Initial asset valuation: determining the fair entry cost

Once an item has been identified as an asset that should appear on your company's balance sheet, a key question arises: for what value? Correctly determining the entry value of an asset is not a simple accounting exercise. This initial value, known as the historical cost, forms the basis for calculating future depreciation and any impairment, and has a direct impact on the image of your company's assets. A valuation error at the outset can therefore have lasting repercussions on your annual accounts and your tax position. The French General Chart of Accounts (Plan Comptable Général - PCG) sets out a precise framework for initial valuation methods. This article explains how to determine the initial cost, whether the asset is purchased, produced by the company, received free of charge or in exchange, and discusses the specific treatment of borrowing costs. It is also crucial to take into account principles of asset depreciationThese allow the cost of an asset to be spread over its useful life. Correct valuation at the time of acquisition ensures that expenses are allocated appropriately, thereby contributing to a company's improved financial health. In addition, a clear understanding of these principles helps to avoid inconsistencies when revaluing or disposing of assets in the future. At the same time, a clear understanding of the definition of asset impairmentThis refers to the decrease in value of an asset over time due to wear and tear, obsolescence or other factors. This concept is essential to ensure accurate valuation of assets, enabling companies to accurately reflect their financial position. By integrating these concepts into their accounting strategy, companies strengthen their ability to make informed decisions about the management of their resources.

The basic principle: valuation at cost

The fundamental rule laid down by the French General Chart of Accounts for the initial valuation of assets is that of the historical cost. Article 213-1 of the French General Chart of Accounts stipulates that assets are recorded in the accounts at their cost at the time they are acquired. However, this "cost" takes different forms depending on how the asset was acquired.

For working people acquired for valuable considerationIn other words, if they are purchased, the entry value is their acquisition cost. We'll look at the components of this cost in more detail below.

For working people produced by the company for its own sake (a machine built in-house, software developed...), the input value is their cost of production. Here again, the components of this cost are precisely defined.

For working people acquired free of chargeTheir entry value is their purchase price. market value. The market value, defined in article 214-6 of the French General Chart of Accounts, corresponds to the amount that could be obtained from the sale of this asset on an active market, under normal conditions, at the date of entry, net of disposal costs.

Finally, for working people acquired by way of exchange against other (non-monetary) assets, the rule is also valuation at fair value. market value (that of the asset received or, failing that, that of the asset given), except in specific cases where the exchange lacks "commercial substance" or where the market value cannot be reliably determined.

The historical cost principle is central to French accounting. It aims to ensure objectivity and traceability of the value of assets recorded in the balance sheet.

Break down the acquisition cost of a fixed asset

When a company purchases a fixed asset (machinery, building, vehicle, etc.), its acquisition cost is not limited to the price shown on the invoice. Article 213-8 of the French General Chart of Accounts specifies the items that must be included in this cost.

The starting point is, of course, the purchase priceAfter deduction of discounts, rebates and cash discounts obtained from the supplier. To this must be added any customs duties and taxes not recoverable by the company (non-deductible VAT, for example).

To this price must be added all the directly attributable costs incurred to put the asset in place and in working order for the use intended by the company's management. The list can be long and depends on the nature of the asset. It typically includes :

• Initial delivery and transport costs.
• Installation and assembly costs.
• Site preparation costs (including any prior demolition costs).
• The cost of tests required to verify that the asset is functioning properly (net of any revenue from the sale of test products).
• Professional fees directly linked to the acquisition or installation (architects, surveyors, experts, etc.).

One particularity concerns acquisition costs These include transfer taxes (for real estate), notary or agency fees, and legal fees. For the individual financial statements of French companies, the PCG offers a option These costs are either included in the acquisition cost of the asset (which increases its balance sheet value), or they are expensed directly in the year in which they are incurred. This choice must be made consistently. In the consolidated financial statements (prepared in accordance with French GAAP), however, these costs must be included in the cost of the fixed asset.

Finally, the acquisition cost must also include theinitial estimate of future dismantling, asset removal and site restoration costs These costs, although not yet disbursed, represent the counterpart to a provision for liabilities and charges entered under liabilities in the balance sheet. These costs, although not yet disbursed, represent the counterpart to a provision for liabilities and charges recorded on the liabilities side of the balance sheet. They are depreciated separately in the individual financial statements.

It is just as important to know what costs must not be included in the acquisition cost. GAAP excludes costs that are not directly necessary to bring the asset to its intended operating condition. For example: the cost of opening a new facility (administrative overheads), the cost of launching a new product manufactured with the machine, the cost of training staff to use the asset, or the cost of relocating the business. These costs are expensed as incurred.

The capitalisation of costs, i.e. their incorporation into the value of the asset, ceases when the asset is in a condition to function as intended by management, even if it is not yet used to full capacity or if it generates initial losses (PCG, art. 213-12).

Calculate the production cost of a fixed asset

When a company produces a fixed asset for its own use, the principles for determining the cost are similar to those for external acquisitions (PCG, art. 213-14). The production cost is the sum of the costs incurred to create the asset.

It begins with the cost of raw materials and supplies consumed for the manufacture of the asset.

It also includes other costs incurred during production operations. These costs are divided into :

• Direct production costs : These are costs that can be directly allocated to the production of the asset without any intermediate calculation. Think of the salaries and social security contributions of the staff who worked directly on the manufacture of the asset, or the energy consumed specifically by the machines used for this production.
• Indirect production expenses : Costs that cannot be allocated directly but are necessary for production. They must be reasonably related to the production of the asset. Examples include a share of the production plant's overheads (rent, maintenance, insurance), or a share of the depreciation of the machinery used to manufacture the asset (PCG, art. 213-17). These indirect costs must be allocated on a rational and consistent basis (for example, according to direct labour hours, machine hours, etc.).

Note, however, that the proportion of fixed costs corresponding to a sub-activity (i.e. when the plant is operating below normal capacity) should not be included in the production cost of the asset (art. 213-18 of the French General Chart of Accounts). It remains an expense for the year. Only costs corresponding to normal activity can be capitalised.

Accounting treatment of borrowing costs

Financing the acquisition or production of a major fixed asset often requires recourse to borrowing, which generates financial costs (interest, etc.). The French General Chart of Accounts (art. 213-9) provides a solution to this problem. option for the treatment of these borrowing costs when they finance a eligible asset. An eligible asset is defined as an asset that requires a long period of preparation or construction before it can be used or sold (for example, the construction of a building, the manufacture of a complex machine).

For these eligible assets, the company can choose :

1. Either from record all borrowing costs as financial expenses of the financial year in which they are incurred. This is the simplest approach.
2. Either dincorporate borrowing costs directly attributable to the eligible asset into its acquisition cost. This incorporation is only possible during the period of acquisition or production of the asset, until it is ready for use.

The borrowing costs concerned may be interest on specific or general borrowings, amortisation of borrowing issue costs, or financial expenses on finance leases (in the consolidated financial statements).

If the company opts for capitalisation, the amount to be capitalised must be calculated precisely. In the case of a loan taken out specifically for the asset, the actual interest on the loan (less any financial income from the temporary investment of the funds) is capitalised. If the company uses funds from general borrowings, it must apply a capitalisation rate (weighted average of the rates of its outstanding borrowings) to the expenditure incurred for the asset. The amount of borrowing costs capitalised during a financial year may never exceed the total amount of borrowing costs incurred by the company during that same financial year.

The choice between recognition as an expense and capitalisation of the asset must be applied in a manner that is consistent with the Group's accounting policies. consistent to all the company's eligible assets and must be disclosed in the notes to the financial statements.

Managing special acquisition cases

The initial assessment may have some specific features depending on the circumstances of the acquisition.

In the event ofexchange of one asset against another non-monetary asset, the general rule is to value the asset received at its fair value. market value (PCG, art. 213-3). However, if the exchange has no "commercial substance" (i.e. it does not significantly modify expected future cash flows) or if the market value cannot be reliably determined, then the asset received is measured at net book value of the asset given in exchange. A balance (sum of money) paid or received adjusts these values.

For goods acquired free of chargeAs we have seen, the assessment is based on the market value (PCG, art. 213-4). The offsetting entry is generally recorded under extraordinary income.

If a good is acquired or produced using a investment grantthis subsidy has no impact the calculation of the acquisition cost of the asset financed (PCG, art. 213-6). The asset is recognised at its total cost (acquisition or production), and the grant follows its own accounting treatment (generally spread as income over the depreciation period of the asset financed).

Lastly, for assets acquired in foreign currencytheir entry cost must be converted into euros using the exchange rate in force on the date of the transaction (asset entry date). If a currency hedge has been put in place specifically for this acquisition prior to the transaction, the rate of this hedge may be used (PCG, art. 420-1). This value in euros will be used as the basis for subsequent depreciation and amortisation calculations.

Specific initial stock valuation

The general principles of valuation at cost also apply to inventories, but with procedures adapted to their nature.

Le acquisition cost The cost of inventories (goods, raw materials) includes the purchase price (net of discounts/discounts and recoverable taxes) as well as the ancillary costs necessary to bring the inventories to their current location and condition (transport, handling, insurance, etc.). This is indicated in article 321-20 of the French General Chart of Accounts.

Le cost of production The cost of inventories (finished goods, work-in-progress) includes direct costs (materials consumed, direct labour) and a share of indirect production costs (fixed and variable), calculated on the basis of normal activity of the production tool (PCG, art. 213-32). Abnormal costs (wastage), storage costs not necessary to the production process, general administrative costs and marketing costs are excluded. These aspects will be developed in more detail in an article dedicated to inventories.

Accurately calculating the entry cost of your assets is a crucial step. An error can permanently distort your accounts. Our firm is at your service to ensure that your valuations are accurate and optimised. It is essential to use rigorous methods and to comply with the relevant regulations. accounting depreciation principles for sound financial management. This will not only reflect the true value of your assets, but also optimise your tax results. A good grasp of these issues will also contribute to the long-term future of your business.

Sources

• General Chart of Accounts (as issued in particular by ANC Regulation no. 2014-03 and subsequent updates), Articles 213-1, 213-3, 213-4, 213-6, 213-8, 213-9, 213-12, 213-14, 213-17, 213-18, 214-6, 321-20, 213-32, 420-1, 831-2.