Roadtrip to Circularity Accounting -5-
Roadtrip to Circularity Accounting -5-
This is the fifth 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 proposes a modified depreciation methodology to better reflect circularity in accounting.
As a reminder, the focus is on accounting for intangible and tangible fixed assets and current assets.
Outcomes of this analysis:
A small team led by Tweuus came to the conclusion that the use of subsidies and one-off premiums is too sensitive to political influence.
The result is an ‘unreliable’ government in the eyes of many:
(1) just as investments gain momentum, politicians conclude that the subsidy is no longer needed.
All too often, the latter means that the intended investments are scaled back and, for the energy transition, that the level of investment is too low to achieve the transition goals, which are therefore no longer realistic.
(2) For various green initiatives, ‘pots’ are made available by the ministries with different procedures to follow.
In some cases, investments have to be made first and then a subsidy can be applied for, with the risk that the pot is already empty, or an application for a subsidy has to be made first – with rather long waiting times – and then, after approval, investments can only be made, with the risk that the benefit of the investment will come (too) late in the business process.
The solution to the above problems can be linked to a more circular way of thinking: the depreciation of an investment is not so much (only) tied to consumption per se, but also to the application of a circularly responsible asset with (1) a much longer useful life and (2) the incentive of an additional, initial = threshold depreciation.
Fiscally, the use of threshold depreciation is also well defensible, as the purchase of an asset includes a profit mark-up, which is accounted for by the supplier in the same year as the user’s threshold depreciation. Alternatively, the application of threshold depreciation could be limited to European suppliers.
It is also proposed to allow an increased depreciation percentage in the first year for green, environmentally effective assets. In terms of result expectations, this will put a lot of money on the line, and if the company’s profitability is too low for such a high depreciation rate, leasing companies will undoubtedly line up to assist.
The above is an example of what the application in administration and taxation (one-to-one identical) could look like. The length of the periods and the distribution of the depreciation, in addition to the possible choice of a threshold depreciation and the remaining residual value, can be adjusted for each green asset type. It is preferable to work with (minimum) values specified from central government.
Advantages: the investments in sustainable assets receive an incentive from the tax authorities (lower results due to higher depreciation) without having to set up complex organisations for allocation and control. The tax authorities can relatively easily request a company’s calculation of depreciation with a random sample. It is likely that companies -on the advice of their accountant- will already include the necessary information in the notes to the annual accounts, so that asking for details afterwards will no longer be necessary.
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.
