercial Code (HGB) then requires that current assets be depreciated if the value on the balance sheet date is lower than at the time of posting. This requires value adjustments on receivables in the event that they have been classified as doubtful receivables . The default risk of doubtful receivables is greater than 0% and less than 100%, which means that the amount and / or timing of the receipt of payment is subject to uncertainty . Reasons can be that the debtor has not paid after a corresponding reminder , there are complaints or the customer has even applied for insolvency proceedings . Because of the strict lower-of-cost-or-market principle , these receivables must be accounted for with their probable value. Here, the balancer is required to make a forecast of the probability of repayment. The depreciation or value adjustment is intended to absorb the part that is probably no longer recoverable as a decrease in value . If the claim is uncollectible (default risk = 100%), for example because the insolvency proceedings for the debtor result in an insolvency rate of 0% ( rejection due to lack of assets ), it must be written off in full.

In the tax balance sheet , dubious claims are to be stated at their probable value. In August 2003, the BFH set up three criteria for this purpose . An individual value adjustment may only be carried out if a cautiously assessing businessman must conclude that there has been a partial loss of receivables due to general life experience from the respective circumstances of the individual case . The debtor's individual ability and willingness to pay must be determined. The circumstances prevailing on the balance sheet date must objectively justify the estimate, which is not overly pessimistic.

Credit institutions

Exceptions to the principle of individual valuation are permissible in companies that have a large number of many claims ( trading companies , credit institutions ). Credit institutions may deviate from the principle of individual valuation and value their receivables as a provision as part of the general bad debt allowance ( Section 340f HGB). The individual value adjustment is not subject to any offsetting prohibition at banks , but may be deducted from the dubious claims ( Section 340f (1) HGB).

For loans and receivables ( english loans and receivablles ) and assets that are held to maturity ( english held to maturity ) can be both specific allowances and "portfolio-based specific allowances" are formed: ${\ displaystyle EWB_ {pb}}$

{\ displaystyle EWB_ {pb} = (exp-S_ {BW} \ cdot EQ) \ cdot (1-EBQ)}

.

The claim against the debtor is compared with the market value of the loan collateral , taking into account the recovery rate , whereby the part of the claim that is presumably not to be recovered (1 - recovery rate or ) must be taken into account. ${\ displaystyle exp}$ ${\ displaystyle S_ {BW}}$ ${\ displaystyle EQ}$ ${\ displaystyle EBQ}$

HGB / IFRS

A distinction has to be made according to which accounting standard the EWB is formed, either according to HGB or IAS / IFRS . Depending on the standard, there is a different type of evaluation with different values as a result.

HGB

The formation of individual value adjustments is based on the general valuation principles of Section 252 (1) No. 4 HGB (principle of prudence ).

Determination of the individual value adjustment on receivables

The determination of the individual value adjustment depends on the creditworthiness of the borrower and the value of loan collateral:

   Buchwert der nominellen Forderung
   − erwartete Tilgungszahlungen
   − erwartete Erlöse aus Sicherheitenverwertung
   = Betrag der Einzelwertberichtigung

Repayment payments are difficult to estimate in terms of amount and probability. Due to the complex procedure, assessing the creditworthiness is only possible on the balance sheet date and for large loans.

IFRS

introduction

The formation of individual value adjustments according to IFRS is derived from the IAS standard 39 (communication of information relevant to decision-making) in contrast to the principle of prudence in the HGB. Individual value adjustments are made for significant impaired loans that are subject to individual consideration. Significant here means essential, i.e. above an individually defined significance limit per engagement. Impaired means impaired; d. H. the bank does not receive the contractually agreed cash flows .

Insignificant Loans

Insignificant loans (below an individually defined significance limit per commitment) are also subject to an individual value adjustment, but simplifications apply here, particularly relating to the valuation of collateral and cash flow. A different description is chosen for these individual value adjustments to distinguish them. They are often referred to as "portfolio-based individual value adjustments" : ${\ displaystyle poEWB)}$

{\ displaystyle EWB_ {pb} = max. {IA-Sv \ cdot EQ, 0} \ cdot (1-EBQ)}

.

Parameter description: = utilization of the loan, = loan collateral (market value), = recovery rate, = recovery rate and = loss given default / loss amount.
${\ displaystyle IA}$
${\ displaystyle Sv}$
${\ displaystyle EQ}$
${\ displaystyle EBQ}$
${\ displaystyle LGD}$

The methodology is based on the PoWB determination procedure.

calculation

Amortized cost (= FAK) less the present value of expected cash flows less the present value of the collateral results in the expected loss, which is 100% adjusted in value. The FAK are the original acquisition costs taking into account the repayment amounts, the distribution of premiums / discounts over the term of the loan and value adjustments.

Bookings

When the outgoing invoice is posted, a faultless claim is posted:

          Forderungen
               an Erträge
               an Umsatzsteuer

If a risk of default is identified, the outstanding receivables may be transferred to a separate account for doubtful receivables and the value adjustment posted:

          zweifelhafte Forderungen
               an Forderungen

          Aufwand aus Wertberichtigungen
               an Wertberichtigung zu Forderungen

After completing the procedure, there are three options:

- Case 1: The bad debt loss is higher than the value adjustment, the difference is shown as an expense in the profit and loss account

          Abschreibung auf Forderungen
          Umsatzsteuer
               an zweifelhafte Forderungen

          Wertberichtigung zu Forderungen
               an Abschreibung zu Forderungen

- Case 2: The bad debt loss corresponds exactly to the value adjustment

          Wertberichtigung zu Forderungen
               an zweifelhafte Forderungen

- Case 3: The bad debt loss is lower than the value adjustment

          Wertberichtigung zu Forderungen (gesamter Wertberichtigungsbetrag)

               an zweifelhafte Forderungen (Höhe des Forderungsausfalls)

               an Erträge aus Auflösung von Wertberichtigungen (Differenz)

If the payment is unexpectedly received in the following period, the depreciation is corrected:

          Bank
               an Periodenfremder Ertrag
               an Umsatzsteuer

Individual evidence

↑ Reinhard Heyd, Gabler Business-Wissen AZ Bilanzierung , 2005, p. 131
↑ BFH, judgment of August 20, 2003, Az .: IR 49/02, BStBl. II 2004, 941 = BFHE 203, 319
↑ Reinhold Adrian / Thomas Heidorn (eds.), Der Bankbetrieb , 2000, p. 732
↑ Gerald Preißler, German Figlin , IFRS-Lexikon, 2009, p. 107 f.

[1] Reinhard Heyd, Gabler Business-Wissen AZ Bilanzierung , 2005, p. 131

[2] BFH, judgment of August 20, 2003, Az .: IR 49/02, BStBl. II 2004, 941 = BFHE 203, 319

[3] Reinhold Adrian / Thomas Heidorn (eds.), Der Bankbetrieb , 2000, p. 732

[4] Gerald Preißler, German Figlin , IFRS-Lexikon, 2009, p. 107 f.