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Question Marks

2014 8th Issue

Reclassification between
tangible assets and
inventories Six of one and
half a dozen of the other
The topicality of this issue of our newsletter on the
rules of the Act on Accounting is provided by the
amendment to the Act on Accounting promulgated
on 26 November 2014. The amendment specifies
the date when a reclassification between tangible
assets and inventories is required.

Initial classification Classification may not be obvious either when the asset
is purchased for dual purpose. For example, a vehicle or
Many decisions have to be made upon purchasing an asset, photocopier purchased is leased out for a time, then at the
including that relating to the purpose for which the asset is end of the lease term it is sold. The asset is purchased partly
purchased. Under the provisions of the Act on Accounting, for resale, but it is used on a long-term basis to provide
if the asset serves the companys activities on a long-term services before it is sold. In light of this, should the asset
basis, for at least one year, then it shall be recorded under be recognised as a tangible asset during the period of lease
fixed assets (among intangible and tangible assets). In and sold as a tangible asset, or should it be reclassified into
contrast, if the asset is acquired for the purpose of resale inventories at the end of the lease term? Or should it be
in the course of regular (normal) business operations and recorded under inventories already upon purchase? Can the
it remains unaltered before being sold, it shall be recorded companys business model be a consideration? For example,
as goods under inventories. If the asset is to be used for leasing out the asset and selling it at the end of the lease term
the production of products to be sold or during the supply or treating the lease as being temporary until an appropriate
of services, it shall be recorded as raw materials under buyer is found? Does it determine the case if the lessee has
inventories. The Act on Accounting requires that tangible an option to buy? A similar question may arise also in the
assets (tools, instruments, equipment, fittings, work clothing, case of purchase of land, where a car park is operated until
uniforms, protective clothing) serving the companys the development of the property to be constructed for sale is
activities for a period of not more than one year, as well as completed or the land is sold.
assets reclassified from fixed assets, are to be classified as
inventories. Assets acquired or produced for the purpose of In the case of certain assets it may be difficult to determine
sale, which the company uses on a temporary basis prior to whether the asset is used for a period of less or more than
their sale (disposal) have to be shown under goods from the one year. Such assets may be, for example, certain tools
date of being put into use. which may be very valuable. Depending on the intensity of
use, the tool may become worn out within one year, but it
Based on the above, generally it is easy to decide in which also may remain usable after one year. If the expected period
balance sheet caption the asset shall be presented; however, of use cannot be determined individually with due accuracy,
there may be cases in practice over which accountants may should the average period of useful lives of such assets
ponder. be taken into account to determine whether it should be
One such case is when the purpose of acquisition has not yet capitalised as a tangible asset?
been determined when the asset is purchased. For example,
a company developing and trading in real estate buys land Reclassification
and plans to construct a property held for lending, but it is
not yet decided whether the company will sell the property In practice it may sometimes happen that the use or purpose
upon completion or own/operate it going forward. Future of the asset capitalised as a tangible asset upon purchase
utilisation of the property will depend on market conditions. In changes, for example the company wants to sell the
this case, should the asset be recorded in the balance sheet asset, but free transfer or removing from use, or scrapping
as a tangible asset, considering that it was not purchased may occur. A production machine typically has to be shut
specifically for resale? down and dismantled in order to prepare it to be sold and
transported; but does this matter if the machine has been

Question Marks / 2014 8 th Issue 2014 KPMG Hungria Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Question Marks / 2014 8 th Issue

shut down and dismantled only after an agreement on the condition and its sale is highly probable. This latter criterion
sale of the machine has been reached with the buyer? Real is met if the appropriate level of management is committed
estate can even be sold while used, for example, while it is to a plan to sell the asset, an active programme to locate a
leased out; additionally, when a business is sold the use of buyer and complete the plan has been initiated, the price is
assets need not be discontinued in order to sell the business reasonable in relation to the assets current fair value, the
together with its assets. sale is expected to qualify for recognition as a completed
sale within one year and it is unlikely that significant changes
While it is supposed to occur less frequently, the purpose of
to the plan will be made or that the plan will be withdrawn.
an asset classified as an item of inventory upon purchase may
Based on this, it is very rare that an asset used up to the sale
also change and the company may decide subsequently to
could qualify as held-for-sale. IFRSs also contain detailed
use it on a long-term basis instead of selling it.
rules on reclassification between investment properties,
All of the above raises the question whether in these cases tangible assets and inventories. Evidence of change in use
the asset should be reclassified between tangible assets and and thus the circumstance giving rise to reclassification
inventories and as of what date. According to the provisions is the commencement or end of owner-occupation, the
of the Act on Accounting effective so far, if the use or purpose commencement of development of the property with a view
of an asset has changed after its initial classification, because to sale or commencement of an operating lease to another
the asset no longer serves the relevant activities or operations party. For lack of specific requirements it is questionable
on a long term basis, or vice versa, its classification shall be to what extent these criteria can be applied when making
changed accordingly, i.e. the fixed asset must be reclassified decisions on reclassification based on the Act on Accounting.
as a current asset, or vice versa. However, the Act on
Finally, do not disregard that in addition to effects on
Accounting does not provide any guidance as to what shall
accounting and financial indicators, reclassification of assets
be deemed a change in use or purpose and the date of
can also have tax consequences, as the sale of assets
reclassification. For example, is the decision on sale relevant?
recognised as purchased inventories (raw materials, goods)
Consider that all sales are preceded by a decision on sale, but
may also have an impact on the amount of business tax and
then all intangible and tangible assets should be reclassified
innovation contribution; furthermore, reclassification may
before sale into inventories. Or does the purpose of the asset
influence the amount of corporation tax liability as well.
change only if and when the previous use of the asset is
discontinued and the sale of the asset is intended afterwards? Endnote
Or should the classification be determined based on the
business model? In the above case of the asset purchased Most entities purchase and use various assets necessary
for dual purpose, does the purpose of the asset change for production and supply of services during their operation.
at the end of the lease period, if the business reason was Decisions need to be made both upon purchase and
already upon purchase that the asset would be sold at the during the use of the assets on whether the asset should
end of the lease period? If the use or purpose changes after be recognised as a fixed asset or under inventories in the
the reporting date but before the balance sheet preparation records. However, determining the classification is not always
date, does the asset need to be reclassified already as of the easy. The decision may affect financial indicators as well, and
reporting date? tax implications should not be disregarded.

The 2014 amendment to the Act on Accounting partly This newsletter is not intended to discuss all possible
responds to the question of the date of reclassification. transactions related to this topic nor provide answers to all
According to the amendment, assets must be reclassified questions which may arise. If you still have any uncertainties
from fixed assets into current assets or vice versa, not later or our newsletter provided you with food for thought,
than in the period of preparing the balance sheet and as of the we recommend that you contact your tax or accounting
reporting date. However, the amendment still fails to provide advisor or contact us, since a thoroughly thought-over and
any guidance as to what should be deemed a change in use or well-developed methodology can significantly contribute
purpose, thus this should still be determined by the entities. to enabling financial statements to give a fair view of the
financial position of the company, its financial performance
International Financial Reporting Standards (IFRSs) specify and the results of its operations.
more detailed rules on classification and reclassification of
assets. For example, a non-current asset can be considered The next issue of our newsletter will discuss in detail the 2014
held-for-sale, if it is available for immediate sale in its present amendments to the Act on Accounting.

Contact
Judit Boros Lszl Kajtr
Partner Partner
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E: kerdojelek@kpmg.hu (KPMG International), a Swiss entity. All rights reserved.