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Capital expenditures or operating expenses (CAPEX or OPEX)? Opportunities for capitalization of expenses

PhD student at Harvard Extension School, Cambridge, MA, USA.

Capital and operating expenses are the two main types of costs in the business cycle of an enterprise. These costs differ from each other in nature and in the method of their recognition in both accounting and tax accounting.

Capital expenditures, or CAPEX (short for capital expenditure), represent the costs of acquiring non-current assets, as well as their modification (completion, retrofitting, reconstruction) and modernization.

The main characteristic of capital costs is the duration of their use. If a company plans to use an asset investment for more than one year, it will most likely be classified as CAPEX. What counts as a capital expenditure for a company largely depends on both its scope of activity and the established rules of its industry. For example, for one company a capital investment will be the purchase of a new printer, for another it will be the purchase of a license, and for a third the capital investment will be the purchase or construction of a new office building. In practice, capital costs for a company most often include investments in fixed assets and intangible assets.

Accounting for capital expenditures under IFRS is carried out in accordance with the standards IAS 16 “Fixed Assets”, IAS 23 “Borrowing Costs”, IAS 38 “Intangible Assets”.

Operating expenses, or OPEX (short for operational expenditure), are the costs of a company that arise in the course of its ongoing activities. Examples of operating costs are the cost of production, commercial, administrative, management expenses, etc. The main task of the company's top managers is strict control, and often reduction of operating expenses in parallel with increasing the company's income. Thus, the share of operating expenses in relation to the company's revenue is always an indicator of the effectiveness of company management.

In accounting, CAPEX results in the capitalization of costs on the company's balance sheet, which in turn increases the value of assets and the company's net profit for the reporting period (since costs incurred in the current period are capitalized and then amortized over several years). However, capitalizing costs also has disadvantages. First, the company will pay a large amount of income tax. Secondly, the company is required to test its assets for impairment on a regular basis.

Recognition of OPEX in accounting results in a decrease in net profit for the current period, but at the same time the company pays less income tax.

In practice, in approximately 80% of cases, the company immediately determines what type of costs belong to them. Discussions arise over the remaining 20%. We suggest you deal with the most frequently asked questions.

Fixed assets

If a company acquires an expensive fixed asset that it plans to use for several years, then the question of capitalizing this fixed asset most often does not arise. But if a company acquires a large batch of inexpensive objects or spare parts for an existing fixed asset, or makes expenses for inseparable improvements in leased premises, then accounting for these costs causes difficulties. What to do with them? Capitalize, recognize as inventory or immediately write off as expenses of the current period?

In order to understand this, it is necessary to return to the definition of a fixed asset in accordance with IAS 16 Fixed Assets.

Fixed assets are tangible assets that:

• intended for use in the production or supply of goods and services, rental or administrative purposes;
• are expected to be used for more than one reporting period.

The standard also clarifies when we must recognize a fixed asset. A fixed asset is recognized as an asset only if:

• it is probable that the entity will receive related to the item future economic benefits;
• price of a given object can be reliably assessed.

Therefore, when deciding whether an item is a fixed asset for accounting purposes, a company should keep in mind the following characteristics:

• purpose of the object (production, provision of services, rental, etc.);
• the expected period of use of this object;
• the likelihood of obtaining future economic benefits from the use of this facility;
• the ability to estimate the value of an object.

In practice, it is not always possible to classify an object as a fixed asset based on the above characteristics. In these cases, the company must use professional judgment and materiality.

So, let's look at some of the nuances.

Should we capitalize or recognize low-cost homogeneous items purchased in large quantities as current period expenses?

Very often, companies purchase inexpensive homogeneous objects in large quantities. For example, tools, communication devices, furniture, office equipment, etc.

The cost of one such object may be insignificant (for example, 1 thousand rubles), but the total cost of a batch of objects can be very significant for the company. What to do in such cases? Should these objects be recognized as CAPEX or OPEX?

There is no clear answer. IAS 16 in paragraph 9 says that the standard does not define the unit of measurement that should be used when recognizing an object as a fixed asset. This means that in some cases a company may combine minor, similar items into one fixed asset with an aggregate cost. The Company will need to exercise professional judgment in each individual case. It is only important to remember that the expected useful life of such objects should be approximately the same and exceed 12 months.

Example 1

The Monet coffee shop purchased 100 identical chairs for 5 thousand rubles. a piece. The coffee shop's managing manager plans to use these chairs in the coffee shop's new, renovated space for his customers to use for approximately three years. How to account for incurred costs - as part of CAPEX or OPEX? The first step is to understand whether the costs incurred satisfy the requirements of IAS 16 to be recognized as property, plant and equipment. Let's look at Table 1.

Table 1

Characteristics of a fixed asset in accordance with IAS 16	Object: chairs (100 pieces)	Fulfillment of the criterion for OS recognition
1. Purpose of the object	The chairs are intended for use by the coffee shop's customers and will be used in its ongoing operations.	Eat
2. Estimated period of use of this object	Three years	Eat
3. The likelihood of obtaining future economic benefits from the use of this object	The likelihood of receiving benefits is high, since the chairs will be used by visitors in the ongoing operating activities of the coffee shop, which generates the main revenue	Eat
4. Possibility of assessing the value of the object	The cost of a batch of chairs, amounting to 500 thousand rubles, is economically justified and documented	Eat

Based on paragraph 9 of IAS 16 and his professional judgment, the chief accountant of the Monet coffee shop decided to capitalize the entire batch of chairs as one item of fixed assets with an aggregated cost of 500 thousand rubles. and a useful life of three years. This decision is also appropriate taking into account the fact that the chairs will be used in the current activities of the enterprise, which generates the main revenue.

Capitalize or expense spare parts?

There is also no clear answer to this question. Purchasing replacement parts should be considered on a case-by-case basis and professional judgment should be used.

In most cases, spare parts, such as consumables or minor components, are classified as inventories under IAS 2 Inventories and are recognized as operating expenses as they are used.

However, there are situations when the cost of spare parts can be capitalized, that is, recognized as part of property, plant and equipment. In this case we are talking about expensive spare parts for some fixed assets. For example, a company may capitalize marine and aircraft engines, spare parts for expensive production machines, airplane seats, etc. When recording such spare parts, it is important to remember that they will most likely be capitalized separately from the main item of property, plant and equipment. For example, if the useful life of an engine is five years and the remaining useful life of an airplane is eight years, then the replacement engine in the airplane will be accounted for as a separate asset with a depreciation period of five years. The aircraft will be depreciated over the remaining eight years. In this case, the carrying amount of the replaced engine is subject to derecognition in accordance with paragraphs. 67-72 IAS 16.

Capitalize or recognize as current period expenses the costs of permanent improvements to the leased premises?

Currently, most companies rent premises for offices or industrial premises. It often happens that the rented premises are completely unsatisfactory for the tenants, so they carry out reconstruction, repairs and various improvements at their own expense.

Example 2

The management company of the Monet coffee shop chain decided to renovate the rented office and add two more offices: for a senior manager and a chief accountant. During the renovation, additional partitions were erected and glass doors were installed. These improvements are inseparable from the leased premises: as soon as the lease expires, the company will not be able to use these offices. It will also not be possible to dismantle them and use the remaining material elsewhere, since dismantling will cause significant damage to the rented premises.

So how should you account for the costs incurred - as part of CAPEX or OPEX? As we said earlier, there is no universal answer here, it all depends on the specific situation. First you need to understand whether the costs incurred satisfy the requirements of IAS 16 for recognition as property, plant and equipment. Let's look at Table 2.

table 2

Characteristics of a fixed asset in accordance with IAS 16	Object: inseparable improvements for the construction of two offices in a rented premises	Fulfillment of the criterion for OS recognition
1. Purpose of the object	Use of offices for the current operational activities of the senior manager and chief accountant	Eat
2. Estimated period of use of this object	For the remaining lease term, i.e. 9 years	Eat
3. The likelihood of obtaining future economic benefits from the use of this object	The likelihood of receiving benefits is high, since the presence of offices will allow you to use the rented premises more efficiently	Eat
4. Possibility of assessing the value of the object	The cost of expenses amounting to 1.5 million rubles is economically justified and documented	Eat

Since these costs meet all the requirements of IAS 16, the company can capitalize them and recognize them in accounting as an item of property, plant and equipment.

When capitalizing permanent improvements, useful life is often an issue. In most cases, the useful life cannot exceed the rental period of the premises. However, non-standard situations are also possible.

Example 3

The company leases premises from a parent company or from a company that is controlled by the same shareholders (that is, related parties or companies under common control). The standard lease agreement is concluded for five years and then renewed automatically. The tenant company has renovated the premises. The Company estimated that the permanent leasehold improvements have a useful life of eight years. Can a company set a longer useful life (eight years) than the lease term of the premises (five years)? In this case, it is necessary to carefully analyze the lease agreement. If the company plans to lease the premises for at least eight years and the contract provides for an automatic renewal of the lease term after five years (that is, there is a high, more than 95% probability that the contract will be renewed after five years), then the company has the right to depreciate inseparable improvements over eight years.

Intangible assets

Discussions about recognizing costs as intangible assets or writing them off in profit or loss most often arise at the stages of research, development, creation and launch of intangible assets into production or in the process of providing services. Whether costs will be recognized as CAPEX or as OPEX depends on many conditions.

First you need to understand what an intangible asset is. According to IAS 38 Intangible Assets, an intangible asset is an identifiable non-monetary asset that has no physical form.

“An asset satisfies the identifiability criterion if it:

• is separable, that is, can be separated or separated from the entity and sold, transferred, licensed, leased or exchanged individually or together with a related contract, asset or liability, regardless of whether the entity intends to do so;
• is the result of contractual or other legal rights, regardless of whether those rights are transferable or severable from the enterprise or from other rights and obligations."

IAS 38 defines the conditions for recognition of an intangible asset:

“An intangible asset is recognized if and only if:
it is recognized as probable that the entity will receive future economic benefits associated with the item;
the original cost of a given asset can be reliably estimated.”

Examples of intangible assets are trademarks, patents, copyrights, licenses, computer software, etc.

Let's consider the procedure for recognizing costs associated with creating your own intangible asset within the company. For accounting purposes, IAS 38 divides the process of creating an intangible asset within an entity into two main parts:

• stage of research;
• development stage.

Research stage

All costs that the company incurs during the research stage are recognized as expenses when incurred.

Examples of activities during the research stage are:

• activities aimed at obtaining new knowledge;
• search, evaluation and final selection of areas of application of research results or other knowledge;
• searching for alternative materials, devices, products, processes, systems or services;
• formulation, design, evaluation and final selection of possible alternatives to new or improved materials, devices, products, processes, systems or services.

All exploration stage costs are recognized as OPEX because at this stage the company cannot demonstrate with a high degree of certainty the successful creation of an intangible asset that will be capable of generating future economic benefits for the company.

Development stage

At this stage, the company can, with a high degree of probability, identify an intangible asset and prove that it is capable of bringing future economic benefits.

Examples of activities during the development stage could be:

• designing, constructing and testing prototypes and models before production or use;
• design of tools, templates, forms and dies that involve new technology;
• designing, constructing and testing selected alternatives to new or improved materials, devices, products, processes, systems or services.

The company has the right to begin capitalizing development stage costs only if it demonstrates that everyone the following criteria:

1. the technical feasibility of completing the creation of the intangible asset so that it can be used or sold;
2. intention to complete the creation of the intangible asset and use or sell it;
3. the ability to use or sell an intangible asset;
4. how the intangible asset will generate probable future economic benefits [an entity must demonstrate that there is a market for the product of the intangible asset or the intangible asset itself, and estimate the future economic benefits of the asset using the principles of IAS 36 Impairment of Assets; if the asset is intended to be used for internal purposes, then it is necessary to prove the usefulness of such an intangible asset for the company];
5. availability of sufficient technical, financial and other resources to complete the development, use or sale of an intangible asset (an example could be a developed and approved business plan and/or confirmation from external creditors of readiness to finance the development and use of the created intangible asset);
6. the ability to reliably estimate the costs associated with an intangible asset during its development.

After the company demonstrates that all six of the above criteria are met, it has the right to attribute to the initial cost of the asset all costs directly associated with the creation, production and preparation of this asset for use, namely:

• costs of materials and services used or consumed in creating the intangible asset;
• employee benefit costs [as defined in IAS 19] arising in connection with the creation of an intangible asset;
• payments necessary for registration of legal rights;
• amortization of patents and licenses used to create the intangible asset.

IAS 23 sets out criteria for recognizing interest as an element of the cost of an entity's own generated intangible asset.

However, some types of costs can not be attributed to the initial cost of the created intangible asset and are subject to recognition in expenses as they arise. These are:

• Selling, administrative and other general overhead costs other than those that can be attributed directly to preparing the asset for use;
• initial operating losses, as well as losses associated with internal inefficiency in the process of creating an asset that arose before achieving the planned level of productivity of the specified asset;
• costs of training personnel to work with the created intangible asset.

All costs incurred after the created intangible object is recognized in accounting and the start of its operation are recognized as expenses as incurred.

It should be remembered that, in accordance with paragraph 64 of IAS 38, the costs of trademarks, title data, publishing rights, customer lists and similar items created by the enterprise itself cannot be distinguished from the costs of developing the business as a whole. Consequently, such items are not subject to recognition as intangible assets. Also, goodwill created by the enterprise itself is not subject to recognition as an intangible asset in accordance with paragraph 48 of IAS 38.

Table 3

Stages of creating intangible assets within a company	СAPEX	OPEX	Comments
Research stage		×
Development stage	×		Costs are subject to capitalization at this stage only after all six criteria are met: technical feasibility of completing NMA; intention to use or sell the created intangible asset; the ability to use or sell the created intangible asset; the likelihood of future economic benefits from intangible assets; availability of resources (technical, financial, etc.) to complete the NMA; ability to reliably estimate costs.
Operation stage		×

Example 4

The ComputerSoft company is developing new software for electronic patient registration in hospitals, which has passed the research stage and is in the development stage. The company is currently awaiting regulatory approval to use the program in hospitals. The company has already received similar permission to use other software for children's clinics. The company does not expect significant problems in obtaining regulatory approval and has therefore already begun the mass production process.

In accordance with paragraph 57 of IAS 38, costs at the development stage can be capitalized after all criteria are met (see Table 3).

In practice, it is impossible to clearly determine the moment when, having fulfilled all the criteria, the company should begin capitalizing costs at the development stage. Management must always use professional judgment to make such a decision. The management of Computersoft decided that all the criteria defined in paragraph 57 of IAS 38 are met from the moment the application is submitted to the regulatory body. This action confirms that the most difficult criterion, namely the completion of the technical creation of the intangible asset, is met. In general, for many companies, filing an application with the regulatory authority and/or registering the created intangible asset will be the beginning of the capitalization of costs.

Currently, every company is faced with the issue of capitalizing costs or recognizing them as expenses of the current period. What is better for the company - CAPEX or OPEX? There is no ready-made right answer.

Before 2008, many foreign companies gave priority to capitalization of costs (CAPEX) in order to improve the net profit of the reporting year. It is no secret that for most top managers, annual bonuses and bonuses directly depended on net profit. After the 2008 crisis, many foreign companies revised the system for assessing top management and personnel and developed more complex indicators for assessing employee performance for the payment of annual bonuses and bonuses. At the same time, a trend has emerged to reduce the capitalization of costs and increase their recognition in OPEX.

It is important to remember that each company has its own specifics and each controversial case must be considered separately. It is good practice for the company to have written justification for capitalizing disputed costs in the form of annexes to accounting policies or internal memoranda. Firstly, such documentation will allow the company to argue its position before auditors, the tax inspectorate and other inspection bodies, and secondly, it will serve as the basis for taking into account similar situations in the future, especially when key employees move within the organization or leave.

The phenomenon when the costs of acquisition, further maintenance and modernization of a fixed asset are included in its cost is called capitalization of costs. The correct attribution of certain acquisitions to a company’s asset, and not to a liability, affects the value of the financial result of the activity and is necessary for understanding existing problems, achievements and development prospects.

In international financial reporting, it is customary to divide costs into two types:

1. Capital

These are expenses that will bring economic benefits to the organization for more than 12 months. What exactly will be classified as capital costs is determined by the scope and scope of the organizations’ activities. For some companies, this category includes ordering a new MFP, for others – purchasing expensive machines, for others – building a new warehouse.

In practice, capital expenditures are recognized as investments in fixed assets and non-current assets. Their accounting and evaluation are regulated by IFRS standards No. 16, 23, 38.

1. Operating

These are costs associated with the current activities of the company: funds for the purchase of raw materials, advertising and promotion of the company, remuneration of workers and managers, etc. They are classified as current period expenses.

The first type of costs is capitalized – i.e. is included in the balance sheet asset, which leads to an improvement in the financial results of the enterprise. The disadvantages of capitalization include an increase in income tax and the need for periodic revaluation of fixed assets, which involves wasting money and labor.

What costs can be capitalized?

IFRS provisions state that the following types of costs are subject to capitalization:

• for the acquisition or production of fixed assets;
• its refinement for further use;
• commissioning;
• further maintenance and repairs.

IFRS rules indicate that costs are capitalized if two conditions are met:

• they have an accurate cost estimate;
• they are designed to increase the amount of economic benefits brought by the fixed asset to the enterprise.

For example, the costs of the following actions can be added to the value of assets:

• modernization of the machine, as a result of which it began to produce more products per unit of time;
• repair of equipment, thanks to which the quality of manufactured goods has increased;
• costs for modifications that increase the “life” of the machine, etc.

Costs can be capitalized until the cost of the asset equals its fair price, i.e. will not be comparable to the amount of money that can be obtained from the sale of a fixed asset at the moment in conditions of free competition.

If costs do not have a clear monetary expression or there is no connection between them and the possibility of additional benefits in the future, they should be classified as current expenses.

Capitalize or write off as current expenses?

In the activities of an enterprise, situations are possible when the decision on capitalization depends solely on considerations of expediency and expert judgment.

For example, a cafe purchased a batch of chairs for 1 thousand rubles, which are planned to be used for more than one year. IFRS does not introduce the concept of a unit of property, plant and equipment. This means that small items can be combined into a single unit for financial accounting purposes and their value capitalized.

Whether such a decision is advisable is determined by the chief accountant or the head of the organization. On the one hand, capitalization will increase the value of assets and improve the performance of the cafe. On the other hand, it will cause an unjustified increase in income tax and force regular revaluations of another fixed asset item.

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Last time we looked at the rules for reflecting expenses for the repair of fixed assets in the accounting and tax accounting of an organization. However, the procedure for writing off costs according to IFRS requirements is different. Let's figure out what the differences are between writing off expenses for property repairs according to Russian standards and international standards.

The restoration of fixed assets should be understood as the implementation of a set of works aimed at maintaining the property in working condition or at changing the initially adopted standard indicators of the functioning of the operating system.

Currently, a broad concept of restoration work is increasingly used - “technical maintenance” of an object. It includes maintenance (a set of operations to maintain good condition) and repair (a set of operations to restore good condition).

In addition to repairs, restoration processes include modernization, reconstruction, completion and additional equipment, as well as re-equipment of production facilities.

Accounting according to Russian rules

The regulation on accounting for fixed assets (PBU 6/01 “Accounting for fixed assets”, approved by order of the Ministry of Finance of Russia dated March 30, 2001 No. 26n) stipulates that the restoration of an object can be carried out through repair, modernization (completion, additional equipment) and reconstruction.

In this case, restoration costs are reflected in the accounting records of the reporting period to which they relate.

Creation of reserves according to accounting rules is not allowed.

However, enterprises retain this right in relation to tax accounting (Article 324 of the Tax Code of the Russian Federation). In order not to record repair costs in accounting and tax accounting differently, companies have the right to establish a uniform approach in their accounting policies, that is, refuse to create a reserve for OS repairs at all.

If, as a result of modernization and reconstruction, the useful life, power, quality of use, etc., originally accepted for the object, are improved, then the costs of modernization and reconstruction of this object after their completion increase its initial cost.

A similar rule applies to tax legislation. The initial cost of fixed assets changes in the following cases (clause 2 of Article 257 of the Tax Code of the Russian Federation):

• completion, retrofitting, modernization;
• reconstruction;
• technical re-equipment.

Thus, only if the characteristics of the object are improved, amounts aimed at its modernization or reconstruction and other improvement can be included in the cost of the fixed asset. Otherwise, the costs must be taken into account as operating expenses.

The costs of maintaining facilities in both accounting and tax accounting are included in current expenses.

Accounting

The legislation provides for the following methods of accounting for the costs of repairing fixed assets:

• based on actual costs incurred;
• using deferred expense accounts.

In accordance with accounting standards, costs for the restoration of fixed assets are reflected in the accounting records of the reporting period to which they relate.

When repairs of fixed assets are carried out unevenly throughout the year, for the purpose of preliminary accounting of repair work, account 97 “Future expenses” is used. The costs of repair work accumulated on this account are written off as production (handling) costs in the manner established by the organization. This may be a uniform write-off of costs over the period to which they relate, a write-off in proportion to the volume of production, and other options.

Attention

The costs of maintaining facilities in both accounting and tax accounting are included in current expenses.

Let us dwell a little on the issue of using account 97. By Order of the Ministry of Finance of Russia dated December 24, 2010 No. 186n, changes were made to the Regulations on accounting and reporting in the Russian Federation. The amendments also affected the wording of paragraph 65 of the Regulations, according to which costs incurred by the organization in the reporting period, but relating to subsequent reporting periods, are reflected in the balance sheet in accordance with the conditions for recognition of assets established by regulatory legal acts on accounting, and are subject to write-off in the procedure established for writing off the value of assets of this type. Previously, we talked about the direct application of the article on deferred expenses. However, if a resource arises that will bring future economic benefits to the organization, the expense should not be recognized immediately in full. And it makes sense to use account 97. At an enterprise, the use of account 97 should be enshrined in the accounting policy.

Tax accounting

According to the rules of the Tax Code, funds for the restoration of fixed assets can be either current expenses of the enterprise (repair and maintenance) or capital investments in fixed assets (completion, retrofitting, modernization, reconstruction, technical re-equipment).

Expenses for the repair of fixed assets made by the enterprise are considered as other expenses (other expenses associated with production and sales) and are recognized for tax purposes in the reporting (tax) period in which they were incurred in the amount of actual expenses (Article 260 Tax Code of the Russian Federation) similar to accounting.

Capital investments are reflected in accounting in the accounts of investments in non-current assets with a further increase in the value of fixed assets. For the purpose of calculating corporate income tax, these costs increase the initial cost of the corresponding fixed assets.

To ensure equal inclusion of repair costs over two or more tax periods, enterprises are allowed to create reserves for upcoming repairs of fixed assets in accordance with the procedure established by Article 324 of the Tax Code. Let us remind you that in accounting, reserves are not created for upcoming repairs.

Costs for completion, additional equipment, reconstruction, modernization of fixed assets are recorded in the account for investments in non-current assets. And upon completion of the work they are debited from this account.

As a result of completion, additional equipment, reconstruction, modernization or technical re-equipment, the useful life of a fixed asset item may increase. Based on the new useful life of the object, it is necessary to recalculate the depreciation rate to be applied.

A distinctive feature of tax accounting is the right of enterprises to the so-called “depreciation bonus” in relation to capital investments. Capital investment costs in the amount of 10 (30) percent of the initial cost of fixed assets are taken into account for profit tax purposes at a time.

Convergence with IFRS

Let us turn to the draft regulation “Accounting for fixed assets”, which was proposed by legislators and is at the discussion stage as a federal accounting standard for accounting for fixed assets in organizations (with the exception of credit organizations and budgetary institutions). This standard is intended to replace PBU 6/01. They may introduce a new rule regarding accounting for the costs of restoring an asset for cases where the amount of restoration costs is taken into account as a component of the object.

When performing a regular audit of the technical condition and major repairs recognized as components of an asset, the organization will be able to recognize the associated costs in the actual cost of the asset component at the time of their occurrence. At the same time, any unamortized amount of costs for the previous regular inspection or repair will be subject to derecognition, that is, it will have to be written off.

The initial cost of the inventory item after overhaul/revision (Cp) in this case will be equal to:

Wed = Sp + Sk2 – Sk1, Where

Sp– the initial cost of the object – the main part;

Sk1– cost of the component – ​​previous major overhaul;

Sk2– cost of the component – ​​subsequent major repairs.

Example

The organization carried out a major overhaul of the hot-dip galvanizing line in the amount of RUB 5,133,000.

Previous similar major renovations were counted as a component of the facility. The cost of the previous overhaul was RUB 3,781,500, accrued depreciation until the date of the current overhaul was RUB 3,002,000.

The following entries will be made in accounting:

DEBIT 08 CREDIT 60

– 5,133,000 rub. – expenses for major repairs of the line are reflected;

DEBIT 01, subaccount “Disposal” CREDIT 01

– 3,781,500 rub. – the original cost of the component is written off in the form of costs for the previous overhaul;

DEBIT 02 CREDIT 01, subaccount “Disposal”

– 3,002,000 rub. – the accrued depreciation of the previous overhaul is written off;

DEBIT 01 CREDIT 08

– 5,133,000 rub. – a component of the fixed asset is reflected in the form of costs for major repairs of the line.

This is just a single example that demonstrates the actual convergence of domestic accounting standards and the rules established for the preparation of financial statements according to international standards (IFRS). In accordance with IAS 16 “Fixed Assets” (put into effect on the territory of the Russian Federation by order of the Ministry of Finance of Russia dated November 25, 2011 No. 160n), if elements of fixed assets are subject to regular replacement, then the carrying amount of the replaced parts is subject to derecognition in accordance with provisions for write-off from the balance sheet (clause 13 of IFRS 16).

The same applies to regular large-scale technical inspections of fixed assets. Any amount of previous technical inspection costs remaining in the carrying amount (as opposed to spare parts) is subject to derecognition. It does not matter whether or not the costs associated with the previous technical inspection were reflected in the initial cost of this object. The standard indicates that the cost of a previous technical inspection, in the absence of one, must be determined by calculation. The amount of costs for a technical inspection included in the book value of the object at the time of acquisition and construction can be the amount of a preliminary estimate of the costs for an upcoming similar inspection.

Recovery according to IFRS

As a rule, large organizations develop their own methods for accounting for the costs of restoring fixed assets in accordance with the requirements for preparing financial statements in accordance with international standards. At the same time, separate rules may be established for different types of costs.

Funds allocated for reconstruction and modernization of facilities, as in tax accounting, are considered in IFRS as capital investments that increase the initial cost of fixed assets. But with regard to repairs, the position in IFRS is different. As noted above, in tax accounting all repair costs are current expenses. Accounting is still only considering the adoption of changes in favor of including, under certain conditions, the costs of major repairs in the cost of fixed assets. According to the rules of IFRS, the costs of repairing objects can act as both current expenses and capital expenses for repairs.

If certain types of repairs do not meet the criteria for recognizing objects as fixed assets under IFRS, then the costs for them are recognized as current costs.

Conversely, those costs that meet the criteria for recognizing them as fixed assets are capital and increase the initial cost of the object. Such repairs are also called “capitalized”.

In accordance with IFRS 16 (clause 13), capitalized repairs are repairs with the replacement of part of an object, in which the amount of new costs for repairs and replacement of parts of an object is capitalized for the object, and the residual (book) value of the replaced part is subject to write-off.

The enterprise independently determines which scheme to use to record amounts for capitalized repairs as part of an asset.

During regular repairs, the main part of the fixed asset and the component of the fixed asset (capital repairs) are each depreciated separately.

The remaining useful life of the main part of the inventory item after the overhaul does not change; it continues to be depreciated based on the established period.

The cost of a component of an asset (capital repair) is its depreciable cost. It is depreciated for the period of regularity of this repair, which is fixed by regulatory or other technical documentation, that is, until the next repair.

For information

Capitalized repairs are repairs with the replacement of part of an object, in which the amount of new costs for repairs and replacement of parts of an object is capitalized for the object, and the residual (book) value of the replaced part is subject to write-off.

Capital repairs that are irregular (one-off) in nature are included in the initial cost of the asset (that is, included in the cost of the inventory asset) and are depreciated along with the main part of the asset, remaining as a component of the asset for accounting purposes only.

As stated in the previous chapter, when writing off a component (replacing it), it is necessary to write off the original cost and accumulated depreciation on it. If the component has not previously been allocated as part of an OS object, then it must be allocated by calculation at the time of write-off (replacement).

To calculate the cost of an object after major repairs, capitalize repairs and write off the replaced part, you must perform the following steps:

• determine the initial cost of the object on the date of entering the opening balance (the date of entry on the balance sheet or the date of the previous major overhaul);
• determine the cost of major repairs at current prices;
• calculate the initial cost of the replaced part of the object and the accumulated depreciation of the replaced part.

And only after this will it be possible to determine the initial cost of the fixed asset at the end of the period.

The amount of direct costs for repairing an asset and the amount of indirect costs according to IFRS rules may differ from the corresponding amounts according to Russian standards. A special case of this difference is that in RAS, when performing repairs by contract, the amount under the contract is taken into account, while in IFRS, the actual cost of repair work is taken into account.

Costs for modernization, reconstruction and technical re-equipment of fixed assets in IFRS meet the criteria for capitalization of costs and are capitalized for fixed assets by including them in the cost of the fixed assets without separating them into a component.

Capitalized costs are written off as enterprise expenses by calculating depreciation, non-capitalized costs are accounted for in accordance with the cost accounting methodology adopted by the enterprise under IFRS.

As you can see, the procedure for accounting for an enterprise’s expenses for the restoration of fixed assets in accounting and tax accounting, as well as according to the rules for preparing reports according to IFRS standards, has a number of differences. And if domestic accounting is aimed at bringing it closer to IFRS standards, then tax accounting still has fundamental differences. These primarily include the possibility of including the costs of some capital repairs in the cost of an asset according to IFRS, and in tax accounting - the formation of reserves for upcoming repairs. But we must take into account that the creation of such reserves is a right, not an obligation, and the enterprise independently decides on the advisability of applying such a tax norm.

THEM. Akinshina, tax consultant

What are the three main categories of inventory costs for manufacturing companies?

Capitalized costs– costs for the purchase or creation of fixed assets that contribute to the extraction of profit over several reporting periods, not capitalized – costs for the purchase or creation of fixed assets that contribute to the extraction of profit during one period. When determining the composition of capitalized costs included in the initial cost of fixed assets, one should proceed from the principle of correlating the income of the reporting period with expenses.

The legislator defined capital investments as investments in fixed assets (fixed assets), including costs for new construction, expansion, reconstruction and technical re-equipment of existing enterprises, acquisition of machinery, equipment, tools, inventory, design and survey work and other costs (Article 1 of the Federal Law of February 25, 1999 No. 39-FZ (as amended on July 24, 2007) “On investment activities in the Russian Federation carried out in the form of capital investments”)

Capital investments are considered as a way of reproducing fixed assets: replacing individual worn-out parts of fixed assets, replacing equipment as a whole, overhauling existing fixed assets, technical re-equipment, reconstruction or expansion of existing production at an enterprise, purchasing new equipment or building new production facilities.

The costs incurred by an enterprise for capital investments in an existing fixed asset (during modernization, re-equipment) increase the cost of the fixed asset, accumulating first on account 08 “Investments in non-current assets”, and then on account 01 “Fixed assets”. If capital investments in fixed assets led to the formation of a new object (reflected in accounting, as indicated), the amount of such investments is the initial cost of such a fixed asset. Capitalized costs are considered as costs incurred by the enterprise on the so-called qualifying asset of the enterprise and included in its cost. An asset in this case is defined as an asset that necessarily requires a significant amount of time to prepare for its intended use or sale. Qualifying assets may be property, plant and equipment, construction in progress, investment property, and inventories. Assets that are ready for intended use or sale are not qualifying assets; investments and inventories that are produced routinely in large quantities, on a recurring basis, and over a short period of time.
The criterion for capitalization of costs directly related to the acquisition, construction or production of a qualifying asset is the possibility of the enterprise receiving economic benefits in the future. Costs that do not satisfy this condition must be included in the expenses of the period to which they relate.

It’s worth starting with the fact that our costs come in two types: capitalized as part of the cost of a product, service or fixed asset ( product costs) and period expenses ( period costs). The accounting standards by which the company keeps records always clearly prescribe which of these categories our specific expense will fall into, but then the following happens to it: capitalized costs, aka product costs(for example, the price you paid when purchasing the product ( purchase price), the cost of its delivery to your warehouse ( inbound transportation), the cost of storing it in a warehouse ( storage costs)) will become the components from which the cost of our asset will ultimately be formed. This means that when an asset is sold (if it is, say, a product), these costs will return to us, that is, they will be reimbursed ( recovered). Period costs(for example, salaries of administrative staff and accounting, office rent and other costs not directly related to the production of goods/services) at the end of the period will be expensed ( expensed) and turn into expenses. That is, to greatly simplify it, when at the end of the reporting period the company calculates its profit, it will consist of gross revenue for the period minus all those expenses that we did not capitalize, but attributed to the expenses of the period - as auditors say, “expanded” "(and minus a lot more, but we won’t talk about that now).

The costs of training personnel to operate the purchased equipment, the costs of dismantling and recycling fixed assets upon expiration of their service life, the costs of paying property taxes, insurance premiums, interest on debt (if purchased on credit) are not capitalized, since at the time of their payments fixed assets are already ready for use and operation.

Accountants often draw a line between product costs and accounting period costs (period expenses).

The equivalent of product costs in a trading enterprise are purchased goods, in industry - production costs. The costs of the product are distributed between operating expenses involved in calculating profit and inventories. This carryover inventory becomes expense (as cost of goods sold) only when the products are sold, which may occur several periods after the products have been produced. A synonym for product costs is the term “inventory costs.”

Product costs - inventory costs (product cost, inventoriable cost) - costs included in the production cost of manufactured products are distributed between work in progress, products in warehouse and cost of goods sold.

Calculation of capitalized costs, i.e. the amount of interest included in the cost of the asset is not complicated in the case when each project has its own loan and the borrowed funds were not spent on anything other than this specific project. In this situation, all interest accrued under the loan agreement is applied to the increase in the value of the qualifying asset.

However, if there are several projects or borrowed funds were used for other purposes, including operational ones, then the calculation of capitalized interest is carried out by applying the interest rate to the amount of costs capitalized for the period for each qualifying asset. It is important to know that the amount of capitalized interest costs may not be greater than the total amount of actually accrued interest costs for the period. In large companies, it is often impossible to correlate a specific loan with a specific project, since financing is carried out centrally for all objects.

In some cases, where the costs included in the cost of an asset increase evenly over the year, or where they increase often by small amounts, a simplified approach to calculating capitalized interest is permitted. For this purpose it is calculated average capitalized cost of a qualifying asset and the contractual interest rate is applied to it. The average capitalized cost of a qualifying asset is the sum of the asset's carrying amount at the beginning and end of the reporting period divided by two. To calculate capitalized interest, the interest rate under the loan agreement that was issued in connection with this asset is applied to the average capitalized cost of the qualifying asset.

When capitalizing borrowing costs, one should distinguish between two cases shown in table. 5.7.

Table 5.7

Capitalization of borrowing costs

A company can finance a project by simultaneously attracting various loans that differ in interest rates and repayment terms. In addition, they may attract loans in foreign currency, which will create certain difficulties in correlating the project and interest costs. In such cases, the average capitalization rate is calculated based on the entire range of debt instruments used by the company. To calculate the amount of capitalized interest, the specified rate is applied to the amount of project costs.

The average capitalization rate is calculated as the ratio of the total interest costs for the period on all loans to the sum of the average book values ​​of all loans for the period.

Example 5.7

The company began construction of a power plant. The planned cost of construction is $300 million. A long-term loan was raised for construction at 10% per annum in the amount of $200 million. The cost of raising a loan was 2%. To finance the remaining part of the construction cost in the amount of $100 million, an intra-group loan was allocated to the company for three years at 5% per annum in the amount of $150 million. According to the adopted accounting policy, the company uses an alternative method of accounting for borrowing costs.

Let's calculate capitalized borrowing costs for the year and the average interest rate on loans for the construction of a power plant.

• 1. Capitalized borrowing costs for the year will be $29 million (200 million x x 10: 100%) + (200 million x 2: 100%) + (100 million x 5: 100%).
• 2. The average interest rate on loans will be 9.6% (29 million: 300 million x 100%).

Disclosure of borrowing costs in financial statements. In the notes to the financial statements, when using the basic method, it is sufficient to disclose only the accounting policy for reflecting borrowing costs.

If an alternative method is used, the following should be disclosed:

• 1) the accounting policy adopted for borrowing costs;
• 2) the amount of borrowing costs capitalized during the period;
• 3) the capitalization rate used to determine the amount of borrowing costs allowed for capitalization.

Comparison of IAS ( IAS) 23 “Borrowing costs” with Russian NBU 5/2008 “Accounting for borrowing and credit costs.” On January 1, 2009, the Accounting Regulations “Accounting for expenses on loans and credits” PBU 15/2008 came into force (approved by order of the Ministry of Finance of Russia dated October 6, 2008 No. 107n).

PBU 15/2008, like the international standard, regulates not only the accounting of loan costs, but also the accounting of the principal amount of the loan, which is accounted for separately from interest as accounts payable. In turn, repayment of a loan or credit is reflected as a decrease in accounts payable.

The amount of interest on borrowings is allocated between other expenses in the income statement (main method) and the carrying amount of the investment asset (alternative method). PBU 15/2008, as well as its international counterpart, contains conditions for applying an alternative method, similar to the conditions established in the international standard: expenses have arisen to create an asset; expenses incurred on loans associated with its creation; work to create the asset has begun. However, unlike IAS ( IAS ) 23 according to the rules of the Russian standard, assets acquired for resale are excluded from the “investment asset” category. This is due to the fact that the Russian content of the concept of “investment asset” differs from the international approach. From an IAS point of view (IAS) 23, the concept of “investment asset” is similar to a qualifying asset, which for the investment object is a temporary state of the investment object. Once the valuation process is completed, the investment item is in a state in which it can be used or sold and qualifies as one of the types of enterprise assets: fixed asset, intangible asset, inventory (goods) or investment property. In turn, the definition of an investment asset given in PBU 15/2008 is not transitional and applies only to long-term assets, excluding the possibility of reflecting an investment asset as part of inventories (goods).

On the one hand, the new Russian standard has come closer to international rules in the matter of stopping the inclusion of interest in the cost of an investment asset during the period of downtime in the work on creating an investment asset; in this case, interest is written off as other expenses. On the other hand, in contrast to the international standard, PBU 15/2008 establishes a standard for downtime: downtime must last more than three months.

However, we can summarize: there are no significant differences between the two analyzed standards.