August 12, 2020 · 6 min read
When accounting for non-current assets, enterprises may encounter a situation where a fixed asset is on the balance sheet, and its initial cost equals the amount of accumulated depreciation. However, despite the fact that the useful life of this asset has expired, it may still be suitable for further use. Since you can independently determine the period over which a particular fixed asset will be used in accounting (while usually taking into account the minimum permissible periods established by law according to paragraph 26 of P(S)BO 7), the actual useful life of such an asset may be longer. In such a case, an organization may have a fixed asset suitable for use, but it is fully depreciated in the accounting records. Thus, the question arises: How should such an asset be properly reflected in accounting?
Next, let's consider one of the options for action when a fully depreciated asset is identified in accounting. As stated in paragraph 16 of P(S)BO 7, an enterprise may revalue an asset if its residual value differs significantly from its fair value at the balance sheet date. From this, we conclude that an organization may, but is not obliged to, revalue an asset with a zero residual value. Moreover, keeping such a fixed asset on the enterprise's balance sheet does not contradict the norms of P(S)BO 7. After all, assets that continue to be used by the company and whose residual value is zero are subject only to quantitative accounting.
If you still decide to undertake such a rather labor-intensive process as the revaluation of fixed assets, we remind you that it requires determining a materiality criterion. As recommended by the Ministry of Finance, the materiality threshold can be set as: 1 percent of the company's net profit (loss) (paragraph 34 of Methodological Recommendations No. 561), or a 10 percent deviation of the residual value from the fair value of fixed assets (paragraph 34 of Methodological Recommendations No. 561).
However, the company can independently establish the materiality criterion. In doing so, it is necessary to ensure that a properly drafted order on the accounting policy of the enterprise and a manager's order on conducting the revaluation are in place; for example, the latter should specify the group of fixed assets and the date of their revaluation.
Also, from our point of view, revaluing an asset will require spending a certain amount of money and time to find a company capable of conducting an expert valuation of non-current assets. This is evidenced by Article 7 of Law No. 2658, which states that to determine the fair value of assets, it is necessary to engage a professional appraiser. If you carry out the revaluation of fixed assets on your own, it will be invalid (Article 8 of Law No. 2658). Furthermore, during a self-assessment, you might accidentally underestimate the tax base, for example, for corporate income tax, and in some cases, VAT. In this event, during an audit, a fine and penalty will be imposed (Articles 123 and 129 PKU).
Another negative aspect of conducting a revaluation is that once a final decision is made to revalue one fixed asset, you will be forced to revalue all assets of the same group. Moreover, the revaluation procedure will need to be carried out regularly, so that the residual value of the revalued assets does not differ significantly from their fair value (paragraph 16 of P(S)BO 7).
A positive aspect of revaluing fixed assets is that it will increase the value of assets and the amount of revaluation surplus, which is part of equity. This will lead to increased interest from investors and creditors.
Impact of Revaluation on Tax Accounting
The financial result may be adjusted for differences arising from the depreciation of fixed assets and reduced by the amount of their revaluation within the limits of previously expensed impairments in accordance with legislation (paragraph 138.2 PKU).
If no impairment was carried out in previous periods, the financial result is not increased by the revaluation amount.
Thus, the revaluation of assets will be reflected as part of the revaluation surplus and will not affect the corporate income tax base if it is carried out for the first time. Subsequent revaluations will affect the financial result before taxation, but only if impairments were carried out in the past.
Regarding the impact of revaluation on VAT, Article 185 PKU states that the object of taxation is operations involving the supply of goods, and activities related to the revaluation of fixed assets do not fall into this category. Therefore, VAT tax liabilities do not arise.
However, we warn that sometimes conducting a revaluation can affect VAT accounting. For example, if a fixed asset has been revalued, then in the event of its sale, the VAT tax base must be determined taking into account the revaluation (Article 188 PKU).
Also, we deem it necessary to note that if the useful life of an asset has expired, but the asset continues to generate economic benefits, in addition to conducting a revaluation, one can increase the period of useful life of such an asset (paragraph 25 PBO 7). This approach is called quantitative accounting, as the assets do not actually affect the determination of the financial result, but they continue to participate in the enterprise's activities.
Thus, the useful life of a fixed asset can be revised to reduce expenses in financial statements, increase the enterprise's net assets, and for other reasons in accordance with the decision of the enterprise's manager. The change in the asset's useful life must be documented, for example, by an order from the enterprise.
After establishing a new useful life for an asset with a "zero" residual value, depreciation will not be accrued in the future, and depreciation accrued in the past is not subject to recalculation. This is explained by the fact that such adjustments are changes in accounting estimates, which affect the financial result of the reporting and future periods (paragraph 8 of P(S)BO 6).
Summarizing the above, we make the conclusion that you have the right to independently decide on the revaluation of a fully depreciated asset, as its retention on the balance sheet does not contradict legal norms. In the event of a revaluation, you can expect a positive tax effect; however, if your enterprise applies tax differences, there will be no economic effect.
Accountant
Hnes Oksana
