New federal standards on fixed assets and capital investments

On 17 September 2020 the Ministry of Finance of Russia, by Order No. 204n, approved the new Federal Accounting Standard (FSBU) 6/2020 "Fixed Assets" and FSBU 26/2020 "Capital Investments".

The changes in the accounting for fixed assets concern:

• a clarification of the features of fixed assets;
• a change in the accounting treatment of low-value assets;
• a clarification of how an inventory item is determined;
• a change in the rules on depreciation and revaluation;
• the testing of fixed assets for impairment;
• a clarification of the information disclosed in the financial statements.

We set out some of them.

The key change is that no cost limit is set for recognising a fixed asset in the accounts. The organisation sets the cost limit itself (up to 100,000 roubles). An asset is recognised as low-value equipment and as inventory if its cost is below the limit set by the organisation and its useful life is more than 12 months.

The concept of the liquidation value of an item of fixed assets has been introduced. It is the amount the organisation would receive on disposal of the asset (including the value of materials remaining from the disposal) after deducting the expected costs of disposal. The item of fixed assets is considered as if it had already reached the end of its useful life and were in the condition typical of the end of that useful life. Liquidation value, in turn, is the limit for the charging of depreciation. In other words, depreciation is suspended when the liquidation value of the asset becomes equal to, or exceeds, its carrying amount.

For owners of commercial property, this makes particularly important the question of how to determine the liquidation value of buildings whose useful life, when they are assigned to the tenth depreciation group, exceeds 30 years.

In reply to an organisation's enquiry on the determination of liquidation value, the Ministry of Finance of Russia noted that the FSBU does not limit the permissible methods of determining it. It stressed that the method must secure compliance with the requirements for the formation of information in the accounts, which are laid down by the Federal Law "On Accounting" and by regulatory legal acts.

Under the FSBU, the liquidation value of an item of fixed assets may be equal to zero: a) where no proceeds are expected from disposal of the item of fixed assets at the end of its useful life; b) the sum from disposal is immaterial; c) that sum cannot be determined.

It therefore appears that an organisation may assess the materiality of the liquidation value by reference, for example, to historical cost, or by another method that the legislation does not prohibit, and apply a liquidation value of the corresponding amount.

Since the FSBU contains no criteria for determining whether the proceeds are material, the organisation may set that criterion itself in its accounting policy.

Recognising in the accounts a liquidation value equal to zero, without documentary support, carries risks: an incorrect calculation of property tax for properties whose tax depends on average annual value.

For investment property (property intended to be provided for a fee for temporary use), the FSBU introduces special rules. They apply where the property is measured at a revalued amount at each reporting date:

- the historical cost of the asset (including a cost that has already been revalued) is restated so that it equals its fair value;

- an upward revaluation or a write-down of the asset is included in the financial result of the organisation's activity, as income or an expense of the period in which the revaluation was carried out;

- assets that are revalued are not depreciated.

As to the transitional provisions, the FSBU allows two ways of reflecting the consequences of a change in accounting policy:

1) retrospective;

2) an alternative, under which the comparative figures relating to fixed assets for preceding periods need not be restated, and a one-off adjustment is made to the carrying amount of fixed assets at the beginning of the reporting period (the end of the period preceding the reporting period).

Changes concerning the accounting for capital investments:

1. It is established that the concept of capital investments is linked only to fixed assets.
2. A list is given of the costs recognised as capital investments. Improvement and restoration of fixed assets are included in capital investments.
3. The conditions for recognising capital investments in the accounts are set. In prospect, the investments must bring the company economic benefits over a long period, or help it to achieve the organisation's objectives; and it must be possible to determine the amount of the costs, or an equivalent amount, unambiguously.
4. The definition of the unit of account for capital investments is clarified. It is the item of fixed assets being acquired, created, improved or restored.
5. The moment at which capital investments are recognised is set: they must be recognised as the costs arise.
6. The accounting for particular types of cost is clarified. The cost of capital investments does not include, for example, costs arising from consumption of raw materials, supplies and the like above the norm.
7. The method of determining the amounts included in the cost of capital investments has changed. In particular, where capital investments are made on terms of deferred (instalment) payment for more than 12 months, or for a shorter period set by the organisation, capital investments include the amount that the organisation would have paid had there been no such deferral (instalment plan).
8. Mandatory testing of capital investments for impairment is introduced.
9. Uniform rules are set for writing capital investments off the accounts.
10. The requirements for disclosure of information on capital investments are clarified.

The FSBU allows the consequences of a change in accounting policy to be reflected in either way, at the organisation's discretion:

1) retrospectively;

2) prospectively, where the organisation may apply the requirements only to facts of economic life that have taken place after FSBU 26/2020 began to be applied, without changing accounting data that have already been formed.

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