On Jan. 27, 2016 the Federal Cabinet of Germany proposed adjustments in the calculation of the interest rate used in the commercial valuation of retirement benefits, a move intended to provide relief to Germany businesses. The interest-calculation averaging period will be extended from seven to ten years. The provision can also be applied to annual financial statements for fiscal years ending on Dec. 31, 2015.
Under current law, valuation of retirement benefits involves application of an interest rate, which is derived from a mean value over the previous seven years. The current low interest environment has led to a steady decline in interest rates, and this has proven to be a significant burden on businesses due to the rise in reportable benefit accruals. But with the adoption of the Accounting Directive Implementation Act (BilRUG), the Bundestag has resolved to look into the discounting interest rate for long-term pension benefits, and to adjust this if necessary. The Federal Cabinet has now taken up this issue, and this may mean a slowdown in the decline in the interest rate.
The Federal Cabinet’s proposal calls for an extension of the seven-year period to 10 years in Section 253, Part 2, page 1 of the German Commercial Code, new edition. The smaller decline in the interest rate would lead to a reduction in expenditures, and thus to a noticeable lightening of the burden on affected businesses. However, this relief will not take the form of a disbursement. To prevent disbursement of the difference between old and new valuations, a new clause in the German Commercial Code, Section 253, Part 6 specifically bars disbursement of this differential amount.
With the adoption of the new rule, it becomes mandatory for fiscal years ending after Dec. 31, 2015, but backdating to the fiscal year ending on Dec. 31, 2015 is also an option.
The new regulation is expected to be passed by the German Parliament in February 2016.
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Authored by Baker Tilly International independent member firm Baker Tilly Roelfs. Read the German version >