Accounting for the inflation adjustment premium

Against the backdrop of the economic burdens, in particular the development of energy prices as a result of the Ukraine crisis, the Third Relief Package for Employers created the legal framework for tax-free, financial support for employees. Accordingly, benefits to mitigate the effects of inflation can be granted tax-free up to an amount of EUR 3,000. The inflation compensation bonus, which is generally granted in two installments (IAP I and IAP II), can be paid out divided into several amounts and is limited in time until December 31, 2024. Since employers are free to determine the specific form of this benefit, there are various aspects that should be included in these considerations. In addition to the possibility of using the inflation compensation bonus as an employee retention tool, the commitment should be designed in such a way that the tax requirements for tax exemption of the bonus, in particular the one-time grant in addition to the agreed remuneration, are observed. This means that the inflation compensation bonus may not be offset against an already existing remuneration claim or an already agreed future increase. The guidance issued by the tax authorities on the so-called Corona bonus can provide guidance on this issue.

IDW provides guidance on accounting for inflation compensation premium

The Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) has developed the following guidelines for the presentation of employer obligations in the financial statements. In addition to commitments based solely on the statutory framework, this also includes provisions arising from collective tariff agreements. Essential to the question of the amount of the provision to be taken into account as of the balance sheet date, or the expense for the fiscal year, is the distinction between the cut-off date defined by the employer, on which the entitlement to investment compensation premium arises, and the date of payment. If the cut-off date for granting and payment of the first part of the inflation compensation premium has already occurred in calendar year 2022, the corresponding expense is to be allocated to fiscal year 2022. If the employer sets a cut-off date for the accrual of the entitlement after the balance sheet date of December 31, 2022, there are no obligations as of the balance sheet date and, to that extent, fiscal year 2022 is not charged with an expense. To the extent that a cut-off date for the accrual of the entitlement is prior to the balance sheet date and the premium is paid in full or in part after the balance sheet date, the question arises of pro rata temporis recognition of the obligations as of December 31, 2022, with the start of the underlying twelve-month period for the accrual of the obligations being September 1, 2022, as in this respect the legal basis for the granting of the premium came into effect retroactively. Depending on the structure of the commitment, the expense will be recognized pro rata temporis at 4/12 or the total amount of the first part of the bonus will be attributable to fiscal year 2022.

In addition to the legal basis for granting the inflation compensation premium, further criteria for the period allocation of the expense may result from collective bargaining agreements that may need to be observed. Overall, it is clear that the question of period allocation is very much dependent on the content of the respective commitment. In this respect, there is scope for accounting in the financial years 2022, 2023 and 2024.