25. February 2020

Time Value Accounts in balance sheet accounting

Occasionally, in practice, in connection with the tax accounting procedures in the company’s internal accounting within the framework of flexible working time arrangements, it is only mentioned that it is irrelevant for the employer whether the employee now creates credit balances or not, since the liquidity view is identical from the employer’s point of view. This blanket statement can basically not be followed. Rather, it must be made clear in this context which accounting transactions take place exactly when a time value account is converted. Against this background, the application example presented in the following assumes the advised “normal case” according to which the employer invests the employee remuneration claims converted into a credit balance in a guaranteeoriented investment product via a credit institution (for illustrative purposes, employer and employee social security contributions are not included).

Application example:

An employee with a monthly gross salary subject to social insurance contributions of € 3,000 waives € 500 on the 1st of the next month in favour of conversion into a credit balance. These € 500, – are invested accordingly by the employer in an investment product. These processes trigger the following internal bookings at the employer:

  • Personnel expenses on company account (ongoing business operations) € 2,500,
  • Personnel expenses to settlement arrears € 500 (§ 249 HGB (German Commercial Code) in connection with § 6 Para. 1 No. 3a EstG (Income Tax Act)) and
  • Company account (account-holding bank) to company account (ongoing business operations) € 500,-.

In this case, the employer generally incurs a cumulative tax-deductible expense of € 3,000.00, so that the entire expense can be claimed for tax purposes in analogy to an immediate payment of the remuneration. However it is to be distinguished that with an immediate payment of salary an operating expenditure deduction at a value of € 3.000, – in accordance with § 4 exp. 4 EStG (personnel expenditure) can be made valid with an immediate payment of salary, whereby with a value credit endowment the employer expenditure distributes itself on € 2,500 immediately liquidity-effective operating expenditure in accordance with § 4 exp. 4 EStG and € 500, – operating expenditure in height of the developed requirement for remuneration (§ 249 HGB in connection with § 6 exp. 1 No. 3a letter e EStG).

Additionally a balance sheet extension takes place by the necessary reserve formation as well as by the accomplished active exchange in contrast to an immediate payment of wages. Because while with an immediate payment of salary the operating assets of the employer are reduced by the intended amount, however with the value assets formation described here the asset exchange mentioned is converted. This means that the conversion amount is transferred from the “normal” company account to another account in the name of the employer at a commissioned bank where the investment of the credit balance takes place. In this bank account, the employee entitled to a credit balance is then granted corresponding liens for reasons of insolvency protection, for example.

From the employer’s liquidity point of view, it is superficial that the same payment amount must effectively be used for both the creation of a credit balance and the waiver of the creation of a credit balance. However, the tax and accounting effects described above have far-reaching effects on the determination of the company’s profits under commercial and tax law. Thus it becomes finally clear that the often practiced attempt to regard the balance sheet items affected by the value credit formation in isolation, in order to cause a simpler overall representation, is not possible due to the complexity of the balance sheet preparation of a capital and/or a partnership.