Accounting treatment of intragroup loans... - KPMG Germany
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Accounting treatment of intragroup loans...

Accounting treatment of intragroup loans...

... in consolidated financial statements under German commercial law


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It is standard practice for the financing of subsidiaries to provide intragroup loans via a centralised holding or financing company. If the subsidiary operates in a different currency area to that of the lender, the treatment of any foreign currency risks that arise becomes an inevitable issue.

Often the subsidiary is financed in its local currency, which means that the currency risk is initially assumed by the holding company or financing company. If no corresponding refinancing occurs in the foreign currency in such cases, the currency risk initially remains with the holding company or financing company. This risk is then hedged on a regular basis by currency derivatives outside the group, so that there is an economically closed position in the reporting currency from a group perspective.

The accounting treatment of intragroup financing hedged in this manner is clearly set out as hedge accounting in international consolidated financial reporting1 as well as in the reporting of separate financial statements under German commercial law2. With consolidated financial statements under German commercial law, questions of interpretation arise; answers to such questions are required for the envisaged recognition as a valuation unit at group level.


1 According to IAS 24.45, foreign currency translation differences remain in the consolidated financial statements and can be designated in the context of hedge accounting under IAS 39.

2 As a valuation unit according to Section 254 HGB consisting of foreign currency loan and currency derivative.

Foreign currency translation differences arising from intragroup transactions

Taking the entity theory of consolidation in accordance with Section 297 (3) HGB into account, changes in foreign exchange rates that relate to intragroup financing may not have an effect on the consolidated profit or loss and therefore are to be eliminated from profit or loss in the course of the consolidation of liabilities. This is in line with the prevailing opinion. This is also justified by the fact that currency gains and losses can only result from direct foreign investment in assets or from loans and borrowings to non-group third parties denominated in foreign currency, but not, however, from intragroup credit relationships.

On the other hand, in the professional literature an opinion has taken hold that is in line with international financial reporting under IAS 21.45: That contributions to earnings from the separate financial statements under commercial law can or even should be retained in the consolidated financial statements.

Additionally, the view has been expressed in the literature that, for the purposes of simplification, a corresponding recognition or retaining of foreign currency translation differences in profit or loss can be considered (see Beck’scher Bilanzkommentar, Section 303, note 21). In particular in light of the simplification of the currency translation that BilMoG strives to achieve, this approach is presumably not questionable and it is already being implemented frequently in practice.

In light of this heterogeneous opinion, it seems that it is permissible either to eliminate or to retain currency translation effects from intragroup financing. Of course this "de facto option" should be exercised consistently in accordance with commercial law principles and therefore determines the feasibility of retaining valuation units recognised in the separate financial statements in consolidated financial statements under HGB.

Retention of valuation units formed according to Section 254 HGB in consolidated financial statements under German commercial law

Section 298 (1) HGB states that Section 254 HGB (valuation units) is also applicable to consolidated financial statements under HGB. Section 298 HGB requires, however, that there is no deviation in the characteristics of the consolidated financial statements. The requirements for the recognition and financial reporting of valuation units according to Section 254 HGB (and indirectly according to Section 298 HGB) are specified in the Statement on Accounting issued by the Auditing and Accounting Board of the German Institute of Public Auditors (IDW RS HFA 35).

One of the consolidation principles set forth in Section 300 (1) HGB is the combination of the financial statements pursuant to the law applicable to the parent. Consequently, the parent company's interest is replaced by the assets, liabilities, prepaid expenses, deferred income and special items of the subsidiary. These items are to be recognised fully in accordance with Section 300 (2) HGB. Pursuant to Section 308 HGB, valuation is to be consistent across the group. This does not expressly require reassessment of valuation units. As the prevailing opinion (also from a group perspective) is that the effects from foreign exchange risks normally occur at "realisation" at the latest, a valuation unit recognised in the separate financial statements can in principle be continued in the consolidated financial statements under German commercial law once the general requirements of Section 254 HGB are met.

The two approaches for the presentation of foreign currency hedging under IDW RS HFA 35, item 75 et seqq., the net hedge presentation method and the gross hedge presentation method, contain inherent differences when it comes to justification and specific recognition. Nonetheless, both methods lead to appropriate accounting treatment once the option to recognise currency translation effects described above is exercised properly and the general requirements for the recognition of valuation units are met by the reporting company.


It can be noted that for consolidated financial statements under German commercial law, it is also possible to recognise the economic results of intragroup loans denominated in foreign currency.

Source: KPMG Corporate Treasury News, Edition 70, August 2017
Author: Robert Abendroth, Senior Manager, Wirtschaftsprüfer, Finance Advisory,

© 2019 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative (“KPMG International”), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten.

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