Depreciation for extraordinary technical or economic wear and tear must be recognized if the asset is impaired either in its substance or at least in its use. This is the case if an external event has a direct (physical) impact on the asset. Exceptional technical wear and tear therefore exists, for example, in the event of fire damage.
Practical example:
A company warehouse is destroyed by fire. The warehouse is part of the business owner's fixed assets and has a book value of €100,000 in his fixed asset register. The insurance company pays compensation of € 150,000. Hidden reserves of € 50,000 are therefore uncovered, which can be transferred to a tax-neutral reserve.
Hidden reserves may only be transferred to a replacement asset. The new asset must therefore fulfill the same or an equivalent economic function as the retired asset.
Practical example:
In the case of a car, an unforeseeable, exceptional event of an economic or technical nature is deemed to have occurred if there is a significant restriction in use due to
- Defects in the material,
- Damage caused by natural events (lightning, flooding, etc.),
- damage due to an accident.
Important! Only straight-line depreciation - in parallel with current depreciation - entitles to the recognition of extraordinary depreciation. If declining-balance depreciation is regularly applied, the straight-line method must be used first in order to be able to claim extraordinary depreciation.
Differentiation between extraordinary depreciation and partial depreciation
Extraordinary depreciation must be distinguished from partial depreciation. Partial value depreciation - unlike extraordinary depreciation - can already be applied in the event of a permanent change in value. Unlike partial value depreciation, depreciation for extraordinary technical or economic wear and tear can be applied to any type of income if the intention is to generate income. Assets are depreciated according to schedule, e.g. on a straight-line basis, over their normal useful life. Depreciation for exceptional technical or economic wear and tear also serves this purpose, although this is only applicable if the previous allocation of acquisition or production costs no longer appears justifiable because a part has been used up or has proved to be a failure. The wear and tear must be exceptional, i.e. it must go beyond the normal wear and tear.
Date of extraordinary depreciation: Year in which the damage occurred or was discovered: Depreciation for extraordinary technical or economic wear and tear must generally be recognized in the year in which the damage occurs, but no later than the year in which the damage is discovered. This applies regardless of any claims for compensation against an insurance company. Depreciation for extraordinary technical or economic wear and tear presupposes that the economic usability of an asset has decreased due to extraordinary circumstances or that the asset suffers a loss of substance (= technical wear and tear). The prerequisite for extraordinary depreciation is therefore an impairment in use, e.g. due to the occurrence of damage.