Types and methods of valuation of fixed assets

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Fixed assets (PE) are tangible assets owned or owned by an entrepreneur that are fit to be used as part of a business and have an expected useful life of more than one year. In accordance with the law, fixed assets are subject to depreciation. However, before determining the method of depreciation, the taxpayer must make an assessment. This is the basis for calculating depreciation.

Different types of fixed assets assessments need to be known in order to correctly maintain accounting records for these research objects, as well as to calculate tax payments on them. Different aspects of an enterprise's activities are associated with different types of assessments.

Fixed assets: essential characteristics

Fixed assets are material objects and equivalent resources, which at the same time meet the following conditions:

• Expected useful life exceeds one year;
• they are suitable for use for specific purposes, namely in production or in the provision of services (paragraph 4 of PBU 6/01);
• intended to generate income infuture;
• expended during the application period;
• no resale planned.

These, in particular, include (clause 3 PBU 6/01):

• real estate, including land (even with a perpetual right of use), buildings and structures, as well as individual premises with joint ownership of them;
• cars, devices, transport;
• mechanisms and inventory;
• objects handed over for repair;
• capital and financial investments;
• draft cattle, etc.

The "completed and usable" condition means that separately purchased items such as a computer, central unit, monitor, keyboard are not considered fixed assets, but only their totality, accepted for use as a finished item. Fixed components are also not considered fixed assets that must be repaired before commissioning, as they, in turn, do not satisfy the “serviceability” condition.

Evaluation of fixed assets and acquisition methods

Evaluation of fixed assets - determination of their value. All categories are valued at the date of purchase, manufacture and the balance sheet date. Methods for assessing the value of fixed assets are regulated at the legislative level. Their application is established within the company depending on the type of activity and goals.

Evaluation of funds is a very effective tool for managing an enterprise and its assets. Calculation of the marketThe value of the object in the current version allows you to optimize the company's asset management policy, ensures its stability in the market, increases investment attractiveness, improves the processes of managing production and financial risks in the company. Thus, the evaluation process itself acts as the best indicator of the company's competitiveness in the market.

It has the most direct impact on the financial results of the company, its profitability, market stability. Therefore, the company's chances in solving strategic management issues depend on the correctness and reliability of the data obtained during the assessment.

It is legally stated that the assessment of the initial cost of fixed assets depends on the method of acquisition, which is presented in the table below:

OS acquisition method	OS Estimation
Purchase by Purchase	purchase price
Acquisition by inheritance or donation	market value at date of purchase
Self-created	production cost

Evaluation rules

Fixed assets that have been purchased are valued according to the purchase price. The taxpayer must understand the purchase price as the value that can be determined by the formula:

purchase price=cost of goods + costs associated with the purchase, accrued until the date of transfer of fixed assets touse + customs and excise duty (in case of import) + non-deductible VAT

The purchase price should be understood as the amount due to the seller, indicated in the purchase document, for example, in the invoice, sales contract. It is important to note that in the case of active VAT payers who purchase fixed assets on the basis of an invoice, the purchase price will, in principle, be a net amount. On the other hand, in the case of organizations exempt from VAT, it will be the gross amount.

However, when it comes to the costs associated with the purchase, which constitute an element of the purchase price and therefore increase the initial cost of the OS. They include, among others:

• travel costs;
• loading and unloading costs;
• travel insurance costs;
• assembly, installation costs;
• notary, tax and other fees;
• fees.

Main types of grades

The main methods for assessing fixed assets include:

• original;
• restorative;
• residual.

The initial cost, which is the purchase price of an asset, is increased by the cost of its improvement, consisting in reconstruction, expansion, modernization and determining the usefulness of this product after improvement, exceeding the use value, measured by the period of use, production capacity, product quality, obtained with improved OS.

Initi althe value as a type of assessment of the organization's fixed assets is reduced by the write-off of depreciation, which is carried out taking into account the loss of their value due to use in a period of time.

The cost and accrued depreciation of fixed assets may be subject to revaluation on the basis of separate provisions. The net book price determined as a result of the revaluation cannot exceed its fair value, the write-off of which is economically justified in the foreseeable period of its further use.

The difference in net asset value resulting from the revaluation is transferred to the revaluation reserve and cannot be allocated to divisions.

The initial assessment among the methods of valuation and accounting of fixed assets can be made in accordance with one of five criteria:

1. The purchase price paid for the component, minus the amount of discounts, rebates, including VAT.
2. Purchase price plus additional costs (such as loading, transportation, assembly, installation, training, etc.).
3. Production costs - costs associated with the creation of a fixed asset. Production costs include direct costs (surveying, research, remuneration for builders, etc.) and indirect costs (interest on loans taken for construction, expenses for the management responsible for construction, etc.).
4. Market value is the price of the same or similar nature of an ingredient that could be bought at a certain price at a certain place and time.
5. Fair value is the price at which two well-informed parties can enter into a transaction on market terms.

There is also the concept of net selling price - the price at which you can get the same or a similar object minus VAT and the average commercial margin. This criterion is not taken into account in the initial OS assessment.

Under the replacement cost in the methods of valuation and accounting of fixed production assets is understood the cost of reproduction of fixed assets in the current conditions, regardless of the time of their commissioning.

Residual value is understood as that part of the fixed asset price that is not transferred to manufactured products in the form of deductions. This method of estimating OS makes it possible to analyze the qualitative state of funds, calculate the coefficient of validity and wear. At this cost, fixed assets can be reflected in accounting.

The use of natural indicators for evaluation also takes place in the process of accounting for fixed assets. Such methods are used to determine the technical composition of fixed assets, when determining production capacity, when formulating tasks and plans to improve the efficiency of asset use, etc. The results are obtained during an inventory of fixed assets.

Among other options, the concepts of salvage value and book value also apply.

At the liquidation value, the evaluation process is carried out at the time when the liquidation procedure after bankruptcy is underway. At the same time, this assessment can be used to recover the company's debts tocreditors in the form of property.

Balance valuation implies the reflection of fixed assets in the balance sheet. This is a mixed methodology, since some of the objects are reflected at the replacement cost, and some at the full original cost. Such an assessment can be complete or residual (after wear).

There is a type of valuation called the market. It is understood as the value by which this OS object is estimated taking into account wear and tear and according to the actual state. At this price, the fixed asset object can be sold to another person in market conditions. In order to determine the cost using this method, the assistance of a specialist appraiser is used.

Among the main types of valuation of fixed assets can also be identified in kind. Natural indicators can be used by the company to justify development plans in this area of accounting, to calculate forecast volumes. The information in this assessment form is reflected in the inventory card for the OS object.

Initial cost: concept

One of the methods for evaluating funds is the initial price of an asset.

Fixed assets are included in the accounting books using the method of valuation of fixed assets of the enterprise at historical (gross) cost, corresponding to the following indicators:

• purchase price of purchased OS;
• production costs that arose within the company for the OS object;
• market value of fixed assets received in the form of a donation or in kind;
• gross transfer valueOS objects that are obtained through transformations (separation, merger of companies);
• assembly costs and other necessary steps to make this tool serviceable.

The initial cost of the OS used is increased by the amount:

• Costs for its improvement (reconstruction, expansion, renewal or modernization). They result in the useful value of the product after its completion exceeding its use value at the time of acceptance for use, which manifests itself, among other things, in the following: extension of the useful life, increase in production capacity, improvement in product quality using an improved fixed asset, cost reduction for its operation, increasing the area or comfort of buildings, etc.
• Reassessment of fixed assets, which is carried out on the basis of individual provisions. Both historical cost and current depreciation are subject to revaluation. The effect of the revaluation is reflected in the revaluation reserve.

The actual costs of acquiring this asset can be paid to the following counterparties:

• suppliers;
• shipping carriers;
• developers;
• contractors;
• consulting firms for services;
• to intermediaries;
• persons for the installation and commissioning of the OS object;
• to the state treasury in the form of taxes and duties.

The following expenses are not included in the initial cost:

• for assets contributed as a contribution to the authorized capital;
• value donated eithergratuitous assets;
• cost of OS objects received by barter;
• capital investments in improving land fertility.

Depreciation and its role in valuation

Depreciation deductions are made by the systematic planned distribution of its initial cost over a certain depreciation period. Depreciation begins no earlier than the asset is put into operation and is completed no later than the time of depreciation or redemption.

It is assumed that the periods and corresponding depreciation rates used by an item of fixed assets or an intangible asset correspond to the periods and rates established by the applicable legal provisions.

Fundamental assets are depreciated monthly in accordance with depreciation methods: linear, in proportion to the volume of goods, by the sum of all numbers of years of useful life, declining balance.

The straight-line method of depreciation is as follows. Annually, the value of the asset is written off to the cost of the goods. The calculation formula is as follows:

A=OnF / 100, where F is the cost of the OS object (initial), thousand rubles;

On – depreciation rate, %.

Decreasing balance method involves applying the formula:

A=OsOn / 100, where Os is the cost of the object at the residual value, thousand rubles;

On – depreciation rate, %.

When using the summed years of useful life method, the formula is used:

A=PS(SR / SL), where PS is the cost of fixed assetsoriginal value, thousand rubles;

SR - term until the end of operation, years;

SL - the total number of years of use of the OS.

When using the method in proportion to the volume of goods (products), the formula is used:

A=PS(Of / He), where Of is the actual volume, thousand rubles;

It is the standard volume, thousand rubles

On the date of acceptance of the fixed asset, the period and depreciation rate are determined. The correctness of periods and depreciation rates is periodically reviewed by the entity and causes appropriate adjustments to depreciation write-offs made in subsequent fiscal years.

The above write-downs for fixed assets that have been updated on an individual allowance basis reduce the revaluation difference reflected in the revaluation reserve. Any balance from the write-off of the revaluation is included in other expenses.

Increase and decrease grades

The state and cost of own operating systems are undergoing changes that increase and decrease their price.

The increase in the application of the method of valuation of fixed assets occurs as a result of:

• self-purchase or production of a fixed asset;
• received in the form of a donation;
• received as a contribution;
• disclosure of surplus fixed assets;
• repricing (which is just a valuable change);
• overvaluation - this depends on both historical cost and current depreciation, and the consequences of this revaluationrecognized in equity;
• improvements - there is an increase in the initial cost according to the reconstruction, expansion, modernization.

Possible cost reduction.

The application of the method of valuation of fixed production assets in the event of a decrease is due to the following reasons:

• liquidation of operating systems due to their consumption, destruction;
• resale of fixed assets;
• transfers in the form of donations;
• transfers in the form of in-kind contributions;
• shortages;
• depreciation write-off.

Depreciation is the process of depreciation as a result of physical and economic wear and tear and the gradual transfer of this value to products made using it. For example, land where minerals are not used using an open method is not subject to write-off.

There are times when permanent depreciation occurs. It occurs when there is a high probability that a component controlled by the entity will not result in the expected economic benefits in the future. This may occur, for example, as a result of the designation of an object for liquidation or the occurrence of adverse changes associated with the use of this measure. Permanent impairment of property, plant and equipment is included in other operating expenses.

Rating indicators

Among the indicators for assessing fixed assets are:

The indicator of physical depreciation shows the degree of depreciation of the fund when it is used, that is, it indicates what part of the cost of fixed assetshas already been reimbursed to the owner in the form of depreciation. Formula for calculating the assessment of the state of funds:

K=C / Osp, where C is the total wear value, thousand rubles;

OSp - the initial price of the fixed asset, thousand rubles.

The expiration rate shows what is the share of the non-worn part of the fixed assets, that is, what part of the cost of the fixed asset has not yet been reimbursed in the form of depreciation. The coefficient is opposite to the first indicator when assessing OS. The calculation is made according to the formula:

K year=1 - K.

Basics of Accounting

The organization of accounting and evaluation of fixed assets is carried out on account 01 "Fixed assets". This account reflects all operations on received funds through account 08 "Investments in non-current assets". This account can be called an intermediate account between 01 and 60 "Payment to suppliers". When an object is accepted for accounting, all costs are written off to Dt account 08, and then from the credit of this account they are transferred to the debit of account 01. From this moment, the introduction of the OS object into operation is considered. The process of disposal and write-off takes place from account 01.

Account 02 is used for depreciation charges.

Example of postings when applying methods of accounting and valuation of fixed assets:

Dt 08 – Ct 43, 41, 10, 60, 70, 69 – initial cost formation.

Dt 01 - Ct 08 - statement in accounting on the balance sheet.

Peculiarities of assessment in urban economy

Methods for valuing fixed assets in the urban economy involve the use of value terms.

An obligatory element of accounting is an inventory in the municipal economy. It means inspection of the buildings of the district when examining their structural elements. Based on such an inspection, an assessment of the value of objects is carried out and the level of wear is determined. This is the essence of total inventory.

During the current inventory, all changes that are possible in the process of overhaul and redevelopment are recorded.

The following methods of valuation of fixed assets are used in the municipal economy:

• at original cost at the time of purchase, including delivery and installation costs;
• at replacement cost, which shows the cost of reproduction of the OS object.

Fundamentals of Performance Evaluation

Optimal management of fixed capital is the creation of conditions for its maximum use while maintaining it in proper technical condition.

There are two factors to evaluate the efficiency of OS usage. The indicators for evaluating the effectiveness of fixed assets include:

• performance;
• profitability.

Performance is the ratio between sales cost and OS cost. This indicator refers to return on assets. Evaluation of the effectiveness of fixed assets by this coefficient can be determined as follows:

Fo=V / OS, where B is the proceeds from the sale of the company, thousand rubles;

OS - cost of OS objects, thousand rubles

The profitability ratio is the ratio of profit per unit value of an asset. The calculation is carried out according to the formula:

R=PE / OS, where NP is net profit, thousand rubles

These indicators for assessing the effectiveness of fixed assets can be calculated in natural units (even mixed ones).

The analysis usually does not include all fixed assets, but production assets, including machinery and equipment.

These methods of assessing the efficiency of the use of fixed assets of an enterprise reflect many factors that affect the profitability or performance of fixed assets.

There are extensive and intensive factors. Extensive factors can make these ratios unreliable to estimate - they reduce the reliability of these two measures.

Optimal use of the OS reduces unnecessary investment costs and too frequent purchases of new equipment. Expansion of production and cost reduction affect the increase in profits received by the enterprise. The increase in the indicator can be used for various purposes, for example, for upgrading, raising wages, buying new equipment, acquiring more raw materials. Therefore, the mechanism functioning on the basis of feedback consists in a better use and application of methods for assessing the effectiveness of the use of fixed assets.

Revaluation basics

Types of valuation and methods of revaluation of fixed assets in a company are closely related. Consider the essence of the concept of revaluation.

Provisions of legislation and other legal acts imply the need to update the OS assessment. The revaluation of fixed assets is associated with the following characteristics:

• reducing their cost;
• increasing their value based on separate regulations.

Permanent impairment occurs when it is highly probable that the asset will not deliver significant or overall foreseeable economic benefits in the future.

The reason for the permanent depreciation calculated by the methods of valuation of fixed assets can be, for example:

• change in production technology;
• liquidation;
• retirement.

The revaluation process takes place using mathematical recalculation:

• price or current value;
• depreciation amounts.

In a situation where, after the revaluation, the cost of the fixed asset has increased, it is revalued, which is included in the additional capital. The revaluation is credited to the financial result as part of other income.

The markdown is reflected in results as miscellaneous expenses and reduces additional capital.

Conclusion

Thus, under the assessment of OS objects we understand the method of accounting for labor instruments that have a natural form and are subject to mandatory use in the production process. The transfer of a part of the cost of such objects to the cost of the final product refers to the concept of depreciation. All rules and methods for assessing the fixed assets of an enterprise can be regulated using PBU 6/01.

Evaluation of fixed assets is necessary in a situation where it is necessary to take into account the company's tangible assets that are used in kind.

When assessing fixed assets, two types must be taken into account: in kind and in cash. At the same time, the use of the natural form gives a qualitative description of the fixed assets object, and the monetary form is used in determining tax liabilities. Therefore, the calculation of various types of fixed assets cost is a very important step.

Assessment of the state of fixed assets allows the company to determine the effectiveness of their use and develop a plan for the renewal and modernization of fixed assets.