German businesses are legally obligated to draw up a statement of financial position at year-end. A key component of this balance sheet is the business’s current assets. This article will tell you what a current asset is, what it entails, and how it differs from a noncurrent resource. We’ll also explain why short-term assets are important for firms operating domestically, and how requirements in Germany differ from international regulations. Plus, at the end of this article, we’ll give you information on how to calculate current assets, along with two concrete examples.

What’s in this article?

• Definition: Current assets simplified
  
• What’s the difference between current and noncurrent assets?
  
• What do current assets entail?
  
• Why are current assets important for businesses in Germany?
  
• Requirements regarding current assets in Germany vs. internationally
  
• How to calculate current assets
  
• Examples of current assets
  

Definition: Current assets simplified

On a company balance sheet, the current assets item contains all acquisitions held for sale, processing, or consumption. They do not stay in circulation indefinitely; instead, they shift to other forms or to cash within a limited or medium term. As a result, such items carry a brief lifespan and yield quick conversion to money.

What’s the difference between current and noncurrent assets?

The total holdings of an organization fall into two main categories: current and noncurrent assets. Both types play a distinct role in daily operations and follow their own set of regulatory requirements.

Unlike short-term items, long-term ones remain in the organization and are applied over an extended period to support ongoing activities. They include:

• Tangible assets, such as machines, vehicles, or office equipment
  
• Intangible assets, such as patents, licenses, and trademark or brand rights
  
• Financial assets, such as holdings, securities, or bonds
  

§ 247.2 of the German Commercial Code (HGB) specifies the scope of long-term holdings. Current assets are determined according to the exclusion principle and encompass all resources that are not noncurrent.

What do current assets entail?

§ 266 of the HGB describes current assets in detail as part of the breakdown of a balance sheet, which lists all the items contained under that section, broken down by type.

What falls under current assets

Not all securities fall into the near-term category. They are listed in that group only when held as temporary reserves of cash or when the organization plans to keep them for a limited period. The intended purpose at the time of acquisition ultimately decides whether a security belongs to the current or noncurrent category.

Why are current assets important for businesses in Germany?

§ 242 and § 264 of the HGB obligate businesses in Germany to prepare annual financial statements. These consist of the balance sheet and a profit and loss statement, plus notes and a management report as appropriate. The balance sheet provides a comprehensive overview of the business’s holdings, earnings, and financial position. Current assets play a core role here as they represent a substantive portion of their resources. Correctly accounting for current assets is hence key when it comes to compliance with the statutory regulations.

They are also important for businesses in Germany with respect to the following:

Securing liquidity

Every organization faces ongoing obligations that it must resolve promptly. These contain payroll, supplier invoices, taxes, or loans. Current assets ensure the liquidity needed to cover these liabilities. Insufficient near-term resources could result in bottlenecks, which can put a firm’s solvency at risk. Liabilities that are settled too late or not at all can also hurt the level of trust enjoyed with business partners and investors.

Stability and flexibility

Firms that use forward-looking cash flow planning and utilize their current assets efficiently can avoid unnecessary borrowing, thereby reducing interest costs. They are also better placed to react to seasonal fluctuations, sudden market developments, or unexpected expenses. Anticipatory short-term resource planning can therefore improve financial stability and give you greater flexibility in how you manage your business.

Profitability

Not having enough current assets can lead to defaulting on payments, while having too many can reduce profitability. Enhanced near-term resources enable businesses to quickly convert their investments in inventories and receivables to cash. The faster this capital becomes available, the more an organization can channel it toward growth, avoiding unnecessary lockups. That means you can increase your profitability if you use your current assets efficiently.

Balanced management

3.4 million businesses in Germany are small and medium-sized enterprises (SMEs)—that’s 99.3% of all firms in the country. A balanced approach to managing current assets is important to these sorts of outfits, as they are reliant on evenhanded liquidity planning. Industries with rapid production cycles—such as retail, manufacturing, or services—face this most acutely, since excess inventory diverts funds toward storage instead of fueling growth. Understocking can create bottlenecks in production or delays in deliveries.

Requirements regarding current assets in Germany vs. internationally

The requirements for reporting current assets in Germany are set out in the HGB and are binding for the majority of domestic firms. Exchange-listed entities, however, are subject to the International Financial Reporting Standards (or IFRS for short). Parent companies that are not capital market-oriented can voluntarily prepare IFRS-compliant consolidated statements. § 315a of the HGB stipulates which additional regulations apply in this case.

The HGB’s primary purpose is to protect creditors, requiring that holdings and obligations undergo cautious valuation. The IFRS, on the other hand, is primarily intended to safeguard investors and strives to present the most realistic possible illustration of a business’s resources, earnings, and overall position. This difference is evident in several key accounting and measurement aspects.

HGB vs. IFRS: The most important differences for current assets

Below are some of the notable differences between the HGB and IFRS:

Asset measurement
German commercial law requires that items be recorded at historical cost, while the IFRS mandates valuation based on market values.

Goodwill
Goodwill is the additional value a business has beyond material things, such as buildings or machines. Factors, including brand awareness or customer relationships, shape it. The IFRS requires organizations to recognize this premium in equity and reduce it when its worth declines. The HGB, on the other hand, requires goodwill to be written down over a set period, regardless of whether the business’s value is actually decreasing.

Internally generated intangible assets
The HGB does not, in principle, allow for the posting of internally generated intangible assets, such as licenses, brands, or software, to the balance sheet. Still, businesses do have a choice if these goods constitute part of their current assets. Per the IFRS, firms must capitalize these kinds of nonphysical items, provided that the business draws an economic benefit from them and can measure them reliably.

Revenue recognition
The IFRS allows entities to recognize income in advance—for instance, by gradually entering earnings from a contract manufacturing order as work progresses. By contrast, the HGB records earnings only once realization occurs and demands immediate recognition of losses as soon as they emerge.

Tax valuation
An HGB-compliant annual financial statement also serves as the basis for computing a business’s taxable profits. An IFRS-compliant statement, on the other hand, is not utilized for tax purposes.

How to calculate current assets

§ 247.1 of the HGB places near-term items on the holdings side, listed under fixed assets. The structure places items in order of convertibility, so the further down you go, the more readily they transform into cash. To calculate current assets, all relevant line items are recorded and totaled.

In certain situations, net working capital results from subtracting short-term obligations from near-term holdings. The net current assets indicate the portion of short-term resources that a business actually has at its disposal.

Stripe Revenue Recognition can help you correctly calculate current assets by allocating all revenue to the correct reporting period. Income counts as realized as soon as the organization generates it, providing reliable figures that enable precise measurement of earnings. Revenue Recognition also reduces the risk of accounting errors and failed transactions.

Examples of current assets

Below, you will find two made-up examples of current assets on a balance sheet broken down according to § 266 of the HGB.

Example 1: Small retail business

Example 2: Medium-sized mechanical engineering company