Niederstwertprinzip – Finanzbuchhaltung ( Rechnungswesen) ● Gehe auf SIMPLECLUB.DE/GO

Hey guys, today is all about courage, let's go! In this video we analyze the principle of lowest cost or market. The lower of cost or market principle is an asset valuation rule that plays a crucial role in accounting. As the name suggests, the goal is to record assets on the balance sheet at the lowest possible value. This results in unscheduled depreciation. But why should you do that? Isn't it always better to be bigger, taller and further away? Answer no. The principle of prudence establishes that risks and losses must be anticipated and not acquire importance only when they materialize.

This is to prevent a company from presenting itself too well. This could not only put pressure on liquidity and therefore the continued existence of the company, but would also put the company's creditors at risk. And these must be protected! #CreditProtection This results in starting with the lowest possible values. There are 2 types of least cost or market principle. On the one hand, the relaxed principle of cost or market reduction and, on the other, the strict principle of cost or market reduction. The relaxed lower-cost or market principle applies to fixed assets. If a permanent reduction in value is likely to occur, unscheduled depreciation must be carried out.

Fixed assets are valued at the lowest value at the balance sheet date. If the reduction in value is only temporary, there is the right to choose for financial assets whether the previous book value or the current lower value is recognized. If the reasons for a reduction in value no longer exist in the future, the requirement to recover value states that a write-down must be carried out. This can be the case, for example, with shares, if a company has overcome a crisis well and the share price recovers. Now to the other side. The strict lower-cost or lower-market principle applies to current assets.

In the case of impairments that are not permanent, it is also important to use the lower value and depreciate current assets. Now let's go to the example! In our Tom hardware store we have fixed assets in the form of buildings, machines and also in the form of shares. Fixed assets tell us that the market or reduced cost principle applies here. The shares Mr. Nagel owns are there to exert influence over suppliers. However, the share price of a supplier falls sharply after sales figures decline significantly and the company speaks of the "beginning of a crisis." Nagel bought the shares in February for 50 euros each.

At the balance sheet date, December 31, the price was a paltry 30 euros. So... how do we proceed now? First of all, let's note that we are talking about fixed assets here. We can also recognize that the crisis will not be overcome tomorrow and that we must assume a permanent reduction in value. The lower of the two stock market values ​​or market value and the amortized acquisition or production costs are then always considered. For stocks we have acquisition costs and market value. At that time the shares were worth 50 euros each. Now the market value is €30. The lowest cost or market principle is applied; the lowest value is used (in this case, 30 euros per share).

There will be an unscheduled amortization of 20 euros per share. A forklift also broke down. The acquisition costs in March amounted to 40,000 euros. Due to the damage, its value has decreased. The market value at the balance sheet date remains 5,000 euros. Since the loss in value is permanent, it must also be amortized here. The forklift is valued on the balance sheet at €5,000. The unscheduled amortization is, therefore, €35,000. Mr. Nagel also has a warehouse full of supplies. "Supplies" is our key word here. Because they are part of the current assets and the strict principle of lowest cost or market value is applied, wherever the lowest value is set.

The delivery includes, for example, the ordered wooden panels. On the day of purchase, the cost of 1 ton of wood was €200. On December 31, the price is 180 euros per ton. It does not matter whether this is a temporary or permanent reduction in value, because we always use the lowest balance sheet value for current assets, i.e. 180 euros per ton; This results in a devaluation. On the contrary, if the price per ton of wood is €210 on the balance sheet date, that is, we have an increase in value, we choose the lower value between the acquisition value and the market value based on the lower of the cost or the market principle.

This means that we will now set the purchase price of the wood panels at 200 euros per ton. Easy peasy! Therefore, we understand that the lower cost or market principle refers to when unscheduled depreciation should be carried out to value assets at the lowest possible value. The lowest cost or market principle applies to fixed assets. If the value is expected to be permanent, I have to cancel it. If the reduction in value is only temporary, there is the right to choose financial investments. The strict lower-cost or lower-market principle applies to current assets. In this case, both permanent and temporary reductions in value result in a devaluation.

Finally, I would like to point out that the least cost or market principle generally also applies to tax law. For those who are interested in this.