THE DEPRECIATED REPLACEMENT COST REPRESENTATION OF FAIR VALUE IN ACCOUNTING. TENDENCIES AND PERSPECTIVES IN THE ROMANIAN ACCOUNTING PRACTICE

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1 THE DEPREIATED REPLAEMENT OST REPRESENTATION OF FAIR VALE IN AONTING. TENDENIES AND PERSPETIVES IN THE ROMANIAN AONTING PRATIE Manea Marinela Daniela Faculty o Economics Sciences, Department o Accounting and Finance, Valahia niversity o Târgoviste, Romania, Post-doctorate researcher at Alexandru Ioan uza niversity o Iai The Romanian accounting system has gone through a radical reorm in the last years, but the preoccupations or improving and developing Romanian accounting still continue. In order to preserve the general objective o rendering available to inancial managers and analysts a common internationally agreed ramework or drawing up and presenting inancial statements, accounting proessionals have the duty to contribute to the elaboration o accounting policies capable to transorm accounting in an essential leadership instrument. nder these circumstances, there is the attempt to identiy a dialogue orm between accounting norms and policies, between the reedom to choose accounting procedures and the obligation to provide users with credible relevant inormation. The present work aims to make a thorough analysis o air value adjustment version o the depreciated replacement cost which is speciic to specialized corporal immobilized assets seldom commercialized on the market, by starting rom the approaches and concepts existing in specialized literature, while aterwards it will carry out a comparative study between normative provisions and the concrete reality o Romanian accounting practice. Aware that air value adjustment represents the proession o assessment experts, the presents work aims to present the potential models or quantiying air value, which is an useul inormation basis or accounting proessionals who have one more instrument at their disposal, or eectively and practically applying IRFS norms. Acknowledgement: This work was coinanced rom the European Social Fund through Sectorial Operational Programme Human Resources Development , project number POSDR/.5/S/5984 Perormance and excellence in postdoctoral research in Romanian economics science domain.,institution: Alexandru Ioan uza niversity o Iai, period: , tutor: Ph.D. Proessor Vasile ocri Keywords: device method, cost method capacity, wear and tear, lie span, reproduction cost. lassiication J.E.L.:M4 I. Introduction urrently, national destinies are strongly inluenced by the orces o the world global competition [], so that the decisions o management, investment and o inancial nature have international implications. Since most o these decisions are based on accounting inormation, it is necessary a good knowledge o national and international accounting norms, so that business can go well. Thus, it can be witnessed a transormation o the accounting system, which has to insure to inormation users investors/shareholders, creditors, a.s.o. clear, credible and internationally comparable sources, so that their decisions are based on strong grounds. In the past, at a global level, there were two opposed accounting traditions: the Anglo-Saxon one, which is in the interest o investors and has the main objective o comparing inancial perormances, and the continental one, which is controlled by the state and oriented towards all the partners o an entity iscal administration, creditors, employees, owners, a.s.o. While the continental system agrees with the measurement at a historical cost, the Anglo-Saxon one proposes the adoption o air value. For those specialized immobilized assets, such as the 550

2 equipments seldom commercialized on a market, o which too little inormation is known, air value is estimated by measuring the depreciated replacement cost. The approach based on cost is ounded on the statement that a prudent and inormed purchaser would pay or an asset at most the purchasing and the production cost o a replacer with the same use; it is all about the current amount o money necessary or building up or buying a new substitute with the same use. I the immobilized asset is not new, rom the gross current cost shall be deducted all the depreciation orms which had been attributed to it by the assessment date. In its simplest orm, the cost method can be represented in the ollowing way: Gross cost Depreciation = Value (called net replacement cost) According to Valuation Standards, the starting point in adjusting value through the approach based on cost is either the gross reproduction cost, or the gross replacement cost, or a combination between the two. Given that the reproduction cost is the current cost involved with reproducing an identical copy o an asset, by using the same materials or similar ones, and since market conditions contribute to analyses over some similar but not identical assets, we agree with the international regulator who opted or the adjustment replacement cost. When it comes to the approach based on cost, the assessment expert compares the immobilized asset with another one which may replace it. II. Research methodology presentation o methods The most used method or determining the replacement cost or assets such as specialized equipments is the device method; at the same time, or the similar installations and equipments, o various dimensions, it is used when it come to the valuation o net replacement cost also the method costcapacity. II. The device method, also known as the summing up method, involves breaking the analyzed immobilized asset in components and valuating the cost o all its individual components, so that the sum o the components will relect the new cost o the whole. The components cost involves not only direct costs, represented by those expenses related to materials, employees and by those ordinary expenses corresponding to the purchasing and installing o the asset, in order to bring it to the estate o unctional use, but also by indirect costs normally required by the purchasing and installing o an asset, which are not generally included in the invoice issued by the seller. The inormation about the cost and reerence materials, necessary or adjusting the replacement cost, will make up a data basis rendered available to the specialized assessor and should contain: catalogues o producers and dealers, price lists and equipment speciications; speciication manuals o manuacturers; price lists o manuacturers; price lists o sellers; published price guide books a.s.o. The materials may be obtained rom: producers and sellers; dealers o new and used materials; exhibitions and show rooms; published price guide books, invoices rom customers; newspapers; auctions; older iles and registers; universities; public libraries; computer data bases; internet; by telephone, letter or personal contact; various ree publications related to equipments such as Yellow book, local newspapers or news publications within the ield. In particular circumstances, or instance when an equipment is produced abroad and the local dealer cannot be ound, it is preerable to contact the technology or the maintenance department o the customer, since customers have to buy spare parts rom somewhere. When the inormation cannot be obtained in this way, then it shall be contacted the consulate o the country where the equipment was produced. It results rom here the need or a data basis at the disposal o the assessor, complete and permanently updated, which can be a working instrument or ounding and upholding a relevant and credible assessment o value. Ater establishing the gross replacement cost, the specialized assessor shall deduct all the depreciation orms attributable to the asset, in order to measure the net replacement cost. For mobile goods, there are involved all the wear and tear orms: physical, unctional, economical. Depreciation represents the 55

3 loss o value rom various reasons, including actors o a physical and unctional type, o exploitation and economical depreciation. Wear and tear represents the loss o value or usability o an asset, caused by use, deterioration, exposure to various atmospheric agents, overuse and other similar actors. When an inspection is carried out or classiying an asset, it is necessary to pay a great attention to the latter s physical state. As a technique o quantiying wear and tear, it can be reminded the analysis age/lie span. I speaking about the concepts which can be used during the analysis, there can be reminded: chronological age; eective age; normal useul lie span; useul lie span let; physical lie span; physical lie span let; economical lie span; economical lie span let. In relation to the indicators presented, rom a strictly conceptual point o view, the wear and tear degree can be calculated by using o the ollowing ormulas: Vcron VE VE WT (%) = 00 ; WT (%) = 00 ; WT (%) = 00. DVF DVN VE + DVR Functional depreciation represents the loss o value or usability o an asset, caused by ineiciencies or non adequacies in the quality o the asset, when the latter is compared with a replacement asset which is more eicient and/or less expensive and produced with modern technology. In other words, the loss o value is caused by conditions inherent to the asset, so that the excess o capacity represents a potential orm o unctional depreciation. The quantiication o unctional depreciation is based on at least two ways: - the irst one is represented by the dierence between the gross reproduction cost and the gross replacement cost, being used or measuring unctional depreciation caused by the costs o excess capital; - the second one is the consequence o the unctioning o some assets such as machines and equipments with exploitation expenses which are bigger than their modern substitutes and is also known as technological depreciation, its measurement being provided by the absolute annual measure o surplus exploitation expenses o an asset, updated at an adequate rate during the useul lie span let (penalty or unctional depreciation rom exploitation). Economic depreciation, also called external depreciation, represents the loss o value or o the ull usability o an asset, caused by actors which are external to it, such as: the increased cost o raw materials, labour orce or utilities (but without the corresponding increase o the selling price o the product); the low demand registered or the product in question; increasing competition; environmental law, a.s.o. Among the ways o estimating economical depreciation, there can be ound: - disutility method (expressed in percents); - the method o updating/capitalizing additional expenses caused by external actors, which is similarly applied in the case o the calculi relative to the measurement o unctional depreciation rom exploitation. Example no. : The object o the analysis is a plane YR PMS, type AN 2, abricated in 998 in kraine and purchased again by the Romanian company S ARIPI ARII SA. According to the owner s statements, it results that the plane AN2 is used only or irrigations and ertilizations in agriculture, there being carried out in time all the periodical revisions; it can be noticed at the same time that a capital reparation o the plane has not been yet carried out. There is known about the plane the ollowing inormation: AN 2; developed or agricultural works; the technical condition o the plane requires capital reparations at the cell, airscrew, envelopes. 552

4 Speciication /m ell Motor Airscrew Fabrication date No. o unctioning hours since the Hz plane was put in use (Ve) Hours o light remaining by the time Hz the plane is out o use Total hours o light (DVN) Hz In order to estimate the air, market value o the plane at , the society resorts to the services o a specialized assessor. Taking into account that the type o the plane assessed is no longer abricated in the present, and that the types o planes abricated are dierent rom the type o plane assessed, both rom the point o view o the construction and rom the point o view o the technical-unctional characteristics, it will be used the method based on or assessing air value. The main elements o the plane cell, motor and airscrew are used according to dierent rules, so that in estimating the degree o wear and tear the starting point will be the percent value o each component, that is: 75% or the cell, 20% or the motor, 5% or the airscrew. At the same time, in order to calculate unctional depreciation, it is also necessary to know the reproduction cost estimated by the assessor, which is, on the basis o the inormation available, o In order to determine the replacement value o the plane, it has been used the method based on gross replacement cost, the value o the plane being determined by diminishing the updated value (again), according to the ormula: V ap = V x( )] x( ) () where: [ o m V ap - updated value, calculated by updating the entrance value, - wear and tear, m - obsolescence generated by unctional non adequacy. It is irst adjusted the measure o the wear and tear, according to the ormula: = n i= u v i v i i, where u i = physical depreciation o the component i calculated with the help o the ormula: VE u i (%) = 00 VE + DVR v i = percent value o the component in respect to the total value. It is determined the wear and tear on groups o components, such as it ollows: c = = 2,50 %; m = = 3,66 %; e = = 56,25 % The wear and tear or the whole plane will be: ( c x75 + m x20 + e x5) = = 4,92 %

5 The obsolescence which underlines the depreciation o the plane as a consequence o technical progress, both rom the perspective o the cost reduction and rom the perspective o new types o planes abricated, is expressed by means o the relation: 0 m = -, where 0 = initial cost o the plane, = reproduction cost. The initial cost o the plane estimated in is o u.m.; or such types o assets, the wear and tear is generally between and 0% m = - = 7,7 % The determination o the value o the plane net replacement cost, is made by replacing the data in the ollowing ormula (): V ap =[ x (- 4,92%)] ( 7,7%)= x (- 7,7%) = II.2 The method cost-capacity is used or measuring the net replacement cost or similar installations and equipments, o various dimensions, precisely or pointing out the reality according to which the costs o similar installations or o equipment parts o dierent dimensions vary exponentially, according to dimension. Below it is presented an example o how the net replacement cost is calculated according to such method. Example no. 2: In order to determine the replacement cost on the basis o the method cost-capacity, let us consider the ollowing inormation about a manuacturing installation: date o the net replacement cost measurement ; date when the installation is put into unction ; total estimated lie span 20 years; capital repair carried out in March 2006 has reestablished 80% o the normal lie span; the production capacity projected is o t/year; the current and uture capacity exploitation is o t/year; the exploitation expenses or uels bigger than a modern substitute, with 2 tones o gas-oil at year, at a price o lei/t; the quota o income tax is o 6%; the selling price o a modern installation substitute o t/year is o lei; the exponent actor is 0,7; the updating rate is o 3%. The ollowing steps are carried out: a) determining the replacement cost on the basis o cost-capacity method: X 2 Q2 = Q, where 2 - not known replacement cost o the asset undergoing valuation; - known replacement cost o capacity Q ; Q 2 - capacity o the asset undergoing valuation; X - exponent actor, which expresses the act, acknowledged through detailed analyses, that not all cost elements o an asset vary directly proportional with their dimension. 0, = ; 2 = ( 0,842) 0, 7 = 2 x 0,88665 = lei b) determination o the wear and tear by taking into account the ollowing parameters: - total lie span estimated 20 years; - reestablished lie span, capital reparation 20 years x 80% = 6 years; - number o years rom the capital reparation 4 years; - useul lie spam let (DVR) 6 years - 4 years = 2 years. - eective age (Ve) 20 years - 2 years = 8 years. 554

6 VE 8 = 00 = 00 = 40%. The wear and tear is x 40% = VE + DVR 20 c) determination o unctional depreciation: - surplus exploitation expenses 2 tones x lei/t = lei/year - net surplus exploitation expenses ( 0,6) = lei/year - the updating actor is o 5,976 - net updated surplus exploitation expenses x 5,976 = lei d) determination o economical depreciation 0, ,7 D e = 00 = [( 0,9375) ]00 =( 0,95582)x00= 4,42% The replacement cost is established as it ollows: Gross replacement cost lei Wear and tear lei Functional depreciation lei ost ater physical, unctional depreciation lei Economical depreciation (4,42%) lei Replacement cost lei III. Results o the research Our attempt o presenting the working steps or measuring air value have had the objective o realizing the possibility o applying these concepts also by accounting proessionals, and not only by assessment experts. The main results, and respectively, limitations emerging rom the research carried out, are: - although international norms make no reerence to the way air value is measured when there is not enough inormation on the market about its estimation, by means o the adjustment techniques previously presented and used by valuation standards, it can be measured such an aggregate; - the concepts and adjusting techniques applied are amiliar to accounting proessionals rom Romanian entities; - and, although it is possible or accounting proessionals to show opposition to adjusting and applying the analyzed instruments, which constitute the proession o assessment experts, still, any uture expert will also resort to and use the techniques presented, also due to his role in an entity. IV. onclusions The detailed presentation o the methods or adjusting the depreciated replacement cost together with the concrete examples oered, constitutes an additional working instrument rendered available to accounting proessionals, who thereore have one more element or applying the provisions o the IRFS norms. Although they are borrowed rom valuation, such norms can be applied also by other proessionals than the assessment experts, by observing the working stages already mentioned. Adjusting air value in the orm o the depreciated replacement cost will no longer represent in the uture only the proession o assessment experts. Although the latter are the main persons to have at their disposal a mix o inormation which they aterwards submit to adjustment or estimating air value, we anticipate a greater openness o accounting proessionals towards putting in practice IRFS norms. This is also a result o the act that Romanian entities, under the current circumstances o deep economical crisis, will no longer aord to resort, whenever they have to establish air values or patrimonial elements, to external assessment experts, not to mention that is also less probable or them to constitute a distinct valuation department which involves considerable costs. There are nonetheless some limitations such as: the lack o motivation o accounting proessionals to measure air value, also as a result o iscal limitations restraining the practices agreed by international norms. We consider that 555

7 Romanian entities will manage to line up with international accounting practices in measuring air values, even i they will have to overcome some limitations and constraints. V. Reerences:. IASB, International Financial Report Standards (IFRS). Oicial norms issued on January st 2009, translation, EAR Publ. House, Bucharest, 2009; 2. Deaconu A. [], Valoarea just. oncept contabil, Editura Economic Publ. House, Bucharest, 2009; 3. Feleag N., Feleag L., Modele i reguli de evaluare în contabilitatea internaional, The Magazine o Theoretical and Applied Economy; 4. Manea M., Msurarea i evaluare privind amortizarea activelor imobilizate, artea niversitar Publ. House, Bucharest, 2007; 5. Ristea M., Dumitru., urpn A., Manea L., Nichita M., Sahlian D., Politici i tratamente contabile privind activele imobilizate, Tribuna Economic Publ. House, Bucharest, 2007; 6. Ristea M., Dumitru., Irimescu A., Manea L., Nichita M., ontabilitatea amortizrii i deprecierii activelor, Tribuna Economic Publ. House, Bucharest, 2009; 7. The Order o the Public Finances Ministry No /2009 on the approval o Accounting regulations conorm with European directives, published in the Oicial Gazette No. 766 bis/