In our practice, over time, an approach has taken root that does not always help apply accounting standards properly. This is the situation where tax rules and tax-related risks begin to influence how accounting reflects business transactions. Yes, accounting is the primary source of data for calculating taxes and duties. However, it is important to remember: tax rules should not replace accounting rules or become the starting point for choosing the accounting treatment.
A clear example of how tax requirements influence accounting decisions is determining the depreciable amount of fixed assets (in particular, estimating residual value).
Accounting approach: what are the depreciable amount and residual value?
Under accounting standards for fixed assets and intangible assets, the depreciable amount is:
the initial cost (or adjusted cost) of an asset minus the estimated residual value.
Residual value is an estimated (forecast) amount that a company expects to obtain from a depreciable asset at the end of its useful life (for example, through sale, scrap disposal, or by recovering usable parts/components, materials, and so on).
It is also established that residual value is determined independently by the entity for each asset and is set as of the date the asset is put into use.
Why it is important to estimate the depreciable amount correctly
The depreciable amount is the sum that will be allocated to expenses and/or production cost over the useful life of the asset. That is why accurate estimates are critical:
- if residual value is understated or ignored, expenses/cost will be higher than economically justified;
- as a result, period expenses or the cost of goods/services will increase.
Accounting on disposal (derecognition): “recoverable items” and their impact
When a fixed asset is dismantled or disposed of, items that can still be used often arise: scrap metal, spare parts, materials, and so on. As a rule, these items:
- are measured at fair value;
- are recognized as an increase in inventories;
- and at the same time reduce the value of the derecognized asset within the limits of its residual value.
Two typical situations may then occur:
- If the items actually obtained exceed the residual value, the difference is recognized as current income.
- If the items obtained are below the residual value, the difference is recognized as current expense.
Tax block: how tax rules influence decisions on residual value
In practice, the issue arises because, when selling or derecognizing depreciable assets, tax consequences can be significant, especially for VAT. For this reason, accountants often end up “aligning” accounting estimates with tax logic.
Selling a depreciable asset: the VAT base set “at the maximum”
Under the provisions of the Tax Code (CF), when supplying assets that have been or are subject to depreciation by the supplier, the taxable value of the supply is determined as the higher of two values:
- carrying (book) value,
- market value.
Example
Assume a company owns equipment whose useful life has expired:
- initial cost: 100,000 lei
- accumulated depreciation: 80,000 lei
- residual value: 20,000 lei
- sale price: 15,000 lei (excluding VAT)
Carrying value = 100,000 − 80,000 = 20,000 lei (and it matches the residual value).
Market value (assumed equal to the sale price) = 15,000 lei.
Since the higher value is used for VAT, the taxable base will be 20,000 lei, not 15,000. Therefore, it may be necessary to calculate additional VAT on the difference. For example, at a 20% rate, the amount would be:
(20,000 − 15,000) × 20% = 1,000 lei.
If, when the asset was put into use, the company had set the residual value at 0, then with full depreciation the carrying value could have been close to zero — and such “additional VAT” arising from the difference between the VAT base and the sale price might not occur (under otherwise similar conditions).
Derecognition (scrapping) of an asset: risk of non-deductible VAT on the un-depreciated amount
The Tax Code (CF) also provides that VAT related to certain expenses/values connected to operations that are not used in entrepreneurial activity (as well as in other cases specified) is not deductible and is charged to period expenses. This is also relevant when, upon derecognition of a fixed asset, there remains an amount not covered by depreciation.
Example
Using the same figures, assume the equipment is not sold but is derecognized. The un-depreciated portion corresponds to the residual value — 20,000 lei.
If no recoverable/usable items are obtained from the derecognition, then VAT related to this un-depreciated amount may become an additional burden. For example, at a 20% rate:
20,000 × 20% = 4,000 lei.
If the residual value had been set at 0, the un-depreciated portion might have been absent — and, accordingly, such an additional burden might not arise upon derecognition.
*Scrapping (in practice, terms such as “taking out of service”, “derecognition”, or “disposal” of a fixed asset are also used) is the procedure by which an asset is recognized as no longer suitable for further use (wear and tear, breakdown, obsolescence) and its removal from the accounting records is formally documented.
Another factor: differences between tax and accounting depreciation logic
Decisions on residual value are also influenced by the fact that, in the tax regulation of depreciation, there are not always specific rules that explicitly take residual value into account as an element of the depreciable base for tax purposes. As a result, when a residual value is set, differences may arise between accounting and tax calculations regarding the amount of depreciation.
These differences and additional calculations often “push” practice toward a simplified option: setting residual value at zero to reduce future complexity and tax risks.
Conclusion: why residual value is often set to 0 in practice
Given the consequences described (especially upon sale and derecognition), accountants often rely on the standards’ principle that for some assets residual value may be immaterial — and then it can be treated as zero when calculating depreciation.
However, it is important to understand: “Residual value = 0” is a management and accounting decision that must be justified. If the asset genuinely has a liquidation value, it is more appropriate to estimate and document it, and then manage tax risks separately (exit scenario, transaction terms, and supporting evidence).
If you have similar cases
We will continue analyzing situations where tax regulations influence companies’ accounting decisions. If you have encountered similar cases, feel free to write to us — and we will consider your example for future materials.
