On Friday, February 26, the German Bundesrat (Federal Council) did not object to the law for the residential properties credit directive. In this Act, the German Bundestag also passed an amendment to the commercial code (HGB) on February 18, 2016, regarding the accounting for pension provisions for occupational pensions.
Pursuant to the revised version of Article 253 (2) sentence 1 HGB, in annual financial statements for fiscal years ending after December 31, 2015, “provisions with a remaining term of more than a year must be discounted at the average market interest rate according to their remaining term, which in the case of provisions for pension obligations results from the past ten fiscal years and in the case of other provisions results from the past seven fiscal years.” So far, the seven-years average also applied for pension obligations. Given the current low-interest rate environment, the enactment of the new regulation – compared to the previous one – will result in initially higher actuarial interest rates for the calculation of pension provisions for occupational pensions and, therefore, lower necessary reserve amounts.
This legal reorganization can optionally also be applied to annual financial statements for fiscal years beginning after December 31, 2014, and ending before January 1, 2016.
However, to prevent the distribution of possibly resulting profits, the legislator also included a payout block in the new article 253 (6) HGB: “In the case of provisions for pension obligations, the difference between the recognition of the provisions in accordance with the corresponding average market interest rate from the past ten fiscal years and the recognition of the provisions in accordance with the corresponding average market interest rate from the past seven years is to be calculated every fiscal year. Profits may only be distributed if – after the distribution – the amount of disposable reserves plus accumulated profit minus loss carryforward equals, at least, this balance. The balance must be disclosed each fiscal year either in the notes or at the foot of the balance sheet.”
In practice, the reorganization leads to the following consequences:
- Given the currently falling interest rates, a part of the interest expense is slightly postponed (analogously in the case of future rising interest rates).
- Concerning the determination of pension provisions for the balance of trade, a further calculation with an additional actuarial interest rate on a seven-years base always has to be performed in future.
- Companies where the fiscal year ends in 2016 (e.g. on January 31, 2016) already have to apply the new regulation.
- No changes are foreseen concerning the selection of the actuarial interest rate for partial pension obligations, anniversary obligations or other similar commitments: the interest rate on a seven-years base will continue to be recognized.
- Provided sufficient reserves, even the profits resulting from the calculated balance can be distributed.
- There are additional disclosure requirements.
This comes into law on March 17, 2016. The Deutsche Bundesbank (German Central Bank) will publish the new actuarial interest rates.