For the valuation of inventories in the balance sheets, especially of manufacturing companies, there are various valuation simplification procedures. They are expressly permitted in commercial law. There are three approaches to this. The group valuation is based on average valuations of similar assets. Here you can choose between the weighted and the moving average rating. When it comes to collective evaluation, the Commercial Code has two approaches, namely LiFo and FiFo. In this case, one simply assumes a uniform consumption sequence depending on the time of access to the working capital. The fixed-value valuation shall be carried out only if there is little change in the stock and value of the assets and their value is of little importance to the company.

Current assets occupy an important position in the balance sheet of manufacturing companies. Current assets serve the entrepreneurial purpose decisively. These include in particular raw materials, auxiliary materials and operating materials. Above all, however, the raw materials and the finished products, mainly intended for sale, which are in stock, are of enormous importance in accounting. In order to record these inventories, companies regularly operate dedicated inventories. After all, a balance sheet should reflect as realistic a picture of the financial and economic situation of the company as possible. So you also have to know which assets are in circulation and what value they have.

For this purpose, there are certain valuation regulations in both commercial law and tax law. We would like to present them to you in this article.

Suppose a mill receives on 01.08.2022 a delivery of 10 t of wheat with a value of EUR 1.400. In the same month, the mill receives another delivery of this type. However, the price has now risen to EUR 150 per ton. In the meantime, if there is no sale or processing or any other disposal of the wheat, then 20 tonnes of wheat with a value of EUR 2,900 will slumber in the silo of the company.

What may seem logical in this presentation at first glance can also be critically questioned. For example, one could assume that the 20 t of wheat has a value of 3,000. Finally, the current value for wheat is EUR 150 per tonne. So, as you can see, there is potential for alternative approaches when valuing stocks.

The Commercial Code recognizes the fact that certain current assets can be valued differently. For this purpose, it offers various evaluation simplification methods. These can be divided into three groups: the group evaluation, the collection evaluation and the fixed value evaluation. All available possibilities for valuation simplification in this case inevitably break the principle of individual valuation (§ 252 paragraph 1 no. 3 HGB). However, because a simplification of evaluation is necessary in practice in order to comply with the principle of profitability and materiality, the legislator has created an exception here. However, this only applies to access assessment. The follow-up evaluation should then follow established rules again.

Group valuation of certain current assets refers to methods based on average valuations. For this purpose, the assets must be equivalent or approximately equivalent in order to be valued as a group. For example, a manufacturer for nails can uniformly evaluate all goods that meet the requirements for group evaluation. A distinction can be made between a weighted and a moving average rating.

3.1.1. weighted average

The weighted average is calculated by multiplying the quantities of similar assets by their value and adding their products. This sum is then divided by the sum of the quantities of these similar assets.

An example where we add another transaction to the above example:

A similar delivery of wheat is purchased in the same year. This is a delivery of 10 t at EUR 160/t. The weighted average is thus calculated as follows:

(10 t x EUR 140/t) + (10 t x EUR 150/t) + (10 x EUR 160/t) = EUR 4.500

10 t + 10 t + 10 t = 30 t

EUR 4.500 / 30 t = EUR 150/t weighted average

The simplification of valuation by means of the weighted average value also lies in the fact that it is only carried out within the framework of the inventory for the financial statements. So you look at the annual average. It must be noted that intermediate departures have no influence on this evaluation method. In the case of valuation using the moving average value calculation, however, this is different.

3.1.2. moving average

With the moving average value, any change in quantity is taken as an occasion for a correction evaluation. As a result, the associated expense is naturally higher than in the determination of the weighted average value. However, in this way one always obtains current values, which can be quite advantageous for certain purposes. The example given above with the wheat thus leads to the following weighted average value via precisely this method:

(10 t x EUR 140/t) + (10 t x EUR 150/t) = EUR 2.900

10 t + 10 t = 20 t

EUR 2.900 / 20 t = EUR 145/t moving average

If a departure occurs before the third delivery, as we took as an example in the previous section, then the moving average value calculation is as follows:

Sale of 10 tonnes of wheat: disposal at EUR 1,450

remaining stock: 10 t at EUR 145/t with a total value of EUR 1,450

Purchase of 10 t of wheat at EUR 160/t: Access to EUR 1,600

(EUR 1,450 + EUR 1,600) / 20 t = EUR 152,50/t moving average

In the collective evaluation, one follows the principle of consumption-follow fiction. It is thus generally assumed that, when leaving the reserve assets, one always maintains a certain order in the consumption of the assets. Either one always uses the longest stored assets as the first or one takes the assets last included in the stocks. For the former method, the term FiFo (abbreviation for first in – first out) is also used. The second method is known as LiFo (abbreviation for last in – first out).

It should be noted that the FiFo method is not recognized in tax law. For tax purposes, one must then choose a different permissible approach. However, since only the LiFo method is permitted in both commercial and tax law, the FiFo method itself plays a minor role in commercial accounting practice. It should also be noted that in addition to LiFo and FiFo, there are also other alternatives to the valuation of stocks, but only LiFo and FiFo are allowed as collective valuation procedures in commercial law.

The fixed value assessment is only provided in certain cases. According to § 240 (3) HGB, the fixed value valuation is only permitted where assets are hardly subject to fluctuations in their quantity and value and also their total value is of only less importance for the company. One example could be ballpoint pens with advertising imprints for customers. Nevertheless, in practice, it is necessary to carry out the assessment at intervals of a maximum of three years on the basis of a new inventory.

There are also special features in the subsequent valuation of inventories. For example, stocks are not subject to wear. After all, they are only stored until they are consumed or sold. Therefore, no (scheduled) depreciation for wear is considered for them. According to the strict lowest-value principle, as specified by the HGB for working capital, one must, however, in the event of a permanent impairment, an unscheduled depreciation. However, this may also require an impairment adjustment if the fair value subsequently exceeds the current carrying amount.

With the valuation simplification provisions for stocks, legislators have introduced exceptional rules on the individual valuation principle. Since these exceptions are mainly related to inventories, this has little impact on the meaningfulness of balance sheets. After all, this is mainly about assets that are relatively uniform in nature or value. However, since there are several options that HGB allows for the valuation simplification of inventories, a direct comparison between two companies using different valuation simplification methods is practically excluded due to the lack of a common basis. But here, too, it can be argued that the differences are only relevant in special cases. However, the overall significance of the balance sheet remains.