Innovations in accounting for capital investments

Popov Aleksei Yur'evich PhD in Economics Docent, the department of Accounting and Audit, Ural State University of Economics 620144, Russia, Sverdlovskaya Oblast' oblast', g. Ekaterinburg, ul. 8 Marta, 62 prepodpopov@yandex.ru Other publications by this author

Shutova Tat'yana Vladimirovna Bachelor's Degree, Department of Accounting and Auditing, Ural State University of Economics 620144, Russia, Sverdlovskaya oblast', g. Ekaterinburg, ul. 8 Marta, 62, aud. 570 t.v.olefir@mail.ru

Introduction

 In recent decades, accounting specialists have been striving to make the financial reporting system even more perfect. The reason for this phenomenon is considered to be the rapid development of world markets, the globalization of the economy, the diversification of economic processes, etc. In this regard, the financial statements should reflect complete and representative information about the objects of economic activity, understandable to current and potential investors, and this vector is feasible only through the convergence of domestic accounting standards with international financial reporting standards.

 To achieve this goal, Russia has adopted a program for the development of Federal Accounting Standards, approved by Order of the Ministry of Finance of the Russian Federation No. 83n of 18.04.2018, in accordance with which new Federal Accounting Standards are adopted. In particular, the new FSB 26/2020 "Capital Investments", approved by the Order of the Ministry of Finance of the Russian Federation No. 91n dated 13.10.2003, is subject to application from the accounting statements of 2022. As a result of the adoption of this standard, the procedure for recognizing, evaluating and reflecting incomplete capital investments in accounting and financial statements is significantly changed, and therefore economic entities are subject to update the accounting policy starting from 2022 years.

 The issues of accounting for capital investments in accordance with the current regulations were considered in their works by Ovchinnikova O. A. ^[8], Druzhilovskaya E. S. ^[3], Zhdankina N. A. ^[4], Zykova M. E. ^[5], Ramazanova A. K. ^[10] and others.

 The analysis of the provisions of the standard being put into effect was carried out in scientific publications by Nikitin V.Yu.^[7], Druzhilovskaya T.Yu.^[2], Vereshchagin S.A.^[1], Popov A.Yu.^[9] and others.

 The foreign experience of recognition and evaluation of capital investments, described in the works of Jackson S.B.^[14], Biddle G.S.^[13] and others, also deserves attention.

 However, when building an accounting system in the Russian Federation, business entities need to adapt the accounting rules in accordance with the standards in force in the Russian Federation, respectively, this article aims to conduct a comparative analysis of the current regulatory framework and the FSB 26/2020 introduced from next year, as well as to develop recommendations for the application of its individual provisions.

 Comparative analysis of the current regulations on accounting for long-term investments and FSB 26/2020 "Capital Investments"

 In connection with the adoption of the new federal accounting standard 26/2020, it is advisable to clarify the main innovations by comparing with previously applied regulations and rules. The entry into force of the new standard is carried out simultaneously with the recognition of the Provisions on Accounting for Long-term Investments (letter of the Ministry of Finance of the Russian Federation No. 160 dated 12/30/93), PBU 6/01 (Order of the Ministry of Finance of the Russian Federation No. 26n dated 30.03.01), Methodological Guidelines on Accounting of Fixed Assets (Order of the Ministry of Finance of the Russian Federation No. 91n dated 13.10.03), as well as other normative acts, which introduced amendments and additions to the above documents.

First of all, it is necessary to clarify the definition of "Capital investments". At the time of adoption of the standard, this term has already been voiced in a number of regulations, in particular, Article 1 of Federal Law No. 39-FZ dated 25.02.99 "On Investment Activities in the Russian Federation carried out in the form of capital investments" prescribes a definition according to which capital investments are understood as "investments in fixed assets (fixed assets), including including the costs of new construction, reconstruction and technical re-equipment of existing enterprises, the purchase of machinery, equipment, tools, inventory, design and survey work and other costs"^[15].

FSB 26/2020 is the result of the theoretical and practical experience of many specialists in the field of accounting and auditing. The combination of theory and practice made it possible to give the most accurate and up-to-date definition of capital investments. In the new document, capital investments are understood as "the costs of an enterprise aimed at increasing, restoring or improving fixed assets"^[16].

At the same time , capital investments should not be considered:

- Performance of works by the enterprise, provision of services for the creation, improvement and restoration of third-party means of production;

- Acquisition and creation of assets intended for sale;

- The costs of maintaining the operability, current condition and uninterrupted operation of fixed assets, i.e. their current repair.

- The costs of unplanned repairs of fixed assets due to various economic factors.

 For a more accurate and concrete comparison of the current rules and regulations of the introduced standard, it is necessary to analyze the following key points:

- Criteria for recognition of capital investments in accounting;

- The unit of accounting for capital investments;

- Principles of initial assessment;

- Accounting procedure for certain types of costs;

- The procedure for determining the amounts included in the cost of capital investments;

- Depreciation;

- Rules for writing off capital investments from accounting;

- Disclosure of information in accounting statements;

- The possibility of using simplified methods of accounting for capital investments.

Special attention should be paid to the transitional provisions of FSB 26/2020.

Analyzing the previously existing accounting rules, the issue of qualification of certain types of long-term investments, in particular equipment for installation, before its transfer to installation, was debatable. In particular, there was a point of view suggesting the accounting of these objects as part of the reserves.

Starting from 2022, two conditions must be met simultaneously in order to recognize capital investments in accounting:

- The costs incurred are guaranteed to ensure that the company receives economic benefits in the future for a period of more than 12 months, or a normal operating cycle exceeding the specified period;

- The possibility of reliably determining the amount of costs incurred or the amount equated to it, since the costs for the purposes of FSB 26/2020 are equated with the issue of shares by the company and the gratuitous receipt of property from the founders, which in the classical sense is not a cost.

The definition of criteria for the recognition of the object of capital investments is an innovation of accounting legislation, since previously existing regulations did not provide such criteria and prescribed only the cost accounting procedure, which has retained its continuity. I.e., after simultaneous compliance with the two conditions described above, capital investments are recognized as actual costs are realized.

In the new FSB 26/2020, the accounting unit for capital investments is an object of fixed assets, which is created by the company, in contrast to the current procedure, which assumes "accounting for costs in general for construction and for individual objects (buildings, structures, etc.) included in it, as well as for purchased individual objects of fixed assets, land plots, environmental management objects and intangible assets"^[17].

When assessing the costs included in the cost of capital investments in the new FSB 26/2020, new approaches take place. It has been clarified that operations on the transfer of advances to suppliers and contractors are not recognized as costs until their contractual obligations are fulfilled, in particular, the provision of property, property rights, the performance of works, the provision of services. Also new is the norm regulating the direct inclusion of the value of estimated liabilities in the cost of capital investments.

Note that a valuation obligation is a real–life obligation of an enterprise with an indefinite amount of performance and/or an indefinite maturity. Recognition of an estimated liability means that the organization is highly likely to incur expenses in the future. In practice, this action is called the creation of an additional reserve, in particular, in connection with the increase in environmental responsibility of companies, they create so-called environmental reserves, which are included, among other things, in the initial cost of capital investments. This norm is a development of the already existing rule provided for by PBU 8/2020, which has found consolidation in a new regulatory act.

The norm deserves special attention, according to which "the amount of capital investments is reduced by the estimated value of the products obtained during their implementation, secondary raw materials, and other tangible assets that the company intends to sell or otherwise use."^[16] This approach is fundamentally different from the previously accepted accounting practice, according to which the received tangible assets were received only during the inventory and included in the income. At the same time, "the estimated value of such valuables, as well as tangible assets remaining unused during the implementation of capital investments, is determined based on their fair value, net sale value, the value of similar valuables and cannot be higher than the amount of costs from which this value is deducted."^[16]

An important provision is the rule according to which the cost of capital investments does not include costs incurred due to improper organization of the process of capital investment, for example, excessive consumption of raw materials, materials, etc. In this norm, in our opinion, there is a certain contradiction to the principle of accounting for capital investments according to actual costs, since during the design of facilities, defects are possible that are detected only at the construction stage, respectively, the costs of their elimination are not initially included in the construction cost estimate. And the constant revision of the estimate is not always economically feasible, accordingly, an economic entity should classify them more carefully in case of excess expenses in order to make an informed decision on their inclusion in the current expenses that reduce the financial result, or in the cost of capital investment.

Also, FSB 26/2020, by analogy with the already adopted FSB 5/2019 "Reserves", retained the principle of forming the initial cost of objects under contracts with payment on deferred or installment payment terms for a period exceeding 12 months or a shorter period established by the organization. This approach provides that the cost of capital investment includes the amount of money that would have been paid by the organization in the absence of the specified deferral or installments, and the difference between the actual amount of payments paid and the recognized estimate is subject to accounting in accordance with the rules of PBU 15/08. Previously, the initial cost was formed in the full amount paid to the supplier (seller) in accordance with the contract. At the same time, a fundamentally important point should be taken into account, according to which capital investments are inherently investment assets, and according to PBU 15/08, the initial cost of investment assets includes the amounts of interest accrued for the period before the capital investment is accepted into fixed assets. I.e., if the process of acquiring, constructing or manufacturing an object of capital investment exceeds the deferral/installment period under the contract, then in fact the entire contractual value will be included in the initial cost, respectively, the specified norm loses its meaning. However, in order to ensure uniformity in the application of the standard, an economic entity must provide for the procedure for determining the amount to be paid on the terms of immediate payment (in the absence of deferral/installments), including using the method of discounting cash flows.  

If the implementation of capital investments involves the fulfillment of obligations under the contract in full or in part by non-monetary means, then the actual costs are "the fair value of the transferred property, property rights, works or services. The fair value is calculated in accordance with the procedure established by IFRS 13 "Fair value Measurement", which recognizes the price that can be received during the sale of an asset or the transfer of a liability at the date of the transaction."^[16]

It should also be noted that the standard being put into effect provides for the procedure for impairment of capital investments, while checking for impairment and accounting for changes in their value due to impairment should be conducted in accordance with the procedure provided for in IAS 36 "Impairment of assets". Previously, such a process was not envisaged. Now the company is recommended to conduct an annual impairment check.

Testing of an object of fixed assets for impairment occurs in several stages:

- Identification of capital investment objects that need to be evaluated;

- Calculation of the recoverable value of the object of capital investments;

- Determination of the amount of the impairment loss;

- Recognition of this loss in the financial statements;

- Analysis of the situation after the reporting period;

- Disclosure of information in the financial statements.

In addition, it should be noted that enterprises may refuse to disclose information regarding the impairment of capital investments. In this case, capital investments are estimated at the reporting date at book value. Information about this is disclosed to a limited extent.

The new federal accounting standard establishes rules for writing off capital investments from accounting. In particular, these rules provide for cases of write-off, the time when the write-off is reflected in accounting, the procedure for accounting for the costs of dismantling or disposal of capital investment objects and environmental restoration, as well as the procedure for determining the amount of income or expense from the write-off of capital investments. Previously, these rules for writing off capital investments or long-term investments followed only from the Instructions for the application of the Accounting Chart of Accounts. An important point in this case is the rule according to which a capital investment is subject to write-off when the completion of the investment process is suspended and there are no prospects for their resumption. In our opinion, this norm is subject to significant criticism, since when recognizing an object, costs were incurred and a certain cost was formed in accounting, which cannot be equated to zero. In our opinion, in this case we should talk about the reclassification of the object of capital investments into, for example, a long-term asset for sale. Another important point is the principle of forming a collapsed result from disposal, which is subject to inclusion in income or expenses, in contrast to the current procedure, which provides for a detailed reflection of income and expenses in the statement of financial results in the case, for example, of the sale of an object under construction.  

In the new FSB 26/2020, it is mandatory to disclose information about capital investments regarding:

- The result of the impairment of capital investments and the restoration of the impairment included in the expenses or income of the reporting period;

- Advances, advance payments, deposits paid by the company in connection with the implementation of capital investments.

A number of enterprises engaged in entrepreneurial activity in the Russian Federation have the right to apply simplified accounting methods, in particular small enterprises, participants of the Skolkovo project, etc. Accordingly, they can determine the initial cost of the object of capital investments without taking into account certain types of costs specified in paragraph 10 of FSB 26/2020, in particular estimated liabilities, interest on loans and credits, depreciation of other assets used in the process of making investments, etc. In this case, unaccounted expenses are recognized as expenses of the period in which they were incurred. In addition, for these entities, actual costs can be determined when recognizing capital investments in the amount of the amounts paid and/or payable by the enterprise to the supplier when making capital investments without taking into account all discounts, deductions, etc., regardless of the form of their provision, or without discounting in case of deferred or installment payment for a period exceeding 12 months. And under contracts providing for non-monetary fulfillment of obligations, these enterprises can determine the actual costs according to a simplified methodology in the amount of the book value of the transferred assets.

The transition to the new federal standard FSB 26/2020 can occur in two ways: 1) retrospectively, i.e., the consequences of changes in the accounting policy of the organization in connection with the beginning of the application of FSB 26/2020 are reflected as if this standard was applied from the moment of occurrence of the facts of economic life affected by it; 2) prospectively, i.e. the new standard is applied to the facts of economic activity that began after the adoption of FSB 26/2020 as a standard accounting policy at the enterprise. In this case, the previously generated data is not subject to change. The method of transition to FSB 26/2020 chosen by the enterprise is disclosed in the first accounting statements after the transition.

Conclusion

 Consideration of the rules of the introduced FSB 26/2020 allows us to conclude that its norms are approaching the concepts of International Financial Reporting Standards, but in a number of points the national specifics of accounting and the accumulated Russian experience are taken into account. The primary analysis of the innovations of FSB 26/2020 carried out in this paper in comparison with the previously existing accounting rules showed the expediency of further research of the rules of FSB 26/2020 for the formation of a methodology for accounting for capital investment objects within the framework of the current Chart of Accounts, as well as the development of practical recommendations on the application of the standard for business entities for the purpose of its use in accounting and analytical work. Accordingly, business entities in the current year need to carry out preparatory work to adapt accounting policies to the introduced standard, in particular, to provide options for accounting for the impairment of these types of assets, as well as to configure software for accounting.

At the same time, we noted that the introduction of IFRS requirements in the domestic accounting system is necessary from the point of view of the economic development of Russian enterprises and organizations and the strengthening of national security. 

Despite the fact that the new document addresses many issues regarding the accounting of capital investments, nevertheless, due to various economic factors and requests from different economic parties, some places remain problematic, which, in turn, requires further work to improve the accounting system of capital investments.