Roadtrip to Circularity Accounting -4-

This is the fourth 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 post addresses the possible solutions to better show circularity in accounting.

As a reminder, the focus is on accounting for intangible and tangible fixed assets and current assets.

Outcomes of this analysis:

Use one interest matrix per company and vary over time (preferably not more than 1x per (half) year by fixed interest up or down.
Keep it simple: continue to use straight-line depreciation if you already did.
Use an initial (initial or threshold) depreciation; in year of application, you may choose to distribute the relevant amount over the remaining period (months) of that year.
An asset lasts longer than before and therefore divide the workable time (tending to technical life) into periods with its own depreciation rates reflecting second, or later life of the asset.
Consider a realistic residual value and correct (“over time” or “one-off”) for interim upgrades (refurbishments) if necessary.
Do not record an asset as one chunk of machinery, but split to underlying major groups (hardware/software as an example).

The step-by-step approach taken is:
– choosing which elements of the balance sheet we focus on ( message 2);
– what are the characteristics of these balance sheet elements ( message 3);
– is the concept of circularity adequately expressed (partly in message 3);
– what are the (preferred) solutions -as far as necessary- to better show the circularity in the administration (this and the next message(s)).

We elaborate the solutions step by step in subsequent contributions.

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

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

Based on the above results, Tweuus has developed a model for lease transactions for circular use, in which all the variables mentioned above can be included.

And knowing Tweuus: not surprisingly, in addition to a linear variant, there is also an annuity variant or an alternative annuity variant to be used by lessors or lessees.

Integration with the administration package TWELAS is being worked out during Q3 2024.

Moreover, as a spin-off, an improved model of scenario analysis has emerged.

Examples of some of the variables and the spin-off capabilities are detailed below.

Examples based on total value of €100,000

The length of the periods and thus the distribution of depreciation, in addition to the possible choice of threshold depreciation and remaining residual value, can be adjusted per transaction.

The model has 5 periods of depreciation, in addition to any residual value amount.

Spin-off: Instead of consecutive periods, the model can also be applied for a comparison of outcomes by allowing for a separate weighting for each period.

In this model, the same total asset value as in the previous example can also consist of up to 5 different components of the asset.

Each component can have its own term, obviously with corresponding interest rate, and still have its own weighting per period per component.

Also -whether or not indexed- an amount for maintenance or refurbishment can be set per period; idem for recovery.

These amounts can be specified as to whether they should be included in the calculation and, if so, whether they should be spread over the period (over time) or as a one-time amount.

Spin-off: Instead of ‘components’ it is also possible to think in terms of ‘transactions’, which are mutually comparable. Differentiated by maturity, interest effect, residual value, etc.

This last possibility enables a lessor company to monitor one ‘asset’ during its lifetime leased out to consecutive lessees.

Another spin-off is that a lessor/landlord is able to monitor an ‘asset’ over its lifetime while it is leased/rented to successive lessees/tenants. This variant offers lessors, but also, for example, manufacturers with their own lease portfolio, the opportunity to have the pricing (and net margin) of their asset ‘in control’ over its entire technical life.