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Determination of profit – Requirements for the recognition of deferred income

The Federal Fiscal Court (Bundesfinanzhof, BFH) recently considered the criteria for creating a deferred income item for period-related services.

Generally, when determining profits by the accrual basis accounting method, the business assets that have to be recognised for the financial year-end are the ones that have to be disclosed in accordance with German Generally Accepted Accounting Principles. In view of the need for a deferral to match the remuneration in terms of time (‘certain period’), the still outstanding consideration has to be time-related or periodically divisible. If the time period over which the services owed have to be rendered is unknown then the extent to which the cash received has become income would not be clear.

The BFH, in its ruling of 26.7.2023 (case reference: IV R 22/20) has now highlighted, in particular, the following:

  • An estimate of the ‘certain time’ as a precondition for recognising the cash received as deferred income would be permissible if it was based on ‘generally applicable standards’. However, this is not the case if the standards that are used are based on the taxpayer’s organisational decisions that could be changed.
  • Payments received for a still outstanding period-related service cannot be recognised as liabilities under ‘advance payments’ but only subject to the conditions for deferred income.

Please note: Moreover, as a result of the 2022 German Annual Tax Act, reporting entities were granted an option (Section 5(5) sentence 2 of the Income Tax Act [Einkommenssteuergesetz, EStG]) according to which the recognition of a deferred item may be omitted if the respective expense or income does not exceed the amount in Section 6(2) sentence 1 EStG (= €800). The option applies for the first time for financial years ending after 31.12.2021 and has to be exercised consistently.

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