When evaluating the company’s participation in the financial statements, doubts regularly arise. These arise precisely when profit transfer agreements have been concluded between the companies and there is a body. Especially problematic are cases in which the organ company has concluded a profit transfer agreement with another company. Then there is a multi-storey structure. We clarify the specifics occurring in the evaluation of the company participation in the following.

1st Assessment of Company Participation

1.1.

If a participation is granted to an undertaking, it shall be assessed. At their time of access, the holdings are to be assessed in accordance with § 271 (1) HGB with their acquisition costs (§ 253 (1) sentence 1 in conjunction with § 255 (1) HGB). This is the consideration paid for acquiring the holding. This can consist of means of payment, the giving up of other assets, the issuance of new or own shares and the assumption of debts. The acquisition costs also include acquisition costs (§ 255 (1) sentence 2 HGB) and other costs directly attributable to the acquisition. They must therefore also be taken into account in the assessment of the company’s participation. Conditional, i.e. subsequent increases or reductions in the share purchase price that are dependent on future events are to be recognised as subsequent acquisition costs. For example, such events may result from a tax audit or the development of financial measures as an indicator of the investee’s income value.

1.2.

1.2.1. Write-off of participation

Company participations are to be further evaluated in the following. However, it may happen that the fair value of an investment as at the balance sheet date, which is to be measured as a future performance measure by means of income or discounted cash flow methods, does not cover its cost. Then the value measurement of the investment in the event of an impairment that is expected to last is amortised to the lower fair value (§ 253 (3) sentence 5 HGB). In the event of a likely only temporary impairment, an unscheduled depreciation (§ 253 sentence 6 HGB) may be made. The value compensation bid (§ 253 (5) sentence 1 HGB) applies if the reasons for a lower value assessment no longer exist.

1.2.2. Additional capital and withdrawals

Partners may, for example, inject additional capital, i.e. money or non-cash assets, into the investee in return for the granting of new shares or without consideration. This then increases the intrinsic return value of the participation. However, the increase in the equity book value must then be recognised in a performance-neutral manner.

Withdrawals which reduce the intrinsic value of the holding are to be recognised in whole or in part as disposal. From a trade-balance-sheet perspective, it is irrelevant whether the capital transfer from the investee to the shareholder takes place under company law by way of an open distribution, by way of a withdrawal or as part of a profit transfer agreement.

Deposits or co-payments of the shareholders, which serve only to maintain the value of an investment, are to be recognised by the shareholder as maintenance expenses. Otherwise, a contribution of money and non-material assets shall be taken into account in determining the fair value of the investment to the extent that the injected capital contributes directly or indirectly to the investee’s recovery of future financial surplus.

1.2.3 Consideration of synergy effects

The commercial valuation serves primarily to determine the debt coverage potential for the purpose of creditor protection. Therefore, synergy effects, for example purchasing advantages, may only be taken into account in the valuation of the company’s participation to the extent that they are likely to be realised by the company accounting for the participation.

The emergence of real synergy effects requires the combination of at least two companies. This necessitates the allocation of synergies among the participating companies for the purpose of the follow-up assessment of holdings. An objective allocation of synergies according to the causation principle among the companies contributing to the creation of synergies is not possible. There is no fixed rule for a division. This is limited only to the extent that it is arbitrary and factually and temporally continuous. Therefore, once selected, a procedure should be maintained over time unless there are important reasons for a breakthrough.

The consideration of synergy effects and the method of distribution is part of the evaluation method. Therefore, it must be specified in the annex according to § 284 paragraph 2 no. 1 HGB. In the event of a planned sale of a participation, the accounting entity is no longer able to take into account real synergies due to a lack of feasibility. Then only real synergies must be taken into account. An arbitrary acquirer must be able to realize this independently of the planned transaction.

2. taking into account the profit transfer agreement in the valuation

2.1 Effect of the profit transfer agreement

A profit transfer agreement within the meaning of § 291 (1) AktG may exist between a controlling company and a dependent company. The question then arises as to how the valuation of the company's participation proceeds.

In the case of a profit transfer agreement, the investee has to transfer profits pursuant to § 301 sentence 1 AktG to the controlling company and, conversely, to compensate the investee for losses pursuant to § 302 paragraph 1 AktG. In the case of a shareholding assessment, the balance sheet consequences arising from the loss assumption obligation are to be taken into account in such a way that the resulting effects are taken into account exactly once.

For the loss incurred by a dependent company up to the balance sheet date of the ruling company and to be assumed by the latter on the basis of the profit or loss transfer agreement, the ruling company has already to passivate an uncertain liability under commercial law (§ 249 (1) sentence 1 HGB).

The determination of the future success value of the participation takes place in principle without considering the profit and loss transfer agreement. Otherwise, once the result of the participation has been settled by way of the profit transfer agreement, the result would be EUR 0,00 each year, resulting in an income value of EUR 0,00.

2.2. Consideration of tax benefits

If individual organ companies achieve losses and other profits, the attribution of the positive and negative results at the level of the organ carrier leads to a pooling of results. Thus, the loss of an organ company immediately becomes the loss of the organ carrier. This prevents tax-related loss carry-forwards from accumulating in different legal entities within the group and the resulting benefits in the form of future tax savings from being used only at a later date, namely when the organ company achieves corresponding positive taxable results. This tax saving represents a positive synergy effect from an economic point of view.

It is then questionable, however, how these advantages from the direct taking into account of the losses of the organ carrier in its commercial legal accounts are to be taken into account in the valuation of the company’s participation in the organ companies. As long as there is no tax contribution agreement, the allocation of the tax benefits can be arbitrarily designed in the absence of a clear allocation criterion. However, the assignment once selected must be maintained steadily over time – as long as there is no important reason for a change.

2.3.Evaluation of company participation in tax contribution contract

If there is an organ, the tax expense falls solely on the organ carrier, who also owes the tax. In order to achieve a causal allocation of the tax expense in a business-friendly manner, tax contribution agreements are often concluded between the organ carrier and the organ companies. The organ carrier then passes on its tax expense to the organ companies belonging to the organ group by means of so-called tax levies.

The possibilities for designing such annual contribution contracts are manifold. It is common, for example, to treat every organ company as if there were no organ company. Often, each company participates only in proportion to the losses of individual organ companies. If the annual contribution is agreed under this procedure, the organ companies shall carry forward the losses. This reduces the future tax levies they bear. As a result, this then leads to the advantage being attributable solely to the loss-making company.

Alternatively, it can also be agreed in the tax contribution agreements that only the actual tax expense of the organ group is transferred to the profit company or loss companies also receive tax credits. If such tax contribution agreements exist, explicit provisions are made for determining the annual contributions. These are therefore to be taken into account immediately when determining the financial surpluses in the income value method or DCF method.

3rd valuation of the shareholding in multi-stage holdings

But there can also be multi-level participation structures. Then there are profit transfer agreements not only with direct subsidiaries, but also indirectly with subsidiaries of subsequent levels of the group. It is then necessary to examine how these chain profit transfer agreements affect the shareholding assessment in the commercial accounts of the ultimate controlling company. In addition, there are particularities in the assessment of participation in the financial statements at intermediate stages. This refers to those controlling undertakings which are themselves dependent undertakings in relation to a superior undertaking.

Then, future losses of the parent company that were not covered at the level of the subsidiary in the devaluation of the participation in the parent company may be reflected in the annual results of the parent company by depreciation of the participation in the subsidiary. This also applies without the parent having made a provision for future loss assumptions;

4th Summary for the Assessment of Company Participation

If the parent is required to offset losses under a profit or loss transfer agreement, it shall increase the net assets of the subsidiary. In this way, it contributes to achieving future surpluses there. This must be taken into account in the valuation of the company’s participation as of the reference date.

If there is an income-tax body and no tax contribution agreements have been concluded between the controlling company and the subsidiaries, the procedure for taking into account tax advantages in the assessment of the company’s shareholding in the controlling company can be arbitrary within the limits of a continuous and factual application.

In the case of tax contribution contracts, the tax contributions are to be taken into account directly when determining the financial surplus in the income value method or the DCF method. Therefore, no tax advantages remain, which could be arbitrarily distributed.

In multi-level structures, it should be noted that, under certain conditions, impairments of indirect holdings may also affect the valuation of the parent’s direct holding.