French Generally Accepted Accounting Principles regarding Fixed Assets have drastically changed as of January 1st, 2005. Real Estate companies are on the front line of this accounting revolution. Inspired by IFRS, these new regulations introduced by the French accounting regulatory committee the “CRC” present a slight French touch due to the “cultural exception”.
The CRC regulations n°2002-10 for depreciation and impairment of assets and n°2004-06 for definition, booking and valuation of assets will significantly change financial results both in the present year as well as previous and future years. Corporate Management must be fully aware of the consequences of their approach to implementing the new regulations.
The basic step by step approach should start by appointing a project manager to:
identify the concerned assets and review the options previously selected for acquisition, financing and differed costs,
decide whether to expense or capitalize these costs in agreement with the new regulations,
identify main components that are to be replaced at regular intervals or produce economic benefits on a different time schedule,
determine the depreciation rate of each component,
determine a residual value that will reduce the depreciable amount,
follow depreciation further to regular impairment tests considering that the depreciable amount will be reduced in a prospective way,
opt for first time implementation of the new regulations in either a retrospective or prospective way.
To ensure the success of the project, accountants will require the assistance of asset managers to identify components, fix residual value and depreciation rates.
Chartered Accountants will have to rise to the challenge of presenting, explaining, training, and accompanying their clients through this period of transition.
Tax implications of the new rules:
The French Tax Administration recently confirmed the “link” between accounting income and taxable income. The consequence for Real Estate Companies, is that tax depreciation will follow accounting depreciation.
The amended 2004 Finance Act answered two important issues regarding the first time adoption of the new regulations. Applying the new regulations retrospectively will have an impact booked via equity/net worth. The impact will generally be positive as depreciation periods will be increased to match their economical life (this is definitely true for the main component of a building i.e. the “structure”). The tax impact will be spread over 5 years. The second issue concerns differed costs that were cancelled by the new accounting rules. These now have to be either directly booked as a cost or capitalised in the building costs. Tax implications will vary according to the nature of the initial costs.
Many tax issues remain unanswered regarding the specific application of the new regulations such as reducing the depreciable basis by the amount of the residual value or by an amount resulting from an impairment test.
These new methods of amortization for individual accounts contradict the annual minimum straight line depreciation as stated by French Tax Law which may reduce the deductible depreciation on a yearly basis. An official progress report was published March 25, 2005, to identify the tax implications of converging toward IFRS in French individual accounts. Further clarification from the Administration is expected before the end of 2005.
Implementing the new French regulations for Fixed Assets also requires taking into consideration Tax implications as these may change according to each company’s tax situation.
One may only speculate whether Fair Value will ever be fully accepted in French Statutory Accounts.
