Why asset accounting is not a reliable tool for determining insurance values

20th March 2023 by P. Merker

Many companies adopt the values from asset accouting one-to-one for the company’s property insurance. However, the fixed asset summary is not an insurance summary. Both instruments serve different operational purposes.

It is therefore not surprising that the unchecked transfer of asset accounting leads to incorrect insurance sums. The consequences are underinsurance or excessively high insurance premiums.

Careful! Many insurers restrict an underinsurance waiver if the insured value is determined solely on the basis of the asset accounting, namely on the items recorded there.

We would like to show where the pitfalls lie and how to do it better.

1. What is the function of asset accounting?

Asset accounting can be found in almost every company: Either because the legislator wants it that way or the entrepreneur or even both.

Asset accounting records the acquisiton or production costs of fixed assets under tax and commercial law and documents depreciation, write-ups and residual values of the individual assets. The fixed asset summary (also known as the fixed asset grid), which is published by companies as an  annex to the annual financial statement, is created on the basis of the fixed asset accounting.

This means that the rules of commercial law and tax law apply to fixed asset accounting. These laws determine the values at which fixed assets are to be recognised and how changes are to be recorded.

However, these rules do not apply to business property insurance.

Note: Asset accounting is made for tax and commercial law, not for insurance! For insurance purposes, it must therefore be adapted.

2. What, on the other hand, is the task of insurance valuation?

When determining the insurance value, on the other hand, the question is what amount would have to be spent in the insured event in order to procure the insured object as good as new. It is therefore a question of replacement values, restoration costs and new values.

The definition is found in the  Versicherungsvertragsgesetz (§ 88) .

3. What are the pitfalls of using asset accounting for insurance valuation?

There are basically two problem areas, that need to be circumnavigated:

  1. Not everything that is recorded in asset accounting is automatically part of property insurance. At the same time, not all tangible assets that are to be insured are recorded in asset accounting.
  2. Often the valuations listed in the asset accounting cannot be used for insurance.
Der Anlagenspiegel ist kein Versicherungsspiegel: Wer allein auf die Anlagenbuchhaltung vertraut, um Versicherungswerte zu ermitteln, riskiert Unterversicherung und zu hohe Prämien.

The fixed asset schedule is not an insurance schedule: those who rely solely on fixed asset accounting to determine insurance values risk underinsurance and excessively high premiums.

It is immediately obvious to first clarify problem area 1 before dealing with the value approaches.

Below are some examples (not exhaustive) to illustrate the problem.

a) Distinction between building and operating equipment

First of all, it is important to distinguish between buildings and operating equipment in terms of insurance. We have already dealt with this topic in detail here: „Building or equipment – that is the question“. Therefore, we will not go into further detail on where exactly to draw the line.

However, we would like to justify why the accrual is important despite the usual summation adjustment:

Due to different price developments – a very relevant topic especially in today’s world – the new values or replacement costs for buildings and furnishings change very differently. If value supplements or indices are used in the calculation – especially if flat-rate adjustment factors are used –  incorrect allocation can lead to incorrect sums insured.

Because of the great relevance, we have also dedicated a separate article to the topic of  “Value Supplements in industrial property insurance”. There we show how to determine and apply them correctly.

b) Differentiation within the technical equipment

However, the work is not done with a clean – insurance-related – demarcation between the building and the operating equipment. An analysis must also be made within the technical and commercial equipment,

  • wether certain repair materials, spare parts, tools and production equipment, which are current assets for tax purposes, are to be allocated to the technical equipment for insurance purposes;
  • wether prototypes, models, samples, exhibits etc., which are recorded as fixed assets, should be eliminated for insurance purposes;
  • how Software has been accounted for: In intangible assets or in facilities. Software that is an integral part of a technical installation must also be allocated to the installation for actuarial purposes.

Vehicles with road registration are also business assets, but are usually covered by motor vehicle insurance – in contrast to vehicles that do not have road registration.

The same applies to  electronic devices, which are covered by special electronics insurance.

c) Third party property

In principle, only the property of the enterprise is recorded in the fixed assets of a company. Exceptions can be, for example, goods acquired under retention of title by the seller or leased assets.

Therefore, it must be checked with regard to the insurance agreements whether third-party property is also insured. If so, it should of course be included in the sum insured.

For leased assets, the accounting depends on what was agreed in the lease contract. From an insurance point of view, however, the agreements with the insurer are decisive, so it is not sufficient to rely solely on asset accounting.

It is important to match the details of the leasing contract and the insurance conditions in order to fully cover all insured property – regardless of legal ownership.

d) Disposed Assets

Honestly, we have not seen any, really any, asset accounting in which there was not some asset listed that no one could tell where it actually was!

This means that fixed assets that no longer exist are regularly found in asset accounting and therefore do not need to be insured.

A second mistake often made is to take the book value of the asset grid out of the sum insured. It would be correct, however, to remove the retirements with the new values as well.

In practice, the incorrect valuation of disposed assets is often the cause of over-coverage and thus of premiums that are too high!

e) Buildings and installations acquired or constructed before 1977

Buildings that were acquired or constructed before 1977 could be recorded in the fixed asset accounts at their book values at that time as acquisition or production costs. This is a result of the Accounting Directives Act, which has only prescribed the recording of acquisition or production costs in the fixed-asset movement schedule since 1987. In many cases, however, these were only available for the previous 10 years (i.e. up to 1977) when they were first applied. Therefore, the law allowed book values to be used as a basis.

This also applies to operating equipment. Only today we will hardly come across operating equipment that is almost 50 years old, whereas 50 years is not an unusual age for buildings.

f) Exemptions for tax and commercial law accounting

Commercial and tax law generally stipulates that all assets must be recorded and valued individually and completely. However, there are exceptions, for example in the form of  group evaluations, for low-value assets  or in the form of the formation of a fixed value.

If, for example, the low-value assets are recorded as operating expenses, they do not even appear in the asset accounting.

In the case of group and fixed values, the principle of always reporting the actual, individual acquisition or production costs is broken.

This means that we can neither rely on the completeness nor on the acquisition values for these items.

When determining the insurance values, it is therefore always necessary to look at the importance of these goods in the company and how they were recorded.

As these are mostly items of minor importance, one should proceed  pragmatically and nevertheless bear in mind, that small flocks also make a mess.

g) Subsequent production or acquisition costs

When already existing facilities are subsequently expanded, converted or extended, the cost incurred for this must be capitalised and added to the original acquisition or production costs.

In this very practical case the subsequent costs are therefore recorded with  incorrect acquisition years. If one now extrapolates to new values in order to determine the insured values, one systematically obtains incorrect sums insured. 

h) Used machinery, plant and equipment

A frequent challenge in determining insurance values by means of asset accounting is used machinery, plant and equipment, purchased on the secondary market or from insolvencies. In the case of this assets, the  second-hand market price can be found in the asset grid – which, by its ver nature, is not a new value.

However, the use of second-hand market prices for the determination of insurance values is generally not suitable, because in the event of damage it will seldom be possible to acquire a comparable machine again second-hand in the short term.

However, there are exceptions:

If you prove and document within the framework of the insurance value assessment that the second-hand market always has a suitable offer for the machine. Either way, a very critical look at the values in asset accounting is necessary, especially in the case of second-hand machinery.

i) Discounts and overpricing

The same problem arises if you have been able to negotiate particularly good  discounts or have found a  “trade fair bargain”. In these cases, too, the recorded acquisition costs are too low for insurance purposes.  Grants and investment cost allowances also usually reduce the acquisition costs to be recorded for accounting purposes. Therefore, these cannot be taken over for the sum insured without further ado.

Incidentally, the same applies with the opposite sign, if overprices were paid, for example because a machine had to be delivered particularly quickly. In this case, the acquisition costs may be too high for insurance purposes.

It is therefore important to check and adjust the prices actually paid.

j) Machinery and equipment manufactured in-house

In the case of machinery and equipment produced by the company itself, the entrepreneur’s profit and the company’s own labour are generally not included in the capitalisation. However, this leads to the fact that the recorder acquisition costs are too low when it comes to determining the insurance-relevant replacement values, which assume external services and thus also include these costs

k) Other business transactions

There are other circumstances to be aware of, but in practice these tend to be rare, especially for technical equipment, because of the shorter useful lives. These include hidden reserves, dissolved reserves, businesses from the former GDR, standard values from 1959 or earlier, and changes in inout tax deduction and VAT.

Nevertheless, in real life we are often surprised how durable machines and systems can be and what old “treasures” can be found in the production halls.

As you can see, it is extremely unlikely that all blurbs and errors will cancel each other out to the correct sum insured. In this case, you should play the lottery – because the stars are favourable for you right now …

4. Which methods are more suitable for determining the insurance values?

The surest way to obtain correct insurance values is to create and maintain a separate “insurance inventory”.

The gold standard is to conduct a comprehensive insurance inventory in a first step to record all machinery, equipment, buildings and commercial equipment on site.

In a second step, the replacement value of each assetis determined independently of the acquisition or production costs listed in the asset accounting. On this basis, the respective value adjustments to the base year can be derived. With this insurance schedule, the insurance values can be updated in the following years with high accuracy and little effort.

Since a complete inventory on site is not always the best way to go for economic and time reasons, asset accounting often provides a good first overview of the size, structure, age and value of the machinery fleet.

Based on asset accounting and experience knowledge, we can decide which elements need to be included on site and which do not. The same applies to the valuation methods, which can include individual revaluations, taking over values from asset accounting using individual indices, estimated values or other approaches.

5. Conclusion

n summary, a reliable insurance valuation based on asset accounting is possible if one knows the pitfalls and proceeds carefully.

Once you have an insurance statement, it is easy to continue it in the following years by

  • correctly recording additions and disposals,
  • calculating and applying individual value adjustments,
  • and, if necessary,taking into account current values.

How long can one “update”?

This depends on the one hand on the investment strategy and on the other hand on how carefully the insurance assets are maintained. As a rule, five to ten years are realistic.

It’s a bit like going to the dentist: with good care, it lasts longer; carelessness when cleaning becomes expensive.

Sounds good? Give us a call, we’ll be happy to advise you!

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Philip Merker Expert for the appraisal of machinery and technical equipment

Philip Merker, MBA

Certified expert for the evaluation of machinery and technical equipment (DIN EN ISO / IEC 17024)

Telephon +49 40 602 13 33

Email ­info@sv-merker.de