Concept and Nature of Valuation Discretion
Valuation discretion is a central principle in German law, particularly in tax law and civil law, and describes the freedom of decision-makers to exercise an independent margin of discretion when assessing facts within the framework of valuations (assessments, estimates, forecasts). Valuation discretion sets limits on the reviewability of such assessments by courts and authorities, as valuations are generally based on subjective judgments and expert considerations and, therefore, cannot be reviewed solely on the basis of rigid, objective standards.
Valuation discretion is distinct from discretionary authority (discretion) and from a mandatory decision in that it not only permits a legal judgment but also involves the actual assessment of a factual circumstance.
Legal Dogmatic Foundations
Distinction from Discretionary Authority and Findings of Fact
Valuation discretion relates to the assessment of facts, in contrast to the actual finding of facts itself, which is subject to full judicial review. Valuation discretion differs from discretion in that the former enables interpretation and weighting of certain facts or economic processes, whereas the latter is a selection decision between several legally permissible options.
Constitutional Foundation
Valuation discretion can be derived from the rule of law principle (Art. 20(3) GG) as well as from the principles of the reservation of law and separation of powers. It ensures that specialized decision-makers can evaluate complex circumstances freely and appropriately, without courts or supervisory authorities imposing their own assessments in their place.
Valuation Discretion in Tax Law
Principle and Areas of Application
In tax law, valuation discretion is of particular importance, for example in the accounting and valuation of assets (§§ 5, 6 EStG) or in determining fair market values for tax purposes (§ 194 BauGB). Within statutory limits (e.g., valuation rules, GoB), taxpayers have a margin of discretion regarding estimates, current values, or probabilities of value developments.
Limitations and Restrictions
Valuation discretion ends where statutory valuation standards are mandatory or limit the discretionary choice (e.g., through simplified valuation methods or valuation discounts). Additionally, it exists only insofar as the valuation decision does not clearly violate norms (prohibition of arbitrariness, principle of authoritative accounting) or the principle of good faith (§ 242 BGB).
Case Law on Valuation Discretion
Case law acknowledges valuation discretion, particularly regarding the extent to which valuation decisions, in the context of proper bookkeeping or statutory valuation methods, allow for application discretion in determining income (see BFH, judgment of November 8, 1960 – I 352/59 U; BVerwG, judgment of February 19, 1963 – I C 127.61).
Valuation Discretion in Civil Law
Valuation Discretion in Value Judgments and Forecasts
In civil law, valuation discretion particularly concerns the assessment of performance disruptions, the amount of damages, or a reasonable performance burden. It is applied, for example, in determining the appropriateness of deadlines, claims for compensation, or withdrawal rights.
Distinction between Mandatory Decisions and Margin of Assessment
The civil law margin of assessment is distinct from mandatory decisions determined by fixed norms and is relevant in cases of value judgments, forecasts, and assumptions of probability. Courts only review whether the assessment is appropriate and consistent, but not the specific valuation itself.
Valuation Discretion in Other Areas
Administrative Law
In administrative law, valuation discretion is often evident in the assessment of suitability, ability, and professional performance in the context of selection decisions (e.g., civil service appraisals). There is also a margin of assessment in the evaluation of reliability or risk predictions in security-related procedures.
Competition and Public Procurement Law
In competition law and public procurement law, valuation discretion plays a role in determining evaluation criteria and weighting during bid assessment. Judicial review is limited to violations of evaluation criteria or obvious errors in valuation.
Control and Reviewability of Valuation Discretion
Limits of Judicial Review
Courts only review valuation decisions to determine whether they were made professionally, free from arbitrariness, and in compliance with procedural regulations (so-called “evidence control”). The court generally does not substitute its own assessment for that made by the authority.
Abuse and Correction of Errors
If valuation decisions are erroneous, indefensible, self-contradictory or made for irrelevant reasons, a correction or annulment may occur. The review focuses in particular on compliance with statutory and methodological requirements as well as the coherence and comprehensibility of the valuation process.
Summary and Significance
Valuation discretion is an important margin of decision in German law and complements other forms of decision-making, such as discretion, by allowing the free appraisal of facts. It ensures the law’s adaptability to complex factual and valuation situations and limits state and judicial interventions to obvious valuation errors. Valuation discretion is thus a significant principle for ensuring expert and flexible decisions and contributes significantly to the functioning of the legal and administrative system.
See also:
Legal Sources and Further Literature:
- Income Tax Act (EStG)
- Valuation Act (BewG)
- Civil Code (BGB), especially §§ 242, 249 et seq.
- Federal Administrative Court, Judgment of 19.02.1963 – I C 127.61
- Federal Fiscal Court, Judgment of 08.11.1960 – I 352/59 U
Frequently Asked Questions
Can valuation approaches in the balance sheet be freely chosen, or are there statutory requirements?
In the legal context, valuation discretion in the balance sheet is restricted by numerous statutory requirements and frameworks. The Commercial Code (HGB) and, where applicable, international accounting standards (such as IFRS), fundamentally regulate permissible valuation methods. Companies do have options within certain limits (for example, valuing inventories using FIFO or LIFO, where permitted), but they are obliged to observe the principles of proper accounting (GoB), particularly the principles of clarity and truth as well as the prudence principle. Statutory frameworks also determine how certain assets and liabilities must be valued (e.g., valuation of fixed assets at acquisition or production cost less depreciation in accordance with § 253 HGB). Thus, valuation discretion is particularly limited by mandatory valuation standards and restrictions in commercial or tax law, which exclude complete freedom of choice.
To what extent does tax law play a role in valuation discretion?
Tax law has a significant impact on valuation discretion, especially through the principle of authoritative accounting (§ 5 (1) EStG), whereby valuations carried out in the commercial balance sheet are generally also binding for the tax balance sheet. However, there are explicit tax law provisions that deviate from the commercial law rules and must be observed, such as the lower of cost or market principle (§ 6 (1) No. 2 EStG) or special depreciation rules. These tax provisions further restrict the scope allowed by commercial law. Permissible discretionary choices under commercial law do not always have to be adopted for tax purposes; conversely, tax law specifications sometimes provide stricter or different valuation standards, further restricting or influencing accounting valuation discretion.
What sanctions apply for violations of valuation rules?
Violations of statutory valuation rules can have serious legal consequences. Civil liability claims can initially be asserted by shareholders, creditors, or other stakeholders if a violation demonstrably leads to incorrect decisions. Offenses are particularly serious if they result in a misrepresentation of the financial, asset, or earnings position (§ 264 (2) HGB). In such cases, the responsible managing director or board member may even be liable to prosecution under § 331 HGB or § 400 AktG—which can include imprisonment or substantial fines in the most serious cases. In addition, tax back-payment and penalty proceedings can be triggered if incorrect valuations lead to evaded taxes. Lastly, there is a risk that financial statements may not be certified by auditors, which can have severe economic consequences.
Are there differences in valuation discretion between small and large companies?
The legislator distinguishes between companies of different sizes (micro, small, medium, and large enterprises) under commercial law (particularly HGB). These classifications affect valuation rules and the exercise of choices. Smaller companies benefit from simplifications, such as the possibility to waive preparing notes or management reports (§§ 266 ff. HGB) and may, in some cases, use simplified valuation procedures. Nevertheless, minimum requirements for valuation apply to them as well, particularly for determining annual profits. For large companies, the requirements regarding documentation, valuation standards, and disclosure are often more detailed and stricter. Thus, actual valuation discretion is generally more restricted for large companies in a legal context than for smaller ones.
What is the significance of the prudence principle for valuation discretion?
The prudence principle (§ 252 (1) No. 4 HGB) is one of the most important rules in accounting law and significantly limits valuation discretion. It requires caution in valuation, i.e., income may only be recognized when realized; losses and risks, however, must be considered as soon as they become apparent. This means that, in case of doubt, the value assumption less favorable to the company must be chosen. The prudence principle thus substantially restricts management’s freedom in value determination and protects creditors and investors from overly optimistic financial statements and the resulting risks.
What reporting obligations exist in connection with valuation decisions?
Valuation decisions based on commercial or tax law options are often associated with special reporting obligations. In the notes (§§ 284 ff. HGB), the company must often disclose the accounting and valuation methods applied, explain any changes compared to the previous year, and present their effects on the assets, financial, and earnings position. In addition, disclosure of discretionary decisions and estimates may be required in certain cases, especially if these have a significant impact on the company’s reporting. In this way, reporting serves to provide transparency for recipients of the financial statements and to ensure the traceability of the exercise of (limited) valuation discretion.
