The Accounting Expression Of Fixed Assets In The Cr And Russia

The diploma thesis deals with an analysis of fixed assets utilization efficiency through the example of the Russian joint stock company “Concern Izhmash”.. In the first chapter the theor

M a s a r y k u n i v e r s i t y Faculty of Economics and Administration

Branch of study: Finance

THE ACCOUNTING EXPRESSION OF FIXED

ASSETS

IN THE CR AND RUSSIA

Účetní zobrazení dlouhodobého

Masarykova univerzita Ekonomicko-správní fakulta

Katedra financí

Akademický rok 2011/2012

ZADÁNÍ DIPLOMOVÉ PRÁCE

Postup práce a použité metody:

Teoretická část práce rozebere způsoby zobrazení dlouhodobého majetku v ČR a Rusku Konkrétně budou porovnány především způsoby vymezení dlouhodobého majetku, složky jeho pořizovací ceny a způsoby odepisování, které vyjadřuje dlouhodobý pokles hodnoty dlouhodobého majetku v důsledku fyzického opotřebení, ale i morálního zastarání Stranou pozornosti nezůstane ani vliv vyššího vytížení majetku na pozitivní výsledky hospodaření v důsledku lepšího roznesení fixních nákladů, které jsou s ním spojeny, do většího objemu výkonů

V praktické části práce bude představen konkrétní ruský podnik a jeho výrobní program Následně se pozornost upře na strukturu dlouhodobého majetku v daném podniku, způsob jeho zobrazení v účetnictví, na výpočet jeho zůstatkové ceny a úroveň vytížení majetku ve sledovaném období V závěru budou diskutovány rozdíly, které by se vyskytly, pokud by analyzovaný podnik vykazoval stejná aktiva podle českých účetních předpisů Diskutována bude i otázka použití reprodukčních cen pro vyjádření hodnoty dlouhodobého majetku

V práci se uplatní zejména obecně vědní metody analýzy, syntézy a komparace K získání informací pro zpracování praktické části budou využity účetní směrnice a data, dále rozhovory s pracovníky finančního útvaru konkrétního podniku

Rozsah grafických prací: dle pokynů vedoucího práce

Rozsah práce bez příloh: 60 – 80 stran

Seznam odborné literatury:

SLÁDKOVÁ, EVA Finanční účetnictví a výkaznictví Vyd 1 Praha: ASPI, 2009 451 s

ISBN 978-80-7357-434

PRUDKÝ, PAVEL - LOŠŤÁK, MILAN Hmotný a nehmotný majetek v praxi :komentář,

příklady, výklad změn 12 aktualizované vyd Olomouc: Anag, 2010 279 s

ISBN 9788072635962

VALOUCH, PETR Účetní a daňové odpisy 2011 6 vyd Praha: GRADA Publishing, a.s.,

2011 140 s Účetnictví a daně ISBN 978-80-247-3803-1

Účetní předpisy pro podnikatele: (zákon o účetnictví, prováděcí vyhláška k zákonu, České účetní standardy): komentář Edited by Libuše Müllerová - Hana Vomáčková - Dana

Dvořáková 3., aktualiz vyd Praha : ASPI, 2009 xvi, 585 s ISBN 978-80-7357-435

BŘEZINOVÁ, HANA - ŠTOHL, PAVEL Účetní závěrka: výklad a praktické příklady: pro

studenty vysokých škol s ekonomickým zaměřením 2 aktualiz vyd Znojmo: Soukromá

vysoká škola ekonomická Znojmo, 2010 136 s ISBN 9788087314074

Vedoucí diplomové práce: Ing Ladislav Šiška, Ph.D

Datum zadání diplomové práce: 4 3 2011

Termín odevzdání diplomové práce a vložení do IS je uveden v platném harmonogramu akademického roku

V Brně dne 4 3 2011

V podmínkách globální ekonomické recese je velmi důležité využití stálých aktiv podniku

Stálá aktiva, jako hlavní nástroj výrobního procesu, umožňují jakékoli organizaci stát se

produktivnější a ziskovější Většina aspektů podnikové činnosti a jejího řízení je s nimi úzce spojena

Diplomová práce se zabývá analýzou efektivity využití stálých aktiv na příkladu ruské akciové

spolenosti “Koncern Izhmash” Tato společnost je jedním z největších ruských výrobců sportovních,

loveckých stejně jako bojových zbraní Zahrnuto je i srovnání účetního systému České republiky a

Ruska

Annotation

Under conditions of the global economic recession, fixed assets utilization efficiency increase

is of great importance Fixed assets while being the major part of production process, allow any

organization to become more productive and profitable Most aspects of enterprise activity and

management are closely connected with them The diploma thesis deals with an analysis of fixed

assets utilization efficiency through the example of the Russian joint stock company “Concern

Izhmash” This company is one of the biggest Russian producers of sports and hunting as well as

combat weapons The comparison of the Czech Republic and Russian accounting systems is also

included

Klíčová slova

Analýza dlouhodobých aktiv, srovnání účetních systémů, využití zařízení, ocenění

dlouhodobých aktiv, odpisy dlouhodobých aktiv

Keywords

Fixed assets analysis, comparison of the accounting systems, the utilization of the

equipment, fixed assets evaluation, depreciation of fixed assets

Prohlášení

Prohlašuji, že jsem diplomovou práci Účetní zobrazení dlouhodobého majetku v ČR a

Rusku vypracoval samostatně pod vedením Ing Ladislava Šišky, Ph.D a uvedl v ní všechny

použité literární a jiné odborné zdroje v souladu s právními předpisy, vnitřními předpisy

Masarykovy univerzity a vnitřními akty řízení Masarykovy univerzity a Ekonomicko-správní

fakulty MU

V Brně dne 26 dubna 2012

vlastnoruční podpis autora

Contents

Introduction………12

1 Fixed assets reflection in the Russian Federation and the Czech Republic: complex specification of the accounting systems……… 15

1.1 The specification of fixed assets……… 15

1.2 Fixed assets accounting system of the Russian Federation……….17

1.2.1 The statutory regulation and objectives of fixed assets accounting……… 17

1.2.2 The classification of fixed assets……… 18

1.2.3 Fixed assets accounting……… ……… 22

1.2.4 Depreciation of fixed assets……… 25

1.2.5 Fixed assets analysis……….27

1.2.6 Fixed assets utilization efficiency upgrading ways……… 30

1.3 Fixed assets accounting system of the Czech Republic……… …32

1.3.1 The importance of IFRS for comparison of the accounting systems of the Russian Federation and the Czech Republic………32

1.3.2 The statutory regulation………33

1.3.3 Determining the long-term tangible assets……… …33

1.3.4 Determining the long-term intangible assets……… 36

1.3.5 The evaluation of the long-term tangible and intangible assets……… 37

1.3.6 The depreciation of the long-term tangible and intangible assets………39

1.3.7 The disposal and discarding the long-term tangible and intangible assets……… 43

2 Fixed assets analysis at the concern “Izhmash”……… 46

2.1 Brief characteristic of the company……… 46

2.1.1 Legal status and company profile……… 46

2.1.2 The organization management structure……… 48

2.1.3 The key indices of the company functioning………50

2.2 The fixed assets technical condition analysis at the concern “Izhmash”……….54

2.3 The equipment age composition at the concern “Izhmash”……….58

2.4 The equipment usage analysis at the concern “Izhmash”……… 59

2.5 The fixed assets utilization efficiency at the concern “Izhmash”……… 64

2.6 Return on fixed assets ratio analysis at the concern “Izhmash”……… 66

2.7 The Czech Republic and Russia accounting systems: similarities and differences, beneficial and negative impacts……… ………68

Conclusion……… … 74

List of references………77

List of tables……… 81

List of abbreviations……… 82

List of appendices……… 84

Introduction

One of the most important factors of output increase and further development of any enterprise

is the availability of fixed assets needed for the effective economic activities However to solve these problems it is necessary not only to provide an enterprise with these assets but increase their efficiency

as much as possible Besides that proper assets accounting also encourages an enterprise to continue in operation while being competitive on domestic and external market in the long-term period and avoid many problems in the production process

The relevance of the thesis is conditioned by all these facts Besides comprehensive comparative approach of accounting systems of the two countries – Russia and the Czech Republic –

is applied in the thesis The significance of the research is also proved by insufficient level of knowledge of several aspects of these problems Moreover, there have been only a few works on examining the accounting systems of Russia and the Czech Republic in comparison up to now That is why the thesis is seen as valuable and can be of great interest, also taking into account close economic relations between these two countries

There are also some outfields connected with techniques (procedures) of fixed assets utilization analysis, as well as the systematization of carrying out the analysis, etc

The problems of fixed assets analysis and accounting were carefully studied by the Russian economists like Belousova S.V., Babaev Y.A., Kondrakov N.P., Yeleneva J.A., etc If to speak about the works by Czech scholars it is necessary to mention those written by Valouch P., Dvorakova D., Sladkova E., Prudky P

The target of the research is “The Concern “Izhmash” Open Joint Stock Company”1 which is one of the biggest producers of small-arms weapon of Russia and produces over 95% of all Russian combat long barrel guns The research subject is the fixed assets of this enterprise

The aim of the thesis is to compare the approaches to accounting of long-term assets in the Czech Republic and Russia and thus evaluate beneficial and negative impacts on both accounting systems, as well as to carry out the fixed assets analysis at the concern “Izhmash”

The research tasks are determined by its aim These are:

- to define fixed assets as an economic category;

- to give fixed assets classification and forms of their valuation (both in the Russian Federation and the Czech Republic);

- to give assets accounting of the Czech Republic and Russia in comparison;

- to consider assets movement within the organization (acquisition, revaluation, exchange, transactions with assets and their disposal)

1 Hereinafter: the concern “Izhmash”

- to offer the ways of fixed assets utilization efficiency improvement;

- to carry out the fixed assets analysis and particularly equipment utilization analysis

The theoretical relevance of the thesis consists in the fixed assets analysis and accounting, as well as their utilization efficiency This analysis is carried out in relation to both accounting systems –

of the Czech Republic and Russia Besides depreciation problems are considered and the summarizing table containing distinctive features of accounting in these two countries is also made up

The practical relevance of the research consists in the fact that the results of the study can be

of great help to more effective fixed assets utilization which finally results in the revenue increase of the analyzed enterprise (as well as other organizations)

The novelty of the research consists in the fact that this work is one of the first attempts to examine fixed assets accounting in the Russian Federation and the Czech Republic in comparison Besides the detailed analysis of fixed assets condition in dynamics at the concern “Izhmash” during the period from 2007 to 2009 is given It will help the organization to detect the existing problems related to its unstable financial status as well as some others like partially obsolete equipment, etc and eliminate them

The methodological foundation of the thesis comprises regulatory, legislation, special literature as well as periodical on the problems of fixed assets analysis and accounting of both countries – Russia and the Czech Republic

Accounting practices and techniques of estimation as well as scientific analysis, synthesis and comparison scientific methods are used in the research work The information background of the thesis comprises the works by Russian and foreign scholars on the problems of fixed assets and their utilization as well as different sorts of data including the financial statements of the concern

“Izhmash” for the period from 2007 to 2009 and the data obtained from the staff of the company

The thesis consists of the introduction, two chapters, the conclusion, list of references, list of tables, list of abbreviations and a list of appendices

In the first chapter the theoretical fundamentals of fixed assets accounting and analysis in the Russian Federation and the Czech Republic, their classification as well as the ways of fixed assets utilization efficiency upgrading are considered Particularly, the ways determining assessment of assets are given in comparison, as well as parts of its historical costs and depreciation methods, which show a long-term assets decline because of their physical and technological obsolescence

The second chapter is focused on the structure and legal status of the specific Russian enterprise – the concern “Izhmash” as well as the main types of activity and performance indices of the enterprise The structure of the enterprise long-term assets is examined as well as the way of its accounting in the accounting system The table comprising the similarities and differences between the Czech Republic and Russian accounting systems is given Besides that the influence on the concern

accounting is calculated in case this enterprise keeps accounting by using the Czech Republic accounting principles presented in this table.

The appendices comprise different tables necessary for better understanding of the specific nature of the concern “Izhmash” activities, particularly the productive possibilities of the company in the medium-term period and its influence on fixed assets, as well as the average useful life of its equipment and the reserves of the return on productive assets ratio increase Further, the differences between the accounting system of the Russian Federation and the IFRS system are represented there

1 Fixed assets reflection in the Russian Federation and the Czech Republic: complex specification of the accounting systems

1.1 The specification of fixed assets

Ineffective usage of resources is one of the main reasons for the economic crisis and rising prices Resources are means of production, all national resources which are owned by the government and its administrative centres, as well as by companies, non-governmental organizations, households and individuals Resources are divided into material, human, financial and natural resources

Means of production are cars, machine tools, instruments and equipment, buildings, facilities, communication lines, means of transport, stocks, etc All these kinds of resources are called fixed capital or production funds

Fixed assets (fixed capital, fixed funds) are mechanical facilities which are involved in the production process while retaining their physical form They are intended for needs of company’s core activities and should have useful life for more than one year.2

Property, plant and equipment owned by the company and used in production process or for supply of goods and services, as well as for performing managerial functions, belong to fixed assets The expected useful life of these assets exceeds one year (or operating cycle in case if it does not exceed one year)

Fixed assets - property and machinery which a company owns and uses, but which the company does not buy or sell as part of its regular trade including the company’s investments in shares

of other companies.3 Fixed assets – long-lived assets used to produce or sell products and services, also called property, plant and equipment, or plant assets.4

Fixed capital is the capital in the form of buildings and machinery Fixed assets make up a large part of assets on most balance sheets, and they yield depreciation, often one of the largest expenses on income statements The acquisition or building of a fixed asset is often referred to as a capital expenditure Capital expenditures are often important events because they impact both a short- and a long-term success of a company 5

This term is usually used in the GAAP accounting

5 Wild J., Shaw K., Chiappetta B Financial and Managerial Accounting: information for decisions 3 edition Boston: McGraw – Hill/ Irwin, 2009 xxxii, 589, 698 p ISBN 97800733605601113, p.322

Fixed assets are intangible, tangible and long-term financial assets Intangible assets – assets

of an intangible nature with a term of usage longer than 1 year with a value exceeded a limit chosen by

an enterprise in according with so- called “common traditions” As the “common traditions” the amount of 60000 CZK is usually respected, but it is not obligatory given.6

These assets are long-term resources that benefit business operations, usually lack physical form and have uncertain benefits, but controlled by the company Their value comes from the privileges and rights granted to or held by the owner Valuable rights, copyright, franchises, licenses, trademarks, patents, software, know-how, goodwill can be mentioned as the examples of intangible assets.7

Assets of an intangible nature with a term of usage longer than 1 year but with a value which

do not come to a limit chosen by the enterprise are charged as costs immediately in the moment of their acquirement 8

Tangible assets - assets of a tangible nature with a term of usage longer than 1 year with a value exceeded a limit chosen by an enterprise in according with so- called “common traditions” and some other assets of a tangible nature (especially buildings and parcels) regardless to their value In this case the amount of 40000 CZK is usually respected as “common traditions” This amount is not obligatory given as well but from the tax point of view it is obligatory determined by the law of income taxes.9 Examples of tangible assets – buildings, parcels, cars, hardware, equipment, machinery, etc 10

Long-term financial assets – assets of a financial nature with a term of payment longer than 1 year regardless to their value As examples of long-term assets – long-term investments, capital shares, long-term bills of exchange, etc can be mentioned 11

For many companies, fixed assets make up the single largest class of assets they own Fixed assets are set apart from all other assets of the company by two important features, which should be regarded as a whole First, fixed assets are used in operations This makes them different from, for instance, inventory that is held for the sale and not used in operations The distinctive feature here is use, not type of asset The second important feature is that fixed assets have useful lives extending

9 586/1992 Col., as subsequently amended Hereinafter: the law of the income tax

10 Valouch P Accounting 1 edition Brno: Mendel Agricultural and Forestry University, 2005 102 p ISBN 8071579165, p.13

11 Valouch P Accounting 1 edition Brno: Mendel Agricultural and Forestry University, 2005 102 p ISBN 8071579165, p.13

over more than one accounting period This makes fixed assets different from the current assets such

as supplies and inventories of the material that are normally consumed in the short period of time after they are placed in use.12

Fixed assets of the enterprise form its material and technical basis Increase in assets and their upgrading result in high quality production and the increase of the company’s competitiveness

1.2 Fixed assets accounting system of the Russian Federation

1.2.1 The statutory regulation and objectives of fixed assets accounting

The fixed asset’s accounting in the Russian Federation is regulated by following regulatory documents:

1 Federal Act of 21 November 1996 no.129 – FA “On accounting” (as amended by FA of 6 December 2011 no.402 – FA);

2 The Order of the Ministry of Finance of the Russian Federation “The approval of the Russian Accounting Standard13 concerning financial accounting and accounting reports”;

3 The Order of the Ministry of Finance of the Russian Federation “The approval of the RAS concerning fixed asset’s accounting no 6/01”;

4 The Order of the Ministry of Finance of the Russian Federation “The approval of Methodological Instructive Regulations for fixed assets accounting in the Russian Federation”;

5 The Order of the Ministry of Finance of the Russian Federation “The approval of the enterprises forms of accounting reports”

Russian Accounting Principles (RAP)14 is the term used to indicate the whole body of Russian regulatory documents governing accounting and reporting Official documents regulating, directly or indirectly, accounting and reporting in Russian are designed for use by all entities However, there are additional specific regulations for non-profit entities

The main objectives of the fixed assets accounting are:

1 correct document execution and up to date recording of the asset acquisition in the bookkeeping entry, as well as its movement and disposal;

2 reliable determination of the fixed assets sales and disposal results;

3 complete assessment of costs related to fixed asset’s maintenance (expenses for check-up, maintenance, and all kinds of repairs);

4 control of the safety of fixed assets and their productivity.

The distinctive feature of the fixed assets is that they are recoverable in the production process and retain their original form for a long period of time Due to the production process and environment they gradually depreciate and transmit their initial cost on production expenditures during its useful life by depreciation charge at the established standard

The structure of fixed assets is formed of the correlation of its inner parts The movement of fixed assets is an acquisition, disposal, depreciation, change, increase or decrease of the funds The technical level of the production largely depends on the structural changes of fixed assets That’s why the analysis of fixed assets structure and the movement of basic capital shall be regarded as a whole 16

1.2.2 The classification of fixed assets

Fixed assets classification is necessary for their definition, composition as well as their accounting In the Russian Federation there is a single classification of fixed assets according to which they belong to different economy branches; they are also divided according to their functioning; natural and material composition; the level of their usage; and their being in possession (i.e the right for them).17 Subject to different kinds of activities fixed assets belong to some certain branches (industry, agriculture, transport, construction, trade, public catering, telecommunication, material and technical security, etc.) In terms of their functions fixed assets are divided into production and nonproduction assets.18 The latter ones do not participate in the manufacturing process These are: dwelling houses, clubs, stadiums, hospitals, etc Inspite of the fact nonproduction assets don’t affect the volume of production, the increase in labour productivity as well as nonproduction fund expansion are closely connected with material welfare of the enterprise workers which finally influences the output of the enterprise on the whole

Each enterprise has fixed and circulating (current) funds They both form so-called production funds They participate in production process or providing services Different sorts of machines, instruments and tools belong to production funds

In their turn, fixed assets are those involved in production process, such as various machinery and equipment, tools as well as buildings, facilities and others

15

Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

16 Kondrakov N.P Accounting – Moscow: Projekt- N., 2008, pp 14-15 (author’s translation )

The optimum ratio is obtained when the proportion of nonproduction assets amounts to 30% of aggregate value of fixed assets 19

20-In accordance with the accounting system of the Russian Federation and particularly its article

RAS no 6/01, there are the following groups of fixed assets:

- buildings (workshops, warehouses, testing laboratories, etc.);

- facilities (construction engineering facilities, like trestles, roads, bridges, tunnels and others);

- intra-organisational roads;

- transfer units (power supply network, heat distribution network and gas distribution network);

- machinery and facilities; including:

1) load-carrying vehicles and facilities (electric generators, electric motors, steam engines, turbines, etc.)

2) working machines and facilities (machine tools, molding machines, electric furnaces, etc.) 3) measuring devices and control apparatus and devices, laboratory test facilities;

4) computing machinery;

5) automatic machines and facilities, different lines (automatic machine tools, automatic assembly lines);

6) other machinery and facilities:

- means of transport (goods wagons, cars, lift trucks, trolleys);

- instruments and tools (cutting tools, spinning tools, fitting tools, assembling tools);

- production implements and furnishings (containers, pallets, desks, etc.)

- organizational stock;

- agricultural enterprise (productive and breeding livestock);

- decorative perennial plantings;

- other fixed assets (library stock, museum pieces, etc).20

Speaking about fixed assets it is also necessary to mention capital investments into land reclamation (irrigation, drainage and others); capital investments into leased items of fixed assets; land plots and environmental facilities (water, mineral resources and other natural resources)

To declare a facility a fixed asset it is necessary to fulfill the following stipulations:

-the facility is intended for exploitation in the production process, execution of work or rendering services as well as for various management needs e.g to let the facility into tenure or temporary possession for a fee;

-the facility is intended for long-term exploitation, above 12 months or normal operating cycle providing it exceeds 12 months;

-the organization does not intend to resell the facility in the future;

-the facility can bring a return in the future.

Fixed assets priced at the minimum threshold in accordance with accounting policies but not exceeding 40000 roubles (1000 euros, 25000 CZK22) per item, are recorded in accountancy and accounting reports within inventories In order to preserve production facilities while exploiting them the movement control system is needed

The following assets though not being fixed are considered as circulating ones: with less than

12 months of exploitation regardless of their cost:

- young and experimental animals;

- perennial plantings in nurseries.23

The facilities comprise some special buildings and constructions for auxiliary production (i.e managerial, administrative and mechanical facilities, stockrooms, warehouses, etc.)

Speaking of facilities it is also necessary to mention construction engineering facilities, mining works (shafts, adits, cross-cuts), oil and gas wells, waste treatment facilities, tunnels and bridges

Transmissive units comprise electric power lines, cable lines, phone network, telegraph network, transmission system, radio communication, pipe lines, air pipe-lines, etc

Electric generators and engines (direct current motors and alternating current motors) belong

to load-carrying vehicles Here there are also current converters, mercury-arc converters, transformers, steam boilers, compressor systems, etc

Working machines and plant equipment involve various pieces of equipment used in the production process, i.e pressing tools, rolling mills, lift trucks, fan systems, excavators, lifting apparatus, etc Here are also various computer machines and control devices

All kinds of moveable vehicles (railway, automobile transport as well as truck vans, electric cars, motortrucks, lift trucks, railway engines, etc belong to means of transport

All kinds of mechanized and non-mechanized manual implements and devices fastened to machinery like electric welding machine, mechanical arms, hammer drills, clamps, chucks, etc belong

to machine tools

Production and organizational stocks comprise different items for production purpose (work tables, file tables and job safety equipment) Technical libraries as well as fire fighting equipment, etc also belong to the rest of fixed assets.24

The importance of each of fixed assets groups in the production process and the increase in its efficiency is different Those directly affecting the level of mechanization fixed assets are working machines, equipment, means of transport and instruments of production Their technical quality as well as their degree of utilization greatly affect the volume of production and its efficiency

Other parts of fixed assets (e.g transmissive facilities) participate in the production process indirectly as they create necessary conditions for it The level of the material and technical facilities of the plant depend largely on both quality and quantity of fixed assets in use

The ratio between global value of fixed assets and the value of some separate groups of fixed assets determine its structure Each enterprise has its own structure of fixed assets reflecting their production and technical specific features.25

Besides above mentioned groups of assets, there are also fixed assets in operation owned by the organization (which include also fixed assets standing ready for use; under repair; fixed assets for the substitution of the overage equipment; as well as fixed assets at the stage of completion; reconstruction and partial dismantling); laid-up fixed assets and off-duty fixed assets (excessive and incomplete equipment which is not used in the production process for the different reasons) Such stratification of assets is resulted in getting information about fixed assets productivity and efficiency

of its usage as well as the replacement of worn-out equipment and the correct calculation of fixed assets depreciation in order to include it in the operation expenses

There is another classification of fixed assets according to which fixed assets are divided as fixed assets owned by the company under the right of ownership (including those which are leased out); fixed assets under management and operating control of the organization; fixed assets taken on lease.26

24

Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

25 Yeleneva Y.A Economics of machine-building – Moscow: Finance and Statistics, 2007, p.34 (author’s translation)

26 Lugovoi V.A The accounting of fixed assets, intangible assets and long-term investments – Moscow: FBK-PRESS, 2004, p.29 (author’s translation)

1.2.3 Fixed assets accounting

Fixed assets have their original (acquisition, historical) cost, depreciation value and replacement (present) cost They are defined in real terms and in terms of money Each operation

of their movement must be executed through fixed basic source documents according to the list of unified document forms of primary accounting documentation of the State Committee of Statistics of the Russian Federation of 21.01.2003 no 7

Asset acquisition to the enterprise means their coming into operation and capitalization of assets Fixed assets are mainly formed due to the completion of construction and assembling operations; their purchase, non-repayable receipts; acquisition as contribution to the equity capital; transfer of ownership on completion of leasing period (provided this transfer of ownership is not stipulated by the agreement); identifying unaccounted fixed assets facilities based on the results

of inventory accounting; assets acquisition from government or municipal agencies in case of unitary system

Business accounting fixed assets unit is an inventory item Fixed assets inventory item is an item with all its fittings or devices or a separate facility intended for some specific purpose or a complex of items representing an aggregate unit In other words, this inventory unit usually performs one and the same specific function.27

Fixed assets are included for accounting purposes at their acquisition cost The latter (the historical cost) is determined by summing up actual purchase costs, construction costs except for the value added tax and other compensated taxes The mentioned costs are:

- sums of money paid according to contract made with supplier or seller as well as sums of money paid for delivery of item;

- sums of money paid to organizations for information and consulting services connected with assets acquisition;

- customs duties;

- sums of money paid to organizations for the contract for construction work;

- non-recoverable taxes, state duty paid due to the fact of item acquisition;

- some brokerage fee for assets item acquisition;

- other costs connected with assets acquisition, construction, etc

General business expenses and some other expenses are not included into actual purchase costs or expenditures for item construction (unless they are directly connected with acquisition or construction of assets).28

Original cost of fixed assets contributed to the authorized capital (charter capital) of the organization is considered to be their monetary valuation, approved by the founders of the organization (within the legislation of the Russian federation)

Original cost of fixed assets obtained by the organization through gift contract (gratis, free of charge) is considered to be their current market value dated the entry of accounting purpose as investments into fixed assets

Original cost of fixed assets obtained by the contract providing fulfillment of obligations through non-monetary assets is a value of assets delivered by organization Value of these assets is defined on the basis of the price, which is paid by the organization in comparable circumstances.29

Fixed assets owned by two or more organizations, are reflected by each of the organizations in

a possessed share The account no.01 “Fixed assets”30

is used by the companies in the bookkeeping entry

Valuation of the same kinds of fixed assets which are built and acquired in different periods of time could have unlike original costs First of all it depends on the changes of equipment prices and the costs of installation and construction works because of the technical progress This makes difficult

to determine the real efficiency of fixed assets usage in the different enterprises of the same branches,

as well as to compare the profitability and evaluation of its evolution The cost of the fixed assets which is recorded in the bookkeeping entry is not liable to variation except as otherwise specifically provided for by the laws of the Russian Federation.31 The change in the cost of fixed assets is possible

in cases of modernization, completion; reconstruction, technical upgrading, partial dismantling and revaluation of the fixed assets.32

Modernization presupposes works caused by the change of technological and supporting purpose of the depreciated fixed assets, as well as increased load and other acquired qualities

Reconstruction is the process of items modification related to the production process improvement and the increase in its technical and economic performance This modification is carried out within the framework of the project of the reconstruction with the aim of capacity increase, quality improvement and shifts in products mix

29 Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002

30 Chart of Account of Finance and Economic Activities of the Organization and Instructions for Its Use, approved by Order of Finance Ministry of the Russian Federation of 31 October 2000, no 94n

31 Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

32 Accounting: Manual for students of Higher Educational Establishments / edited by Bezrukikh P.S., - Moscow : Accounting, 2008, p.55 (author’s translation)

The technical upgrading (or re-equipment) is a package of measures taken to increase the technical and economic indicators on the basis of high-technologies implementation, mechanization and automation of production, modernization and replacement of obsolete and worn-out equipment for more productive one.33

On completion of fixed assets construction works, their full equipping or reconstruction, costs accounted for the investments into fixed assets either increase initial costs of the fixed asset and are written off the financial account or pass to a special account of fixed assets Thus, fixed assets reconstruction costs are not included into prime cost but are related to their initial cost increase Their initial cost can increase as a result of reconstruction at the expense of capital investments or decrease

at the expense of their partial dismantling or price reduction

Commercial organization can revalue homogeneous items of fixed assets at current cost no more than once a year Revaluation is periodical clarifying replacement cost of fixed assets to bring them into compliance with the market prices level Revaluation is conducted by recalculation of its acquisition or replacement cost and the accumulated depreciation during the period of the item utilization 34

Replacement cost is fixed assets reproduction expenditures In other words, it is a sum of money paid at current market prices in case of the item replacement for a new one Within the government act to determine an item current cost it is necessary to specify its acquisition cost through its revaluation

Fixed assets revaluation in terms of replacement cost is made annually as on 1st January In the current accounting fixed assets are reflected according to their acquisition cost and those revaluated according to the residual cost The results of this fixed assets revaluation as on the 1st January of the current year are reflected in special accounting They are not included into accounting records of the previous reporting year and placed on the balance sheet at the beginning of the reporting year Fixed assets revaluation surplus as a result of this revaluation is recorded to the added capital Decreases in the value of assets as a result of the revaluation are placed on the uncovered loss account

Fixed assets revaluation surplus equal to decreases in the value of assets conducted in the previous periods of time and placed on the uncovered loss account is entered to an uncovered loss account Decreases in the value of assets are entered to the reduction of added capital funded with the item revaluation surplus conducted in the previous reporting years The excess of the decreases of the value of the item over its revaluation surplus placed on the organization added capital as a result of revaluation enters to uncovered loss account And this should be disclosed in the financial statements

In case of retirement of the item its revaluation surplus is transferred from organization added capital

to the uncovered loss account.35

1.2.4 Depreciation of fixed assets

All fixed assets except for land are subjected to physical deterioration and obsolescence, i.e when affected by physical forces as well as economic and technology factors they gradually lose their properties and become unfit for use Physical deterioration can be restored by repair or upgrading capital assets but finally they are becoming unfit for use In fact physical deterioration takes place both while their being operated and during their non-operating Partial physical deterioration can be returned through repair and full –by replacement by new capital assets Obsolescence appears when capital assets in their design, efficiency and operating costs are behind advanced constructions but what’s more important they are not able to produce high-quality production in the volume you can get using advanced equipment It needs the replacement of obsolete items by more advanced ones.36

Depreciation value – acquisition (replacement) costs minus accumulated depreciation The sources for acquisition of new assets can be received from the sales of the company’s production Partial redemption of the fixed assets value is included in the final price of the production

Depreciation is the process of gradual transfer of fixed assets value to the final products and the accumulation of the cash fund for the replacement of obsolete assets Balance depreciation is carried out regardless of the operation profit of the company in the accounting period There are following depreciation methods in the accounting in the Russian Federation:

1 straight-line method;

2 declining-balance method;

3 units-of-production depreciation;

4 sum of the year digits method.37

The straight-line method is used to calculate the fixed assets depreciation by the following formula:

DA = Acquisition costs (reproduction costs) * depreciation rate (1.1), where: DA – the depreciation yearly amount

36 Belousova S.V Fixed assets depreciation – Moscow: Finance and statistics, 2006, p 34 (author’s translation)

37

Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

Depreciation rate = 100% / asset useful life (in periods) (1.2)

According to the declining-balance depreciation method the depreciation yearly amount is defined on the basis of the asset depreciation value by the beginning of the accounting period and the depreciation rate and the amortization (depreciation) factor The depreciation rate is calculated on the basis of the asset useful life and the amortization (depreciation) factor is determined by the organization This factor should not exceed 3.38

DA = DV * depreciation rate * AF (1.3), where:DV – the depreciation value;

AF – the amortization factor

Units-of-production depreciation method determines assets depreciation as the proportion between expected volume of the products produced by the asset during its useful life and the volume

of the products produced in the accounting period multiplied by assets acquisition costs

DA = Acquisition costs * (volume of the products produced in the accounting period /expected volume of the products produced) (1.4)

Sum-of-the year digits depreciation method39 defines the depreciation yearly amount as a ratio wherein a numerator is the number of years out the asset useful life and the amount of useful life years number reciprocally multiplied by the acquisition cost (reproduction cost) of the asset

DA = Acquisition costs (reproduction costs) * (number of years out the useful life / the amount of useful life years number) (1.5)

All fixed assets of the company are liable for depreciation with the exception of land, fixed assets that are laid-up for a term at least three months, land improvement facilities and objects like this (forestry objects, road facilities, productive livestock, books and brochures) In addition, fixed assets

of non-profit making organizations are not depreciated 40

For balance depreciation all depreciable assets should be divided into groups Their grouping

is carried out in accordance with the Government Resolution no.1, 01.01.2002 41

38 Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

39 In the Russian Federation it is also called cumulative method

40 Russian Accounting Standards “Accounting of Fixed assets” 6/01, approved by Order of Ministry of Finance of the Russian Federation of 30 March 2001, no 26n (as amended by Ministry of Finance Order of 18 May 2002)

41 See the appendix no 1

The useful life of a fixed asset is determined by an organization by the moment of its recording in the bookkeeping entry While determining the useful life of fixed assets, the following factors should be taken into consideration:

1 expected useful life of an asset in accordance with its estimated power and expected capability;

2 expected physical deterioration and obsolescence, which depends on its operating mode, natural conditions and environmental influence, repairs system, etc.;

3 regulatory and other limitations of fixed assets usage (the lease period, etc.)

The useful life of fixed assets is revised in case of expected economic benefits For example, the review is carried out in case of standard indicators improvement of fixed assets operation This improvement can be obtained due to the fixed assets reconstruction and renewal.42

Balance depreciation of fixed asset starts on the first day of the month after the fixed asset is recorded into bookkeeping entry It is carried out until total amortization of the fixed asset value or its writing-off Regardless of the depreciation method in the accounting period, balance depreciation of fixed assets during the accounting period is carried out monthly The amount of balance depreciation each month equals to twelfth of yearly amount of balance depreciation.43

1.2.5 Fixed assets analysis

Fixed assets are one of the major production factors Productive potential is one of the main factors of enterprise efficiency and its financial soundness Financial statements allow to analyze in details the state and potential shift of the enterprise fixed assets The state and effective utilization directly affect the business activities of the enterprise Efficient use of fixed assets encourages growth

of all technical and economic indicators, increase in output as well as decrease in prime cost and factory labour hours Fixed assets analysis usually starts with the assets volume, their performance.44

For their purpose fixed assets are divided into three groups:

- fixed assets of the basic activity;

- production fixed assets of other industrial branches;

- non-production fixed assets of other industrial branches.45

44 Babayev Y.A Accounting Manual for students of Higher Educational Establishments – Moscow: UNITY-DANA, 2007, pp.72-73 (author’s translation)

45

Yeleneva Y.A Economics of machine-building – Moscow: Finance and Statistics, 2007, p.55 (author’s translation)

While analyzing fixed assets structure and their movement all the accounting data should be examined in dynamics taking into account that fixed assets of the basic activity are directly connected with output production, so they have the highest specific weight or ratio

While analyzing the dynamics of the specific weight of fixed assets in use changes it is necessary to proceed from the fact that capital investments in re-equipment and reconstruction of the enterprise fixed assets mean the faster growth and renovation of fixed assets in use The specific weight of fixed assets in use increase marks the progressiveness of their structure, the enterprise technology intensiveness growth and encourages the increase in output as well as the return on fixed assets ratio increase Moreover, the growth rate of enterprise machines and equipment should exceed the growth rate of other funds

Fixed assets analysis is conducted in several directions and this allows to give fixed assets structure, dynamics and efficiency evaluation as well as to evaluate the efficiency of long-term investments The directions of the analysis are usually determined by the management needs The analysis of the structural dynamics of fixed assets as well as investments analysis make up the financial analysis Fixed assets efficiency evaluation and their operating costs make up the managerial analysis Operation costs analysis is the integral part of the prime cost analysis.46

While making the analysis it is necessary to regard the laws of systems development as each technological stage or economic structure have their own growth ceilings determined by technological systems Fixed assets (technological systems) efficiency is determined by their location

on the development curve and goods position on the market Different combinations of these two factors characterize the balance between benefits and costs

The aims of fixed assets utilization efficiency analysis are the following:

1 determining the dynamics in fixed assets composition and structure as well as their technical condition;

2 studying renewal rate of fixed assets in use, their technical re-equipping and the enterprise reconstruction as well as introducing modern machinery, replacement of obsolete equipment;

3 determining fixed assets utilization efficiency and availability of their usage potential;

4 calculating indicators of efficiency of fixed assets utilization, such as capital investment yield and capitalization ratio, as well as the factors affecting them;

5 determining long-range enterprise development in accordance with the requirements of the market competition;

6 determining efficiency of physical facilities as well as intensity and extensity of the equipment performance.47

The aims of fixed assets usage efficiency analysis are as follows:

1 the equipment utilization efficiency analysis;

2 fixed assets movement analysis;

3 fixed assets technical condition analysis;

4 indicators of fixed assets utilization efficiency analysis

The procedure of fixed assets analysis is aimed on the selection of the best variant of its utilization The main features of the analysis are:

1 variation of decisions how the company should use fixed assets;

2 long-term determination.48

The perspective analysis is the basic kind of investment analysis It comes before the analysis

of the existing fixed assets and the efficiency of its utilization The main aim of the investment efficiency in fixed assets analysis is to determine the capital efficiency and to analyze the possibility of getting procurement of loans to finance company’s activities

The quality of the analysis depends on reliability of the information provided by the accounting system of the company First of all, it means the quality of the accounting system formation and the transaction entry of fixed assets, as well as the correctness of fixed assets allocation

to the classification groups The reliability of stock sheet and the depth of maintenance of analytical data sheet are also taken into account in this case

Main informative sources of the analysis are:

1 business-plan of an enterprise;

2 form no.1 of OKUD49 “Balance-sheet”;

3 form no.3 of OKUD “Cash-flow report”;

4 form no 5 of OKUD “Annex to a balance-sheet”;

5 technical development plan;

6 inventory cards of fixed assets accounting;

7 design estimate documentation;

All-Russia Classifier of Management Documentation

50 Yeleneva Y.A Economics of machine-building – Moscow: Finance and Statistics, 2007, pp 72-73 (author’s translation)

Summarizing indicators are used to characterize fixed assets utilization covering the national economy in general – its different branches, enterprises, etc Here it is possible to mention, first of all, return on fixed assets ratio and profitability

Specific indicators are those mostly used at the enterprises They are divided into indicators of intensive and extensive fixed assets utilization In particular, the analysis of equipment efficiency is conducted at the enterprises taking into account its utilization period and working capacity.51

Indicators of fixed assets intensive utilization define the quantity of output per unit time Indicators of fixed assets extensive utilization define their usage in terms of time.52

1.2.6 Fixed assets utilization efficiency upgrading ways

During a long period of fixed assets utilization they come to organization, put into use and finally wear out Due to this fact they are repaired to repair and the physical qualities of assets are regenerated Besides that fixed assets move within the organization, and are subjected to disposal due

to their decay and non-expediency of further use in the production process The organization is authorized to possess, exploit and manage its fixed assets It means that it has the right to sell, exchange it and let the assets out for lease

Fixed assets utilization efficiency is measured by profit volume per rouble invested into fixed assets.53 One of indicators of fixed assets effectiveness is their utilization increase by means of downtime cuts, introducing new technologies and advanced equipment, increasing shift utilization, return on fixed assets ratio, etc., in other words, increasing the output and services per rouble invested into fixes assets It is possible to reduce the fixed assets annual costs of the enterprise by selling excessive and redundant equipment which is also an important measure to reach the return on fixed assets ratio increase

Untapped reserves of output and return on fixed assets ratio increase are determined by output and return on fixed assets ratio factorial analysis Reserves of the increase in return on assets ratio are determined by multiplying determined reserves of return on fixed assets ratio increase by actual level

of profitability of fixed assets Reserves of the increase in production due to introducing next generation equipment are determined by multiplying its additional quantity to actual value of all

factors forming its level Besides new equipment the usage of technological innovations is another

reserve of the increase in return on fixed assets ratio and the return on equipment item ratio

Establishing business links with investors is also of great importance For plant renovation and introducing new technologies millions of dollars are needed so the plant can not do without large investments To make it possible the transformation of several associations into one big joint-stock company is needed Besides that enterprises should expand their foreign-economic activity as it is an essential condition to receive necessary investments

At the present time the particular importance is attached to forecasting of fixed assets utilization The accounting department carries out the return on fixed assets ratio analysis to predict the fixed assets utilization for some certain period of time Using expertise (intelligent database) the department makes up suggestions in the area of management From this point of view the most important problems are efficient fixed assets utilization which means the recognition of useless equipment and the problem of output growth using the existing fixed assets park While analyzing and forecasting the fixed assets utilization the output data is given in graphics or tabular form This data reflect the intensity of fixed assets release which allows to define the part of fixed assets acquisition costs amortized by depreciation.54

The expenses minimization during the fixed assets useful life is the significant part of the accounting process modelling For this purpose the model of the equipment replacement is worked out

at some certain work cluster Using this model the accounting department analyses the fluctuations in the equipment items and suggests some ideas on management decision making

If there is a lack of information about the expected application of the enterprise funds and this lack hinders management decision making, it is necessary for the accounting department to develop a model of the expenses minimization during the fixed assets useful life While making this model the fixed assets are classified according to the items with the respect of return on production assets ratio.55

Thus the complex approach to the fixed assets accounting, control, analysis and auditing allows to receive without delay all the necessary data for the given period of time It also helps to promote the managerial efficiency of the enterprise financial and economic activities.56

1.3 Fixed assets accounting system of the Czech Republic

1.3.1 The importance of IFRS for comparison of the accounting systems of the

Russian Federation and the Czech Republic

During last few years the significance of the IFRS in the world as well as in the Czech Republic has greatly increased The Order of the European Parliament and the Council of application the IFRS came into force in September 2002 This Order greatly influenced the legislation of the Czech Republic and was reflected in the Law of Accounting57 of the Czech Republic 58

In the meantime, the use of IFRS by Russian companies on a voluntary basis has already been accelerating The drivers have been the requirements of international financial institutions and investors and a desire from management and shareholders for more transparent and internationally intelligible financial information.59

The IFRS appeared in the 1970s and are developing up to the present Business-units (companies) should establish the accounting system on their own its own so that the system could satisfy basic accounting principles and rules established by the IFRS The IFRS complex is broad enough and varies from the Czech Republic legislation 60 (as well as for the Russian one) However, it

is necessary to study them closely because the IFRS usage will allow to compare different accounting systems which are incompatible due to their cultural and economic specific features In other words it

is possible to compare the legislation and accounting systems of the Czech Republic and the Russian Federation while using the IFRS The standards serve like a bridge between different accounting systems Thus the comparative analysis between the IFRS and the Czech Republic and the Russian Federation legislation is used in the thesis.61 The analysis allows to draw a parallel between accounting systems of the two countries and detect similarities and distinctions as well as beneficial and negative impacts

57

563/1991 Col., as subsequently amended Hereinafter: the law of accounting

58 Loja R., Vojackova H Financial statements according to IFRS with focus on assets 1 edition Prague: Bilance, 2005 325 p ISBN 80-86371484, p.9 (author’s translation)

59

GAAP-O-200510.pdf>

<http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-to-Russian-60 Loja R., Vojackova H Financial statements according to IFRS with focus on assets 1 edition Prague: Bilance, 2005 325 p ISBN 80-86371484, p.9 (author’s translation)

61 The comparison between the Russian Federation accounting system and the IFRS is represented in the appendix no 3

1.3.2 The statutory regulation

The Czech Republic legislation The Czech accounting system is regulated by several juridical laws.62 The accounting of long-term assets in the legislation of the Czech Republic is regulated by the Law of accounting, that constitutes the obligation to keep accounting files for the Czech enterprises63 and by the edict of Ministry of Finance64, that extends some rules of the Law of accounting (that constitutes the methods and principles of accounting as well as valuation rules)

The edict of Ministry of Finance is next developed by so-called Czech accounting standards valid since the beginning of the year 2004, that describe in detail concrete accounting principles for concrete economic transactions.65

These regulatory documents are intended for business units which are represented by businessmen and maintain the double-entry accounting Basic methods of long-term assets accounting are defined by the Czech accounting Standard no 13 “The long-term intangible and tangible assets”66(in accordance with the statements of the above mentioned regulatory documents)

IFRS According to IFRS, there are several standards concerning long-term tangible and intangible assets Tangible assets agenda is investigated in the IAS 16 Property, Plant and Equipment and IAS 40 Investment Property IAS 38 Intangible Assets is about long-term intangible assets In addition, other standards like IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IAS 17 Leases, IAS 36 Impairment of Assets, etc are applied while reviewing long-term assets

1.3.3 Determining the long-term tangible assets

The Czech Republic legislation Long-term assets in terms of the accounting are regarded in the edict of the Ministry of Finance67, according to the law of accounting According to the regulatory documents classification of long-term assets it is possible to distinguish:

1 long-term intangible assets;

2 long-term tangible assets;

3 long-term financial assets.68

64 500/2002 Col., as subsequently amended Hereinafter: the edict of Ministry of Finance

65 Valouch P Accounting 1.edition Brno: Mendel Agricultural and Forestry University University,

2005 102 p ISBN 8071579165, p.9

66 Hereinafter: the Czech Accounting Standard no 13

67 § 6-8 of the edict

According to the edict of the Ministry of Finance no 500/2002, next items belong to the term tangible assets: land, facilities, buildings, constructions, movable and real property, perennial plantings, livestock and classes of animals, and other long-term assets

The useful life of fixed assets such as movable and real property, perennial plantings and livestock, is determined as more than one year and the value of these assets is determined by the organization The value of other long-term assets is not defined

In case of assets being not long-term assets automatically without regard to its evaluation, the limit of the entrance price is not definitely defined The limit means that as from this value business-units (or companies) must record assets (e.g computers, equipment, software, etc.) with the useful life more than one year to the long-term assets account automatically The accounting regulatory documents allow business-units (companies) to determine these items evaluation in their internal accounting system provided they adhere the principle of faithful and honest assets reflection in accounting.69

If separate movable objects and complexes of the movable objects with the separate technical and economic functions which have useful life more the one year are not recorded as a part of the long-term tangible assets (for example due to the less acquisition costs than the limit of the entrance price determined by the business-unit), these assets are recorded as a small-sized property (assets) in the bookkeeping entry and business-unit accounts for these assets as inventories (supplies) It means that these assets should not be depreciated the same way as the long-term tangible assets The usage of these assets can be recorded expendably like the consumption of the inventories However, it does not mean that the business-unit can not decide to transfer a part of the assets value to the expenditures during the some certain years of its usage (within the framework of providing the faithful and honest assets wear and tear reflection) But it is not referred to the depreciation accounting of these assets, only to the use (consumption) of the inventories part.70

Additionally, the livestock with the useful life more than one year which is not recorded as part of the long-term tangible assets is charged to the inventories account.71

Furthermore, uncompleted fixed assets belong to long-term assets, according to the Czech Republic legislation, as well as advances obtained by the company for acquisition of the long-term assets, and the valuation difference to the acquired assets The latter includes positive or negative difference between the cost of the whole company or its part primarily acquired or received as a

contribution to the equity capital, as well as the assets and liabilities evaluation (e.g in the process of the company legal form change), which is in the bookkeeping-entry of the company that is purchasing these assets, and the individual articles of the company assets decreased by the accepted company liabilities in the case of its investment, selling, shutting down business, etc The technical evaluation is also the part of long-term tangible assets if its amount exceeds 40000 CZK (according to the law of the income tax)

IFRS According to IFRS, only assets which fulfill all the criteria stated in the conceptual framework are recognized as long-term assets These criteria are the following: the income receivable of the asset usage is under control of this company; and acquisition costs can be reliably determined.72 The long-term tangible assets are divided into several groups according to the method of its usage For example,

it is referred to:

1 Property, plant and equipment, which company holds with the aim of using it in the production process or providing with goods and services, or for administrative aims when they are classified as part of the IAS 16 Property, Plant and Equipment Equally it is expected that these assets will be used in the company production process during more than one accounting period

2 Investment in property is the property in possession of the company with the aim of getting profit more from lease or capital value increase rather than from the usage in the production process or supplying goods and services In this case they are considered as a part of the IAS 40 Investment Property

Important spare parts and general inspections are also parts of the long-term tangible assets The subsequent expenditures will become the part of long-term tangible assets provided their productivity will increase and the company will get bigger economic benefit

Ordinary spare parts are included in inventories and are recorded as expenses in accounting records at the moment of their consumption The important spare parts with the useful life more than one year which refer to the particular property, plant and equipment items should be classified as a property, plant and equipment item They also should be depreciated and tested on a value decrease by the owner at the end of the accounting period (according to the statements of IAS 36) If spare parts classified in such way are not used in the production process yet, in this case they are depreciated during the depreciation period of assets they are referred to When owner starts to use these spare parts

in the production process the depreciation period of spare parts should be reviewed with regard to its own depreciation period The Standard requires the usage of the component depreciation method.73

Some assets are acquired for the purpose of the environment protection or for safety reasons (e.g wastewater treatment) These assets by themselves do not generate money flows for the

company-owner but they contribute to its generation Such assets fulfill the criteria of their accounting

if they generate bigger economic profit while using in the production process than in case if they are not acquired by the company It is also necessary to review their value together with the assets they are referred to as part of the assets value decrease testing (e.g the production line and wastewater treatment equipment)

The expenses which partake of maintaining the assets economic performance are recorded in the bookkeeping entry as expenses at the moment of their acquisition Ordinary repair activities and maintenance can be mentioned as examples of such expenses At the same time expenses which increase the asset economic performance are activated in the balance sheet 74

1.3.4 Determining the long-term intangible assets

The Czech Republic legislation According to the edict of the Ministry of Finance, following assets are the part of long-term intangible assets: expenses for establishing a company, the intangible results of research activities, software, valuable rights, and goodwill, with useful life for more than a year starting from the value determined by the organization The exception is goodwill, which is accounted regardless of its value

Expenses for establishing the company are those spent by the organization with the aim of its creation before it factually appeared (e.g judicial and administrative fees, business-trips expenses, brokerage, consulting works fees and payments and rent) The immaterial results of research activities and software can be recognized if they were obtained by the company own activities or acquired from other companies The example of valuable rights can be right of the industrial ownership

Goodwill is the positive or negative difference between the cost of the whole company or its part primarily acquired or received as a contribution to the equity capital, as well as the assets and liabilities evaluation (e.g in the process of the company legal form change), and the individual articles

of the company assets decreased by the accepted company liabilities

Some other long-term intangible assets also belong to long-term intangible assets: preferential limits and emission permits, unfinished long-term intangible assets and advances obtained by the company for acquisition of long-term intangible assets Like in the case of long-term tangible assets, the technical evaluation is also the part of fixed intangible assets if its amount exceeds 40000 CZK (according to the law of the income tax)

74 Loja R.; Vojackova H Financial statements according to IFRS with focus on assets 1.edition Prague: Bilance, 2005 325 p ISBN 80-86371-48-4, pp.140-141(author’s translation)

IFRS According to IFRS, only those which fulfill the assets criteria are recognized as long-term intangible assets Intangible assets are identifiable non-monetary assets, which have immaterial form and are held by the company with the aim of its usage in the production process or supplying goods and services, as well as with the aim of leasing them for management and administrative purposes The following criteria must be fulfilled to recognize an asset as a long-term intangible one:

1 its identifiability It means that the asset can be differentiated from the goodwill, and it is possible to measure, use and sell this asset during the production process;

2 control of the asset by the company It means that the company has the right to get the future economic benefit from the usage of the asset and to limit the access of other companies to this future benefit;

3 existence of the future economic benefit The company should be able to get this future economic benefit while using the asset in the production process or supplying goods and services, as well as using it for administrative and controlling aims;

4 reliability of the acquisition costs expression in the bookkeeping entry of the company.75

The scientific basic researches are those carried out with the aim to obtain new scientific or technical knowledge They cannot be activated, but are accounted as expenses At the same time research results can be of great important for the development of the company It is possible to activate them the in case of company management goodwill and availability of necessary financial funds (resources)

According to the IAS 38 expenses for establishing a company, promotion and advertising expenses, training expenses and expenses for reorganization of the enterprise are not classified as long-term intangible assets If to speak about the assets produced by the enterprise on its own steam, the research expenses, brand names, periodical expenses, publishing titles, lists of customers, etc.76 Goodwill created by the company own resources is not declared in the accounting evidence as well

1.3.5 The evaluation of the long-term tangible and intangible assets

The Czech Republic legislation Business units evaluate assets at the moment of making a transaction, at the balance-sheet date

or by the moment of preparing accounting statements by the company While making a transaction long-term tangible and intangible assets are regarded as depending on the way of their acquisition:

1 acquisition cost (acquisition costs + expenses related to the acquisition);

2 reproduction acquisition cost (the cost which was paid for the asset at the moment of recording this transaction– in case of gratuitous acquisition);

3 company own cost (direct expenses spent on the assets production and indirect expenses related to the production) – in case of assets production by own activity of the company

Costs connected with the purchase creating part of acquisition costs are defined by edict of Ministry of Finance In case of fixed assets (buildings, cars, computers, software, etc.) the costs connected with the purchase and influencing acquisition costs are especially transportation costs, duty, brokerage, administrative fees, assembling costs, costs on geologic works, licenses and patents Acquisition costs in case of fixed assets are not influenced by repair costs, costs resulting from exchange rates changes, costs on personal training of employees, etc

Own costs can be defined as all direct costs (consumed material, energy, wages of employees producing the asset, etc.) spent on creation of inventories and fixed assets including part of indirect costs (for example wages of administrative workers, etc.) spent on creation of an asset 77

In cases when the law of transformations of commercial companies and cooperatives78 claims the obligation to evaluate the commercial property, property is evaluated by actual cost Actual cost is

a market value, if it is not available, a qualified estimate or an expert judgement can be used Temporary evaluation decrease is accounted by means of the correction items.79

IFRS While giving initial estimate, the property is evaluated by the acquisition costs (acquisition costs + direct expenses related to the acquisition) Among these direct expenses are interests, necessary to activate Besides that it is necessary to take into account the expenses for further removal

of the assets and putting the place into proper condition Assets created by the company own activities are evaluated by its own costs, while recording the same items as in the case of its acquisition In case

of delayed payment it is necessary to discount the acquisition cost for the present value In case of their acquisition as part of enterprise combination long-term intangible assets are evaluated by the real value by the date of their acquisition

While giving further evaluation a business-unit chooses one of two models which is applied for the whole group of assets The chosen evaluation model should be applied for the whole group of assets This refers to the acquisition costs model (the acquisition cost minus depreciation amount minus assets depression accumulated losses) or revaluation model (real value minus depreciation amount minus assets depression accumulated losses)

It is not possible to carry out the selective revaluation The revaluation should be carried out regularly enough to provide the approximate parity between the real assets value and their valuation in the bookkeeping entry The revaluation increase is usually recorded at the bookkeeping account

77 Valouch P Accounting 1.edition Brno: Mendel Agricultural and Forestry University, 2005 102 p ISBN 8071579165, p.11

78

125/2008 Col., as subsequently amended

79 Valouch P Accounting 1.edition Brno: Mendel Agricultural and Forestry University, 2005 102 p ISBN 8071579165, p.12

“Revaluation Fund” which is the part of owned capital of the company The revaluation also has an impact on the deferred tax calculation

The subsequent evaluation is used for the long-term tangible assets In case of long-term intangible assets the active market should exist The items on the market must be homogeneous, the information about prices should be accessible to the public and it is possible to find the buyer and seller willing to make a transaction at any time

1.3.6 The depreciation of the long-term tangible and intangible assets

The Czech Republic legislation Intangible and tangible assets cannot be consumed during one year Their consumption is usually gradual But as time passes many fixed assets, such as buildings, computers, cars, software, lose its capacity to provide useful services This decrease in usefulness is a business cost called depreciation

Permanent evaluation decrease is carried out by means of depreciation amount units establish depreciation schedule Depreciation is carried out on the basis of this schedule Assets usage method as well as depreciation period are also taken into account It is also possible to regard the residual value of the asset (the depreciation amount which the company can get at the moment of the expected asset disposal after the subtraction of the expected expenses related to disposal of the asset) The edict of Ministry of Finance specifies assets which are not depreciated This refers to land, objects of art and collections, unfinished assets, leased assets These fixed assets are recorded on accounts in acquisition costs until the time of their sale or other reason for their removing from the accounting evidence (damage, steal, donation, etc.) These assets are called non-depreciated assets 80

Business-Long-term financial assets also are not taken into account while speaking about assets depreciation The depreciation of this type of assets is forbidden.81

Depreciation methods are used to allocate a fixed assets cost over the accounting periods in its useful life 82

There are several depreciation methods: depreciation during time (the straight-line depreciation, accelerated depreciation, progressive depreciation); units-of-production depreciation; component depreciation Depreciation is regarded in expenses accounting

80 Valouch P Accounting 1.edition Brno: Mendel Agricultural and Forestry University, 2005 102 p ISBN 8071579165, p.13

81

§56 of the edict of Ministry of Finance no 500/2002

82 Wild J., Shaw K., Chiappetta B Financial and Managerial Accounting: information for decisions 3 edition Boston: McGraw – Hill/ Irwin, 2009 xxxii, 589, 698 p ISBN 97800733605601113, p.326

While using depreciation methods in terms of time assets depreciation primarily depends on the length of assets usage While using units-of-production depreciation, assets depreciation in such a case depends on the assets output (performance –e.g number of produced products by this asset) The component depreciation method is applied only for buildings, flats, non-residential buildings, separate movable objects and complexes of movable objects (according to the edict of Ministry of Finance).83

Some particular depreciation method must be selected primarily on the basis of the optimum way of reflecting the reality of the assets usage Assets that are wearing out proportionally should be depreciated by use of straight-line depreciation method Assets which lose bulk (major part) of their value during first years of the usage in the production process (e.g computers), and less of the value after years should be depreciated by use of accelerated depreciation methods Finally assets which lose the major part of its value during the last few years should be depreciated by means of progressive (decelerated) depreciation method

First of all, it is necessary to specify the moment of the depreciation start correctly in case of depreciation temporal method application It is the point of time by which the asset becomes a long-term tangible or intangible asset.84

The straight-line depreciation method is recommended for example in case of a private car used for business activity and the number of the kilometers covered annually is approximately the same In this case the straight-line depreciation method is expected to reflect the gradual decline in the asset value the best way Every year the equal sum of depreciation (part of the assets acquisition costs) will be transferred to the expenditure account The calculation of depreciation yearly amount is carried out by the following formula:

D = EC/t (1.6), where: EC = the asset entry cost, which is subject to depreciation,

t = the depreciation time

In case of assets acquisition during the accounting period it is necessary to calculate the corresponding depreciation amount related to this accounting period.85

The accelerated (degressive) depreciation method is recommended particularly in case of assets becoming obsolete during the first years of depreciation Computer hardware is a typical example of such assets While using this depreciation method, the smaller part of assets value is depreciated every following year The amount of yearly depreciation appears to be the biggest in the first year of its usage, and the smallest one – in the last year It is possible to calculate the depreciation yearly amount using the following formula: