Carrying amounts are the amounts reported on the asset and equity/liability sides of company’s balance sheet.1 On the assets side these are the acquisition or production cost, possibly after depreciation and amortisation or reversals of depreciation and amortisation.2
If a company has a duty to produce commercial accounting, the checking of carrying amounts is a standard activity for which there are strict procedures at investment companies.3
Schematically as at the of each accounting year, carrying amounts are adjusted by the depreciation rates allowed by commercial and tax law, with the result that these are not usually the same as the actual fair or market values of the assets.4 The differences between carrying amount and fair value give rise to hidden reserves or liabilities, which are subject to taxation on recognition.5 These so-called book gains or losses normally arise on the sale of the company or individual assets such as properties.6
Depending on the accounting system in use (HGB, US GAAP or IFRS), the carrying amount can lead to different valuations in the balance sheet.
In accordance with section 7(4) of the Einkommensteuergesetz (EStG – German Income Tax Act), the depreciation rate allowed for tax purposes on residential properties completed after 1925 is currently 2%. The rate for buildings completed before then is 2.5%. The depreciation rate for commercial properties completed after 1985 is 3%. It should be noted in this context that only the standing buildings, and not the value of the land, are subject to depreciation.7 Depreciation is recognised using the straight-line method.
In reality, however, properties – especially on attractive markets – are more likely to increase in value than to see a reduction in value. This is due to the fact that total useful life can be extended by modernisation and maintenance, and that properties are not just valued by their substantial value, but mainly according to their expected future income.