Valuation of Industrial Plant by NIF C-6 and NIF C-15 | Financial Reporting Standards

Accurate valuation of fixed assets is crucial for the correct financial representation of companies, particularly in the industrial context, where these assets often represent a significant portion of the financial statements. Financial Reporting Standards (FRS) C-6 and C-15 regulate the accounting treatment of fixed assets, ensuring that they are recorded, measured and presented in accordance with accounting principles that provide a true view of the company's financial situation.

These standards are of great relevance for both internal accounting and external audits, directly influencing strategic decision-making, investment evaluation and tax planning for companies. This article examines in depth NIF C-6 and C-15, detailing their application in the valuation of property, plant and equipment (PPE), and the accounting and tax implications of their correct implementation.

NIF C-6: Valuation of Property, Plant and Equipment

NIF C-6 refers to the accounting principles applicable to the valuation, presentation and disclosure of tangible assets used in the production or supply of goods and services, or for leasing to third parties, and which are expected to be used for more than one year.

Main Aspects of NIF C-6:

Initial Cost of Fixed Assets: The standard states that the initial cost of fixed assets includes not only the acquisition price, but also the directly attributable costs necessary to put the asset in a condition for use. These may include:
- Transportation, installation and assembly costs.
- Costs of pre-startup testing of equipment.
- Direct taxes associated with the acquisition of the asset (such as non-recoverable VAT).
- Start-up costs, if material.
Depreciation: IFRS C-6 regulates the depreciation of fixed assets, which is the accounting process that distributes the cost of an asset over its estimated useful life. The standard offers several options on how to calculate depreciation:
- Linear Method: The same amount of depreciation is applied each year over the useful life of the asset.
- Units of Production Method: Depreciation based on actual use of the asset (relevant for machinery and production equipment).
- Declining Balance Method: Depreciation is greater in the first years of the asset's life.

Depreciation must be calculated according to the expected useful life, which must be reviewed at least at the end of each fiscal year.

Impairment of Fixed Assets: The standard also establishes that fixed assets must be subjected to impairment tests if there are indications that their recoverable value is less than their book value. In this case, the company must recognize an impairment loss that will be reflected in the financial statements.
Asset Write-offs: Asset write-offs occur when assets are sold, retired from use or are no longer expected to generate future economic benefits. NIF C-6 details how these write-offs should be recorded and how the gains or losses arising from them should be treated.
Revaluation of Assets: IFRS C-6 also allows fixed assets to be revalued, provided that consistent and up-to-date revaluation methods are used. In this case, the revalued value replaces the original cost in the financial statements, and the difference is reflected in equity as “accumulated revaluation.”

NIF C-15: Long-lived assets

IFRS C-15 regulates long-lived assets, which include both tangible and intangible assets that are essential for the long-term operation of a company. These assets are characterized by providing future economic benefits over an extended period.

Applications and Relevance of NIF C-15:

Definition of Long-Lived Assets: Long-lived assets include:
- Tangible assets: Such as land, buildings, machinery, transportation equipment and tools.
- Intangible assets: Such as patents, copyrights and software, if their useful life is long.
Capital Leases: Long-lived assets leased under finance leases must be capitalized by the lessee, i.e. they are recorded as assets on the balance sheet, with a corresponding lease payment obligation. This accounting treatment reflects the economic substance of the lease rather than its legal form.
Reversals and Impairment Losses: As in IFRS C-6, long-lived assets must be assessed for any impairment losses. However, unlike tangible assets that can be revalued, IFRS C-15 states that the reversal of impairment losses can be recognized if there is evidence that the situation has improved.
Intangible Assets and their valuation: Long-lived intangible assets should be valued at the costs incurred for their acquisition or development, and should be amortized over their estimated useful life, unless they have an indefinite useful life.

Types of Assets in Industrial Plant Valuation

The valuation of assets in an industrial plant must consider the different types of assets that make up the production facilities. These assets are grouped into:

Assets that apply:
- Land and Buildings: These assets do not depreciate, but buildings do, according to their useful life.
- Machinery and Production Equipment: They depend on their use and useful life.
- Transport Equipment: If they are used long-term for the distribution of products or services.
- Tools and Molds: Generally, these assets are depreciated based on use and useful life.

Assets that do not apply:
- Biological assets related to agricultural activities (e.g. live cultures).
- Inventories, accounts receivable and deferred tax assets They are not considered under this standard since they are managed according to other regulations.

Valuation of Long-Term Assets in Use

Long-lived assets in use, such as land, buildings, machinery and industrial equipment, are essential to the ongoing operations of businesses. However, these assets can deteriorate over time, requiring accurate valuation to reflect their true value in the financial statements. In this regard, it is crucial to conduct a detailed analysis of asset impairment and determine whether losses should be recognized or adjustments made.

Procedure for the Valuation of Long-Term Assets in Use

The valuation of long-lived assets in use should be based on an approach that assesses whether these assets have experienced permanent impairment. If there is a possibility that an asset is impaired, the following steps should be taken:

Determination of Impairment Loss:
- If there are signs of permanent impairment, the recoverable value of the asset must be calculated.
- He recovery value is the largest among the use value and the net sales price.
Cash Generating Unit (CGU):
- The CGU is the smallest identifiable grouping of assets that generates independent cash flows. It is essential for determining the recovery value of an asset.
- In this sense, a detailed inventory of the assets associated with the UGE must be made to calculate its value.

Asset Recovery Value

He recovery value (VR) of an asset is determined by taking the highest value between two key components:

Value in Use (VU):
- It refers to the present value of the future cash flows expected to be generated by the CGU, using an appropriate discount rate.
- Value in use is calculated based on projected cash flows, adjusted for the time value of money.
Net Sales Price (NSP):
- It is the reasonable and verifiable price that would be obtained by selling the asset in an observable market, less the costs associated with its disposal (for example, sales commissions, transfer costs).
- He recovery value The highest of these two options will be taken (use value or net sales price).

Impairment Assessment and Loss Determination

Once the asset's salvage value has been determined, it will be compared to its net book value (VNL):

If the Recovery Value (RV) is less than the Net Book Value (NBV):
- A will be recognized impairment lossThis loss is reflected as a downward adjustment in the value of the assets and will be recognized in the income statement of the period in which it is determined.

Calculation of Discounted Cash Flows

To determine the use value of the cash generating unit, the future cash flows that the CGU will generate must be estimated, considering the following:

Expected income: Projection of the income that the UGE will generate in the future.
Operating costs and expenses: Operating costs associated with the production and operation of the asset must be subtracted.
Cash flows to be paid or received: This includes any capital expenditures necessary to maintain the operation or improve the asset.

These cash flows will be discounted using a appropriate discount rate, reflecting the time value of money and the risks associated with the CGU.

Appropriate Discount Rate

The discount rate used must be real (adjusted for inflation) and reflect prevailing market conditions. This rate should also take into account the risks associated with the cash flows generated by the asset and its recovery.

Recognition and Recording of Impairment Loss

If an impairment loss is determined, the accounting treatment should be as follows:

Recognition: Impairment losses must be recognized in the results of the period in which they are determined. This loss is reflected as a special item in the income statement.
Adjustment of Book Value: The net carrying amount of the asset will be reduced in proportion to the identified impairment loss. This new carrying amount will be the basis for future depreciation of the asset.

Reversal of Impairment Loss

If, in future periods, there are indications that the recoverable value of the asset has improved (for example, due to an improvement in market conditions or expected cash flows), the impairment loss may be reversed. However, for this reversal to be valid, it must meet certain criteria:

Permanence and Verifiability Features: The reversal can only be applied if the improvement in the recovery value is durable and verifiable, based on market data or an evaluation of the CGU.
Recognition of Reversal: If the impairment loss is reversed, the adjustment will be recognized in the results of the period in which it occurs, increasing the carrying amount of the asset to an amount that does not exceed the original net carrying amount before the impairment loss.

Valuation principles

Determination of Use Value

To determine the value in use of assets, the following steps must be followed:

Identify the applicable valuation methodology:
- Expected present value: Consider multiple future cash flow scenarios.
- Estimated present value: Uses a single scenario of future cash flows.
Determine the projection horizon:
- Specify the remaining useful life of the asset or cash-generating unit.
Define macroeconomic and operational assumptions and premises:
- Consider economic and operational aspects that may affect the valuation.
Determine the realizable value of assets:
- Estimate the value of assets at the end of their remaining useful life.
Obtain cash flow projections:
- Estimate future cash flows from the use of assets during their remaining useful life.
Determine the appropriate discount rate:
- Discounting projected cash flows to their present value.
Obtaining the present value of cash flows (DCF):
- Use discounted cash flow methodology to calculate present value.
Evaluate the reasonableness of the results:
- Analyze whether the results obtained are reasonable and adequately reflect the risks and assumptions.

Flow Projections

First Rule: “Going Concern” Criterion:
- Use reasonable assumptions based on recent data and unavoidable commitments.
- The projection horizon should be based on the remaining useful life of the assets.
- Include the final realizable value of assets at the end of their useful life.
Second Rule: Criteria for Projections:
- Projections must be expressed in current values (without inflation).
- Growth should only be considered for the first 5 years, with no projected growth from the sixth year onwards (according to Bulletin C-15).
- Depreciation and amortization should not be included in the projected cash flows.
- Income and expenses derived from financing should not be included.

Future Cash Flows

Future cash flows are determined as follows:

Expected income over the remaining useful life of the assets.
Operating costs and expenses not including depreciation or amortization.
Cash flows to be paid or received for the realization of net assets.

Formula:

Present Value Techniques

Expected Present Value:

Probability-weighted future cash flows are calculated based on various scenarios (optimistic, moderate, pessimistic).
The discount rate used is a risk-free rate, since risks are included in the scenarios.

Note:It is important to note that determining scenarios and probabilities involves a high degree of subjectivity.

Estimated Present Value:

Estimates future cash flows under a single scenario.
The discount rate will reflect the risks associated with the cash-generating unit.

Projection Horizon

The projection horizon should be based on the remaining useful life of the dominant asset of the cash-generating unit. If there is no dominant asset, the weighted useful life of the assets of the generating unit is taken.

Realization Value of Assets

The realizable value should be included in the estimation of future cash flows. Although the bulletin does not specify exact criteria or methodologies for its calculation, it is suggested to use the following: book value in real terms.

Discount rate

The appropriate discount rate is one that reflects the time value of money, taking into account prevailing market conditions and the risks associated with the cash-generating unit. This rate can be estimated using different approaches:

Weighted Average Cost of Capital (WACC): The WACC of the cash-generating unit may differ from the WACC of the company.
Implicit Rate in Market Transactions: If there is verifiable data of transactions with similar assets.
Company Financing Rate: The rate at which the company can finance itself.

WACC formula:

Discount Rate Estimation Methods

Risk-free rate (RL): Usually taken from the return on US Treasury bonds (historical average).
Market risk premium (Rm – RL): The difference between the market return and the risk-free rate.
Company-specific risk: This risk depends on the company's capital structure and is reflected in the beta (B).

Discounted Cash Flow (DCF) Method

The formula for performing a valuation using the discounted cash flow methodology is as follows:

Implications of NIF C-6 and C-15 in Accounting and Auditing

The correct implementation of NIF C-6 and C-15 has profound implications for the accounting and auditing of companies:

Impact on Financial Statements: Correct valuation of fixed assets improves the accuracy of financial statements, particularly the balance sheet, which reflects the company's net assets and liabilities.
Tax Planning Strategies: Depreciation and impairment losses on assets can have a significant impact on a company's tax base, influencing the calculation of taxes.
Investment Decisions: Proper asset valuation enables companies and their investors to make informed decisions about investments and growth strategy, maximizing return on assets.

IFRS C-6 and C-15 are essential to ensure that companies correctly record, value and present their fixed assets. A thorough understanding of these standards allows companies to make better decisions, improve financial transparency and optimize the management of their assets in the long term.

By applying these standards correctly, companies not only ensure regulatory compliance, but also strengthen their ability to maximize the profitability and sustainability of their operations in the long term.