Roadtrip to Circularity Accounting -3-

This is the third post in the Roadtrip to Circularity Accounting.
A fundamental search for accounting that is clear and appropriate to circularity is needed. Tweuus tries to contribute to this quest.

This contribution addresses the characteristics of circular balance sheet elements.

As mentioned in the previous post, the focus is on intangible and tangible fixed assets and current assets.

To the extent that there is depreciation on balance sheet items (with the counterpart of depreciation expense in the income statement), in practice it can be seen that depreciation is almost exclusively based on straight-line depreciation. According to Dutch legislation (BW article 2:386) and elaborated in the Guidelines for Annual Reporting (RJ 210.403 and RJ 212.417) there must be a systematic method that takes into account the expected future useful life. At least … if there is a limited useful life.

In short: Depreciation rates used for a group of assets vary without explicitly stating which rate is used for which (type of) asset. Percentages typically vary between 10 and 20 percent. The (only) systematic method of depreciation used is the straight-line method.

Outcomes of this analysis:

Regarding the type of assets and in the context of circularity, a number of observations can be made:

• companies do not take into account the common actual first threshold depreciation. Such threshold depreciation can easily range from 10 to 20 percent of the investment amount with outliers to 40 percent for e.g. “small electronics” (phones, laptops, monitors, etc.).
• companies take only limited account of the re-use value, which means that depreciation takes place over a larger part of the investment than is necessary from a circular point of view. This seems partly driven by legislation, which speaks of economic life, i.e. economic importance, while ecological importance is not taken into account. Reuse (after repair costs), alternative use, etc. are thus not sufficiently priced in.
• assets in many situations are depreciated over a shorter portion than the -old school- possible economic life; from a tax point of view, action seems to be taken only in extreme cases.
• the analysis from the previous post (an asset consists of several components) is hardly taken into account for depreciation purposes.

Regarding assets with multiple components (tiered assets):

• the different components may have different maintenance regimes (example: aircraft body, landing gear aircraft and aircraft engines)
• the depreciation periods may differ (substantially).
• more than 4 components rarely occur and the last component is then designated as ‘other’.

The step-by-step approach taken is:

– choose which elements of the balance sheet we focus on (previous post);
– what are the characteristics of these balance sheet elements (this post);
– is the concept of circularity adequately expressed(also partially this post);
– what are solutions -if needed- to better show the circularity in the administration.

In addition, we look at a realistic timeframe to the extent that changes are (should be) forthcoming.

The final goal is to develop the road trip into a road map.

The next post is about the characteristics of the identified elements.

Would you like to contribute ? Don’t hesitate to come forward.