Asset Accounting: Recognition, Valuation, and Impairment Principles

A. Property, Plant, and Equipment (PPE)

1. Acquisition

   Assets are recognized at their net price plus all necessary expenses incurred until the asset is in a condition ready for its intended use.

2. Production Costs

   Includes direct labor, direct material, utilities, and other indirect costs directly attributable to production. General overheads are typically excluded.

3. Financial Expenses

   Costs associated with generic sources of financing, such as loans, may be capitalized under specific conditions.

4. Renovation, Expansion, and Improvement

   Expenditures that expand the capacity or extend the useful life of an existing asset, or significantly improve its functionality, are capitalized as part of the asset's cost.

5. Repairs and Major Repairs

   Routine repairs and maintenance are expensed as incurred. Major repairs that enhance the asset's value, extend its useful life, or increase its productive capacity are capitalized.

   • An expense that does not add value to the asset is recognized as an expense.
   • Expenditures that increase the value or useful life of an asset are capitalized and subsequently amortized or depreciated.

   Impairment Calculation:

   Impairment = Net Book Value (NBV) - Recoverable Value

   Where Recoverable Value is the higher of the asset's Fair Value Less Costs to Sell and its Value in Use.

6. Exchanges of Assets

   Asset exchanges can be classified as commercial or non-commercial.

   • Non-Commercial Exchanges

     Occur when the exchange lacks commercial substance (i.e., no significant change in the expected future cash flows of the entity). The asset received is valued at the lower of the Net Book Value of the asset given up and the Fair Value of the asset received. No profit is recognized.

   • Commercial Exchanges

     Occur when the exchange has commercial substance (i.e., a significant change in the expected future cash flows). The asset received is valued at the lower of the Fair Value of the asset given up and the Fair Value of the asset received. Profit or loss is recognized.

7. Leases

   Leases are categorized based on the transfer of risks and rewards.

   • Operating Leases

     Do not transfer substantially all the risks and rewards incidental to ownership. The asset is not recognized on the lessee's balance sheet, and lease payments are expensed.

   • Finance Leases

     Transfer substantially all the risks and rewards incidental to ownership to the lessee. The asset is recognized on the lessee's balance sheet, and a corresponding lease liability is recorded.

8. Depreciation and Impairment

   Depreciation: The systematic allocation of the depreciable amount of an asset over its useful life.

   Impairment: Occurs when an asset's Net Book Value (NBV) exceeds its Recoverable Value.

B. Intangible Assets

1. Acquisition

   Intangible assets acquired separately are recognized at cost.

2. Development Costs

   Development costs may be capitalized if certain criteria are met, demonstrating the technical feasibility and commercial viability of the asset.

3. Financial Expenses

   Similar to PPE, financial expenses may be capitalized under specific conditions related to the development or acquisition of intangible assets.

4. Renovation, Expansion, and Improvement

   Expenditures that enhance or extend the useful life of intangible assets (e.g., administrative concessions, computer software upgrades) are capitalized.

5. Amortization and Impairment

   Amortization: The systematic allocation of the depreciable amount of an intangible asset over its useful life. Unlike PPE, amortization is not necessarily based on usage.

   Impairment: Recognized when the asset's Net Book Value exceeds its Recoverable Value.

6. Disposal and Write-off

   Intangible assets are derecognized upon disposal or when no future economic benefits are expected from their use or disposal.

C. Inventories

1. Purchases

   Inventories are valued at their net purchase price (price less any discounts) plus all expenses necessary to bring them to their present location and condition (e.g., transport costs).

2. Production Costs

   For manufactured inventories, costs include direct materials, direct labor, and manufacturing overheads.

3. Valuation of Final Inventories and Year-End Adjustments

   Inventories are typically valued using methods such as Weighted Average Price (WAP) or First-In, First-Out (FIFO).

4. Sales, Impairment, and Write-off

   Inventories are expensed as Cost of Goods Sold upon sale. Impairment occurs when the net realizable value is lower than cost. Inventories are written off when they are no longer expected to generate future economic benefits.

D. Financial Assets

1. Loans and Receivables

   Initially recognized at fair value plus transaction costs. Subsequently measured at amortized cost using the effective interest method.

2. Financial Assets Held for Trading

   Initially recognized at fair value, with transaction costs expensed. Subsequently measured at fair value through profit or loss.

E. Key Definitions and Principles

• Generic Source of Financing

  Refers to funds obtained from financial institutions (e.g., bank loans) that are not tied to a specific asset acquisition.

• Specific Source of Financing

  Refers to funds obtained from a specific supplier or vendor for a particular purchase.

• Recoverable Value

  The higher of an asset's fair value less costs to sell and its value in use.

• Asset Write-off

  Any asset needs to be written off when there is no expectation of future economic returns from its use or disposal.

• Goodwill Impairment

  Goodwill is subject to impairment testing annually, and any impairment recognized is not recoverable in subsequent periods.

• Administrative Concessions

  These are rights granted by a government or public authority. They are intangible assets and cannot be developed in the same way as internally generated goodwill or leasehold improvements.

• Research Costs

  Research expenditures are generally expensed as incurred, as the future economic benefits are uncertain at the research stage.