How to correctly calculate and reflect the residual value of fixed assets
The residual value of fixed assets is a price indicator, at which the object of property is indicated in the annual financial statements – balance sheet.
What it is
According to the new federal standard, approved by the order of the Ministry of Finance № 257n from 31.12.2016, the residual value of fixed assets is an indicator of property objects in the current period. It is formed after deducting depreciation charges and losses from depreciation.
According to accounting regulations, the residual value of fixed assets is defined as the accounting price at a specific date (the end of the reporting period) – the original price reduced by the amount of accrued depreciation. Knowing the residual value of assets, management can see the extent of their obsolescence and physical deterioration and, accordingly, the efficiency of their use. This allows you to plan the actual renewal of material and property funds of the institution.
Signs of initial and residual value
Non-current assets are characterized by different types of evaluation, such as initial and residual value. Original cost refers to the price paid for a fixed asset at the time of its acquisition. It is determined by a number of attributes that together form the price of the property object:
- The immediate price of the fixed asset itself;
- transportation costs;
- taxes, customs duties and levies;
- the estimated cost of services for putting the equipment into operation.
The initial estimate is a constant value. It remains unchanged since the acquisition and registration of fixed assets and for the entire period of its use, except in cases of revaluation of the asset (revaluation or devaluation), its modernization or liquidation.
Residual value is a variable value. It is reduced monthly as a result of depreciation accrued on the original price. It is an indicator that is needed to determine the current technical and moral condition of fixed assets.
The initial value is the indicator by which the object is taken into account, and the residual value is the value that characterizes the condition of the object during its use.
Methods of residual value calculation
The residual value of an object is calculated monthly – as of the moment of forming the statements, according to the results of the inventory or at the end of a certain period determined by an accountant. Besides the original and residual values, there is a restorative value. It is determined only for those objects for which at the reporting date organized revaluation.
Here is the formula that shows how to calculate the residual value of fixed assets:
- OSP(B) – initial, replacement cost. Applying this formula to determine PPE, the organization has no right to choose between initial and replacement cost. The replacement value is used if a revaluation was previously carried out for specific PPE items, which determined the replacement value of the assets. Under clause 15 of PBU 6/01, the revaluation is performed once a year as of December 31 of the reporting year;
- A – depreciation accrued on the reporting date.
And here is how to determine the residual value of fixed assets when calculating the indicator using analytical accounts of accounting:
On the debit of account 01, the original and replacement cost, and on the Kt of account 02 – depreciation accumulated on the date of calculation. To make correct calculations, it is necessary to subtract from the aggregate data of account 02 the depreciation that was charged on the funds accounted on 01 account, because the depreciation of Fixed Assets accounted on 03 “Profitable Investments in Tangible Assets” (order of the Ministry of Finance ¹ 94n of 31.10.2000) is also accounted on account 02.
Depreciation charges are determined for all types of fixed assets. The rules for calculating them are set forth in PBU 6/01. Depreciation for intangible assets is calculated in accordance with the procedure set out in PBU 14/2007.
Residual value assessment
The decision on revaluation of fixed assets is made by the management. Revaluation is carried out once a year, but not more often, and only for assets that belong to the company on the right of ownership. This is not a mandatory procedure, the decision is taken voluntarily. There is a rule: if a revaluation has not been carried out before, but has been organized once in an institution, then it will have to be carried out regularly. The procedure is organized at the end of the calculation period – year (as of December 31).
As a result of the revaluation the restoration value is determined. The reinstatement value of fixed assets is the new estimated value of a particular asset after it has been revalued.
To carry out a revaluation, the manager issues an order that lists homogeneous items that need to be revalued. The basis for calculation is the current value of property assets. When revaluing objects, the accountant should perform the following actions:
- recalculate the current value of fixed assets;
- calculate the updated value of depreciation;
- reflect the new amounts in the accounting;
- to include the amount of the surplus in the additional capital;
- to reflect the generated depreciation in other expenses.
The results of the procedure are entered in the balance sheet on a separate line.
Using in accounting
To calculate property tax, the residual value of fixed assets is simply necessary: it serves as the basis for calculating the average annual figure for the reporting and preceding periods. The calculated value is used for:
- Carrying out transactions on sale and purchase and property exchange and resolution of property disputes;
- issuance of credits on the security of property;
- calculation of insurance amounts;
- organization bankruptcy;
- restructuring of debts formed by the enterprise, etc.
Those entities, which total net book value of assets exceeds the established limit of 150 million rubles, do not have the right to use the simplified taxation system (subparagraph 16 p. 3 article 346.12 of the RF Tax Code).
What accounting accounts to use
The value of property valuation on the balance is determined by the account indicators – comparing the balances of certain accounts. The accountant must form a turnover statement on accounts 01 and 02 for a certain period and, using the totals of the turnover, calculate the desired figure.
Account 01 “Fixed Assets” is used in accounting to reflect the initial cost of fixed assets. Account 01 records all expenses on the acquisition, manufacturing and commissioning of the property. These costs are reflected in the debit of account 01. Consequently, to calculate the residual value it is necessary to determine the balance on the debit on a specific date.
Account 02 “Fixed assets depreciation” is used for fixing the accounting data on depreciation charges. Accrued on the property depreciation is carried out on the credit and accumulates the result on deductions up to the moment of writing off the fixed assets from the balance sheet. To calculate the residual value, the accountant must identify the total on the credit turnover on a certain number.
The formula and procedure for calculating the difference of turns 01 and 02 of accounting registers, we described in detail earlier. The action itself is performed as follows: OSR = balance of Dt 01 – balance of Dt 02.
Depreciation is charged not only on property objects in the 01 ledger, but also on assets formed as profitable investments in tangible assets. When calculating it is necessary to distinguish the depreciation accrued only on fixed assets.
Here is what the residual value of fixed assets in the balance sheet includes:
- Line 1150 – residual value for property objects recorded in the 01 account;
- line 1160 – similar value for profitable investments in tangible assets.
The same way the residual value is calculated for groups of intangible assets of the enterprise. It is necessary to form the turnover of accounts 04 “Intangible Assets” and 05 “Amortization of Intangible Assets”. Account 04 shows information about the initial price of intangible assets, and account 05 shows accrued depreciation. Residual value for intangible assets is calculated as the difference of the debit balance of account 04 and the final balance of account 05.
If the organization decided to sell the property, its sale should indicate the value of the residual value, which is written off separately from the depreciation charges. They write off not only the value of the residual value, but also the original cost. The documentary basis for the operation is a certificate-calculation of the residual value of the sold property. To write off fixed assets from the balance sheet when selling them it is necessary to open a sub-account 01.11 – “Retirement” to account 01. It shows the sale price which is different from the acquisition price of the property object.
What accounting entries to use
Let’s present the main accounting entries in the table:
Write-off of OST for a budget institution
Write-off for commercial and non-commercial organizations
Peculiarities in case of simplified taxation
For the simplified taxation system, it is allowed to account for income from sales at the moment of receipt of proceeds. For OSNO, both profit and loss appear following the results of property write-off. The loss should be reflected in the accounting by the post Dt 99 Kt 91. The resulting loss is accounted for in expenses in equal installments over a certain accounting period. The time period in this case is a month. To derive the accounting period accountant performs the following steps: subtracts from the planned period of operation of the property (calculated in months) the actual period of its use in the organization.
The period is changed taking into account the decreasing or increasing coefficients, calculated on the basis of the depreciation premium. If an accelerated depreciation calculation method was used, it is recommended that the specialist reduce the calculation period (letter of the Ministry of Finance № 03-03-06/1/511 of 04.08.2009). If a lowering coefficient was used, the calculation period increases on the contrary (letter № 03-03-06/280 of the Ministry of Finance of 23.11.2011).
In 2009 I graduated from the Bachelor’s program at the South Federal University, majoring in Economic Theory. In 2011 she received the magistracy in “Economic Theory”, defended her master’s thesis.
What does the residual value of the car mean and how to calculate it correctly
A large number of people are interested in the question of the profitable sale of cars. And this concerns not only new, but also used vehicles. Taking into consideration the current prices of cars, people are looking for all kinds of solutions and ways out of the situation that allow them to buy a good car for not much money, including credit agreements with the bank, and then sell it profitably.
In this case, it is worth considering such a concept as residual value. This term is widely used in the tax sphere, accounting, is relevant to entrepreneurs and is directly related to motor vehicles. It will also be useful for ordinary car owners who want to buy a car at the secondary market and then sell it with the least losses.
What it is
Motorists who take a car on credit or are contemplating such an option, have repeatedly encountered the concept of residual value. Therefore, they are quite naturally interested in what the bank-guaranteed residual value of the car is.
In general, the residual value (RV) can be described as a percentage expression of client’s debt to the total value of the vehicle. At registration of credits the borrower undertakes to pay this sum on the day of the last obligatory monthly payment, where the date is clearly stipulated in the contract on crediting.
The advantage of such a loan is that the bank fixes the value and guarantees its immutability until the end of the contract period. This protects the client from the fall in market prices, as the bank guarantees the preservation of OC at 30-55% after the end of the loan agreement. In this situation, the client has the opportunity to sell the car back to the dealer and take a new loan for a different car. This form of relationship is beneficial for all parties.
Doing business with OC is beneficial to those people who are used to changing cars often enough, they want to switch to a new vehicle every 2-3 years. The bank receives a profitable and regular customer, and car dealers can also count on the constant availability of a buyer.
It is important to understand that this program is quite new for our country, and the conditions apply only to a limited number of brands and models. Gradually, the program, which is called Buy-Back, is being implemented and expanded.
But the concept of residual value does not apply only to car loans. PPE is of direct relevance to taxation, is an integral part of the accountant’s work in businesses that have vehicles and other assets of movable and immovable type. An accountant without knowledge of residual value calculations will not be able to correctly calculate depreciation, draw up balance sheets and prepare financial justifications for the sale or write-off of assets.
Residual value should be described as a formula for determining the value of an asset that takes into account various types of depreciation. To determine this value, you need to know the original cost of the asset and the amount of accumulated current depreciation.
When is it necessary to calculate residual value
PPE is calculated when it is necessary to:
- to make exchange transactions with the property;
- to carry out transactions on the purchase and sale of expensive assets;
- to assess the value of the contribution made to the authorized capital if it is made in the form of a fixed asset;
- to obtain a loan against the security of the property asset;
- to restructure the debts of an enterprise;
- handle bankruptcy;
- to resolve property disputes;
- to calculate the amount of insurance sums.
In business matters, the concept of PPE is much more complex than for the average car owner who only wants to buy or sell a used car at a profit. There is no need to apply complex formulas to calculate here.
For a simple motorist, the residual value needs to be calculated when he or she thinks of selling his or her car. This notion will give an opportunity to calculate the approximate price for which he can really offer the car to buyers. But all this is relative and is not calculated by special formulas. It is much easier in this case to study the situation on the market, to estimate an approximate price of the car, similar to the realized one, and to put the same price tag on yours.
Accurately according to all the rules and requirements to calculate PPE is required for entrepreneurs and enterprises with fixed assets, among which are often present and motor vehicles.
Calculation nuances
Many people are naturally interested in how they can calculate the necessary residual value of the car and which calculator to use when doing so.
There are several options how to calculate and perform all the necessary calculations, which eventually allow you to determine the residual value of the car. Someone does it on their own, others use tools in the form of online calculators. And there are those who are forced to turn to specialists to solve the issue that has arisen.
PPE can be calculated independently. At enterprises, this is the direct responsibility of the accountant. Without certain initial data, they will not determine the residual value of the car in any way, since the formula for the calculation involves taking into account certain parameters. In many ways, the determining factor is the depreciation of the car or other asset.
If you are interested in how to correctly determine the residual value of a car, you need to look for the difference between the initial value and the depreciation figures. First, you find out the amount of depreciation calculations. These are taken as of the date the residual value was determined. Then, find out what the original price of the asset was in the form of the car. That is, how much you bought it for.
The easiest way to figure this out is with a concrete example. Let’s assume that in May 2015, a car was purchased at a price of 1500000 rubles. And the vehicle has been in use for 6 years, that is, 72 months.
To begin with, let’s determine what depreciation is here. Here you need to divide the cost of the vehicle by the number of months during which the machine was in use. From here we get 20.8 thousand rubles as a monthly depreciation.
Since the fixed assets are calculated on the first day of each month, then it is necessary to determine the amount of depreciation on a certain date. Let’s say as of 01.10.2018. Forty months have passed from the date of purchase to the date of calculation. The resulting monthly depreciation is multiplied by the number of months, that is 40. It turns out approximately 832 thousand rubles.
As a result, the residual value looks like the difference between the car purchase amount and its depreciation. This gives a result of 668 thousand rubles. Approximately at this value the car can be sold.
Of course, prices can be overstated and understated. But when the difference is more than 20% compared to the average market price for similar models of motor vehicles, the tax authorities may raise questions. This is especially true in situations where the value is actually understated. This immediately raises certain suspicions of possible financial fraud.
Determining residual values after a revaluation
Under current regulations, companies are allowed to revalue their assets in the form of fixed assets once a year. This allows for a balance between current market prices and accounting values.
This raises a legitimate question regarding the determination of the residual value after the first and all subsequent possible revaluations.
A distinctive feature of this procedure is that the basis for the calculation is no longer the original value, but the so-called restored value. The restored value is the value of the object, the value of which has been recalculated as of the end of the period.
As a result, in order to determine the fixed asset, it is necessary to subtract depreciation from the restored value. This will allow you to understand what will be the value of the PPE after the revaluation.
Features of the sale at a price lower than that of PPE
Since you already know that fixed assets are the initial cost of the object minus the amount of depreciation, you can take a closer look at the sale.
In accounting, these objects are shown at book value, as a result of which the PPE of a fixed asset is a concept identical to the book value.
According to current legislation, the sale of a car or other fixed asset below its net book value is not prohibited. It contributes to lower taxation if the car is sold at an underestimated price. Wishing to reduce tax deductions, some people consciously take such a step. It is important to consider the possible consequences.
Hence, the question is not whether the car can be sold for less than its residual value. Rather, the question is how profitable it is to sell the vehicle in this way at prices that differ from the average market prices for the sale of similar cars. Here it is important to understand that the organization sells the object with damage to itself. As a result, the seller recognizes the damage from the sale, because the PPE with all the associated costs was higher than the proceeds from the sale.
The sale of fixed assets is the usual process of sale, and therefore the standard VAT at the rate of 18% will be accrued here. The proceeds received are recognized on the day when the purchaser receives the rights of ownership. Calculation of income tax involves taking into account all the additional costs that accompanied the sale of the object. This storage, delivery and other costs.
About PPE for regular motorists
Tax and accounting issues are not of interest to everyone. Ordinary car owners also encounter the phenomenon of residual value, although they do not always understand and realize it.
It is important to understand that the main expense item for a car is the loss of value as it ages. Whereas previously cars were created with the expectation of a very long service life and were considered almost eternal, now the situation is completely different. Great attention is paid to the issue of residual value.
According to conclusions of experts, in first 3 years, loss of car’s cost from its initial price can make up 15-40%. Roughly speaking, if you have bought a car for 600 thousand rubles, each year it will lose 30-80 thousand rubles. This is approximately the same amount that a car owner needs to spend on fuel at an average mileage of 10-30 thousand kilometers.
The manufacturers themselves and their pricing policy have a great impact on the cost of used cars. If the company introduces to the market the car which is objectively overvalued, this will surely cause the fall of its value. If the car company wants to occupy a large share of the market, then it produces an abnormally affordable model. If you purchase such a car, all other things being equal, it is the owner of this car that will incur the least losses.
The massiveness of the car is also important. Traditionally, there is little demand on the secondary market for those cars, which are little familiar to consumers. A person doesn’t want to risk and is afraid to buy this type of vehicle. He explains it by the fact that in case of breakdown it will be difficult to find parts, there are few experts for repair, components are non-standard etc.
One of the key components in the formation of the residual value on the secondary market – is the reputation. Reputation is formed on the basis of subjective assessments of reliability. For example, you can take Toyota cars. The Japanese automobile giant was able to gain immense popularity and form a reputation as a very reliable carmaker. This allows selling cars of this brand on the secondary market at a fairly high price.
Buying rare and very expensive cars, to get a big profit with their subsequent sale will not work. Such cars lose their value quickly, that is why their residual value differs significantly from the initial one.
Therefore, it is more profitable to take those cars that are in high demand, have a stable positive reputation in the market. After all, the higher the demand, the higher the value.
A person should think about the issue of making the best possible profit when buying a vehicle, not just a profitable purchase. Few people nowadays buy cars once and for life. The resource of today’s cars does not allow for this. Taking into consideration all the nuances, considered above, it is very important to understand the residual value and to know how it is formed and how quickly it decreases, depending on certain factors.
Although, mostly the concept of residual value is interesting for businessmen and is used in accounting, every car owner is indirectly connected with it, regardless of his status. Everyone wants to sell the previously bought car at a profit. And here the key factor is depreciation, that is, costs, and the final residual value minus all losses.
