Concept and significance of the consistency principle in valuation
Valuation consistency is a central principle in German commercial and tax law. It refers to the principle by which the same valuation methods and standards must be maintained for the valuation of assets and liabilities within a company. The goal is to ensure continuity and comparability of annual financial statements and to prevent the manipulation of company values. Valuation consistency is therefore closely linked to the principle of balance sheet continuity.
Legal basis of valuation consistency
Provisions under commercial law
In the German Commercial Code (HGB), valuation consistency is codified as an expression of the principle of truthfulness and clarity of financial statements in § 252 para. 1 no. 6 HGB. According to this, once chosen, valuation methods must be retained in the subsequent annual financial statements. The principle of valuation consistency under commercial law applies to all merchants preparing financial statements and to corporations.
Wording of § 252 para. 1 no. 6 HGB
“The valuation principles applied in the previous annual financial statement are to be retained (valuation consistency), unless deviations are exceptionally permitted or required under § 252 para. 2 HGB.”
Purpose and function in commercial law
The consistency of valuation ensures the comparability of annual financial statements over several fiscal years (period comparison). This allows business developments and economic situations to be understood. Deviating valuation methods could undermine the meaningfulness of the balance sheet and make comparability more difficult.
Provisions under tax law
There is a close connection between commercial and tax law with regard to valuation consistency. According to § 5 para. 1 sentence 1 of the Income Tax Act (EStG), the general principles of proper accounting under commercial law must be applied when determining taxable profit, which also includes the principle of valuation consistency. Changes are only permitted for compelling reasons.
Principle of relevance and valuation consistency
The fiscal principle of relevance (§ 5 para. 1 EStG) stipulates that, for the determination of taxable profit, the valuation methods used in the commercial balance sheet are authoritative. A change in valuation under commercial law must, as a rule, also be adopted for tax purposes, unless special tax provisions apply.
Forms and scope of application
Types of consistency
Valuation consistency is divided into two essential subtypes:
- Horizontal or temporal consistency: The retention of identical valuation methods within the same company from one fiscal year to the next.
- Vertical consistency: The equal treatment of valuation issues within a single financial statement, for example, the application of the same method to similar assets.
Typical fields of application
- Depreciation and value adjustments: The chosen depreciation method (e.g., straight-line or declining balance depreciation) may not be changed arbitrarily.
- Valuation of inventories: For inventory assets, for example, a chosen method such as FIFO or LIFO must be continued.
- Valuation of provisions: Similar provisions must be treated according to the same valuation principles.
Permissible deviations and exceptions to valuation consistency
Statutory exceptions
§ 252 para. 2 HGB permits deviations from valuation consistency if they are factually justified due to special circumstances and necessary to present the net assets, financial position, and results of operations. Such circumstances may include changes in legislation, court rulings, or generally accepted valuation principles.
Examples of exceptions
- Initial adoption of new accounting and valuation standards (e.g., changeover from HGB to IFRS)
- Changes in tax regulations, which mandatorily require a different valuation
- Correction of errors from previous periods when continuing the previous method would be inadmissible
Disclosure obligations
In the case of a permissible exception, the change must be explained in the notes (in accordance with § 284 para. 2 no. 2 HGB). This applies to both the nature and the financial effects on the annual financial statements. This disclosure requirement serves transparency and traceability for the users of the financial statements.
Legal consequences of violations of valuation consistency
Implications for the financial statement
A breach of the principle of valuation consistency may result in the annual financial statement not complying with statutory requirements (so-called formal or material financial statement inaccuracy). This may result in corrections (e.g., retroactive application of the corrected method) and, if applicable, tax consequences.
Liability and sanctions
Incorrect or inconsistent valuations can give rise to civil liability. Furthermore, an erroneous valuation can affect taxable profit determination and lead to tax corrections.
Distinction: Valuation consistency and balance sheet identity
Valuation consistency is to be distinguished from balance sheet identity under § 252 para. 1 no. 1 HGB. While balance sheet identity requires that the same balance sheet items at the end and beginning of successive financial years are identical, valuation consistency concerns the continuity of valuation methods and approaches.
Significance for business practice
Consistent application of valuation consistency is of central importance for the credibility of corporate reporting. It ensures that external stakeholders such as shareholders, creditors, investors, and authorities receive reliable and comparable information about the development and current situation of the company.
Summary
Valuation consistency is a fundamental legal principle in commercial and tax law. It serves to ensure the comparability and transparency of annual financial statements by demanding continuity in valuation methods. Deviations are only permissible under legally defined conditions and must be explained in detail. Violations can have far-reaching legal and economic consequences. Consistent application of valuation consistency is essential for the significance and acceptance of financial statements.
Frequently asked questions
Which statutory regulations govern valuation consistency in German accounting law?
Valuation consistency is one of the central principles in German commercial law, anchored in § 252 para. 1 no. 6 of the German Commercial Code (HGB). Accordingly, the same values for assets and liabilities are to be retained in successive annual financial statements, unless there are compelling reasons for a deviation. This requirement of consistency is further specified by supplementary provisions in other parts of the HGB, especially with regard to special accounting and valuation options (e.g., recognition options, valuation under the lower of cost or market principle). Tax law also refers to this principle via § 5 para. 1 sentence 1 of the Income Tax Act (EStG), since, for taxable profit determination, the commercial law principles of proper accounting (GoB) are generally authoritative. In summary, valuation consistency is thus legally binding through a combination of various normative frameworks, with the aim of ensuring the comparability and consistency of annual financial statements.
What is the significance of valuation consistency for auditors?
Auditors are required, in the course of their audit, to carefully examine the company’s application of valuation consistency and to assess whether the values have been properly continued compared to the previous year. In particular, they must also examine whether potential changes to the valuation methods are factually justified and sufficiently documented. If the company deviates from valuation consistency, the auditor must, considering legal requirements, question whether there is a valid reason under commercial law and whether the deviation and its effects are sufficiently explained in the notes. If valuation consistency is breached without a legitimate reason, this may result in a qualification in the auditor’s opinion, as the accounting regulations would then not have been properly complied with.
Under what conditions is a deviation from valuation consistency permissible?
A deviation from valuation consistency is only permissible in accordance with § 252 para. 2 HGB if there are compelling reasons for it. Such reasons can include a substantial change in the company’s actual circumstances (e.g., change in corporate structure, mergers), or the introduction of new legal regulations and binding new accounting standards. Fundamental changes in accounting policy (e.g., change in valuation standard due to changed case law or modified interpretations by supreme court decisions) can also justify a deviation. In any case, the deviation must be disclosed and adequately explained in the notes to the annual financial statements so that its effects on assets, financial position, and results of operations are quantified in detail. If such a compelling reason is missing, there is a violation of the strict requirement for consistency.
How does valuation consistency affect the determination of taxable profit?
The determination of taxable profit is essentially carried out according to the commercial-law principles of proper accounting (GoB), which also include the principle of consistency (§ 5 para. 1 sentence 1 EStG in conjunction with § 252 HGB). This means that values once chosen for taxable profit determination must generally be retained. Changing valuation methods for tax purposes is only possible under the legally recognized circumstances and after approval by the tax authorities (§ 4 para. 2 sentence 2 EStG). If valuation consistency is breached for tax purposes without a valid reason, this may result in a tax correction and, if applicable, tax disadvantages, for example in the form of off-balance sheet adjustments or additional tax burdens.
What role does the notes to the annual financial statements play in relation to valuation consistency?
According to § 284 para. 2 no. 2 HGB, there is an obligation in the notes to disclose and explain any significant deviations from the accounting and valuation methods applied in previous years, and to quantify their effects on net assets, financial position, and results of operations. The notes thus serve transparency and traceability of values. Particularly when a deviation from valuation consistency is justified by compelling reasons, a clear, detailed and comprehensible explanation is required so that users of the financial statements can properly assess the effects.
What legal consequences result from a breach of valuation consistency?
A breach of valuation consistency constitutes a violation of the statutory requirements under the HGB and possibly also of tax provisions. In practice, this means that the prepared annual financial statements are to be considered erroneous in the sense of statutory accounting regulations. Auditors must regularly report such a deviation in their audit report and, if applicable, in the auditor’s certificate. In the worst case, this can result in denial of the audit opinion. In addition, violations can trigger civil claims (e.g., damages claims by shareholders or creditors) and may also be relevant under administrative offence law and criminal law, particularly if intentional balance sheet manipulation to deceive third parties is involved.
Are there any exceptions to valuation consistency for smaller companies?
The requirement for valuation consistency fundamentally applies to all companies preparing financial statements, regardless of their size, that is, also to micro-corporations, small, or medium-sized companies as defined in §§ 267 et seq. HGB. However, smaller companies may benefit from relief in the form and extent of disclosures in the notes (e.g., regarding disclosure obligations). The basic obligation to retain once chosen valuation methods, however, remains unaffected. Neither the BilRUG (Accounting Directive Implementation Act) nor other relief measures allow substantive exceptions to the principle of consistency. The legal obligation remains, and violations can also result in the aforementioned sanctions for smaller companies.
