The assets that your business uses on a daily basis, whether machinery, premises, vehicles or even software, represent major investments. But over time, these assets inevitably lose value. This loss can be gradual, linked to normal wear and tear, or more sudden, caused by unforeseen events. Understanding how French accounting takes this reality into account, through the mechanisms of thedepreciation and depreciationThis is fundamental for any manager wishing to manage their business effectively and present accurate accounts. This article provides an overview of these key concepts.
Identifying and valuing your assets: the starting point
Before talking about loss of value, we need to know what we are talking about. In accounting, a assets is a resource that your company controls, derived from past events (such as a purchase) and from which it expects future economic benefits (generating income, reducing costs, etc.). It is essential to distinguish these assets from mere expenses. Non-financial assets are mainly divided into fixed assets (goods intended to be used on a long-term basis, such as a building or a machine) from stocks (goods intended to be sold or consumed quickly).
The first crucial stage is theinitial assessment of the asset at the time it enters the company's assets. The general rule is valuation at historical cost. For a purchased good, this is the acquisition cost (net purchase price + necessary direct costs). For an asset produced in-house, it is the production cost. This entry value is decisive because it will serve as the basis for future calculations. For large fixed assets made up of components with different useful lives (such as a building and its roof), a more detailed approach, known as "by component", may be necessary to better reflect their separate wear and tear.
Depreciation: recognising the scheduled wear and tear on your assets
Amortisation is the accounting translation of the loss in value expected and progressive an immobilisation due to its use, the passage of time or programmed obsolescence. These are methodically allocate the cost of the asset over the period during which the company plans to use it. Think of the wear and tear of a car over the kilometres or the ageing of IT equipment.
Which assets should be depreciated? Mainly fixed assets whoseuse is limited in time. This applies to most tangible assets (buildings, machinery, vehicles, etc.) and intangible assets (patents, licences, software, etc.). Certain assets, such as land or purchased goodwill, are generally not depreciated because their useful life is deemed to be indefinite.
The calculation of annual depreciation (the "depreciation charge") is based on the depreciable base (generally the entry cost, possibly less a significant residual value if any) and the useful life planned by the company. Visit amortisation method The method chosen (straight-line, unit labour cost, etc.) must reflect as closely as possible the actual rate at which the economic benefits of the asset are consumed. The straight-line method, which spreads the cost evenly over each year, is the most common and is applied by default. This annual charge is an expense for the company, reducing its accounting and tax income.
Depreciation: reacting to unforeseen losses in value
Depreciation follows a pre-defined plan. But sometimes an unforeseen event disrupts this plan, causing a sudden and significant loss of value. This is where the depreciation. It recognises a loss of value ad hoc and unplannedwhen the current value of an asset becomes less than its net carrying amount (NCV = cost - depreciation already taken). Depreciation therefore complements amortisation to adjust the value of the asset to its current economic reality.
When should you consider whether an asset is impaired? The rule is to be vigilant at each balance sheet date. The company must actively seek to determine whether there are any indications of impairment. These indicators can be varied: a significant fall in market prices, physical damage to the asset, accelerated technological obsolescence, a significant decline in the asset's performance, a major change in its use, a crisis in the business sector, etc. If such an indicator is detected, a impairment test must be carried out.
This test consists of comparing the net asset value of the asset with its fair value. current value. The present value is the higher of the net resale value (market value) and the value that the company can derive from its future use (value in use, often based on discounted cash flows). If the NCV is higher than this present value (and the difference is significant), the difference represents the depreciation to be booked.
Recording an impairment loss has several consequences: it reduces the value of the asset on the balance sheet to its current value, it constitutes an exceptional expense that reduces the profit for the year, and it changes the basis for calculating future depreciation (which will be calculated on the impaired value).
Important point: an impairment loss is not necessarily irreversible. If circumstances improve and the current value of the asset subsequently increases, the impairment may be reversed. recovery (cancelled, in whole or in part), up to the value that the asset would have had had it never been impaired.
Why is this important for your company?
Mastering the concepts of depreciation and amortisation is not just a matter for accountants. It is an essential management issue for a number of reasons:
- Reliability of accounts : Applying these rules correctly ensures that your balance sheet reflects a true and fair view of the value of your assets and that your income statement accurately measures your performance.
- Tax impact : Depreciation and amortisation charges (excluding specific cases such as accelerated depreciation) are generally deductible expenses that reduce your taxable profit. Poor management can lead to higher tax costs or the risk of a tax reassessment.
- Steering tool : Tracking the depreciation and current value of your assets helps you make informed decisions: should you replace equipment? What is the true cost of your products (including wear and tear on machinery)? What is the real value of your business?
- Legal obligations : The correct application of depreciation and amortisation rules is a legal and regulatory requirement in France.
In short, if you manage depreciation and amortisation properly, you can ensure that you have an accurate picture of your company's performance and value, while complying with your obligations.
Understanding depreciation and amortisation helps you to manage your business more effectively and meet your obligations. Our team will be happy to provide you with personalised advice on how to apply these rules with peace of mind.
Frequently asked questions
What are assets in accounting?
An asset is a resource controlled by the company, resulting from past events, and from which it expects future economic benefits (such as generating income or reducing costs).
What is the difference between a fixed asset and inventory?
A fixed asset is an asset intended for long-term use by the company (e.g. machinery, building), whereas an inventory is intended to be sold or consumed quickly (e.g. goods, raw materials).
How is the entry value of a purchased asset determined?
It is determined by its acquisition cost, which includes the purchase price net of discounts and recoverable taxes, as well as all costs directly necessary to bring it into working order.
What is depreciation of a fixed asset?
This is the systematic accounting allocation of the cost of a fixed asset over its expected useful life, to recognise any loss of value due to wear and tear, age or obsolescence.
Why depreciate an asset?
To reflect in the accounts the gradual consumption of the economic benefits of the asset and to allocate its cost to the periods during which it helps to generate income.
What is the difference between depreciation and amortisation?
Amortisation recognises an expected and gradual loss of value, whereas depreciation recognises an unforeseen, one-off and significant loss of value due to specific events.
When should an asset be tested for impairment?
A test is mandatory at each balance sheet date if there are indications of impairment (market downturn, physical damage, rapid obsolescence, underperformance, change of use, etc.).
Can an impairment be reversed if the value of the asset increases?
Yes, an impairment loss can be reversed (in whole or in part) if the current value of the asset increases again, but without exceeding the value it would have had without the initial impairment.
Should a fixed asset always be depreciated in a single block?
No, for fixed assets made up of major components with different useful lives (e.g. structure and engine), the component approach requires them to be depreciated separately.
Do certain assets, such as carbon allowances, have specific rules?
Yes, certain assets or transactions (GHG quotas, CEE, sports transfer indemnities, software created, etc.) are subject to specific accounting rules defined by the General Chart of Accounts.
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