For those of us in the world of finance and accounting – a world that is foreign to many – there is an important concept that hasn’t necessarily been widely noticed by the general public. This is the process of
Imagine you bought land in 2004 for 100,000.00 KM, and by 2022, due to crisis, price increases, and inflation, that same land increases in value by the cumulative inflation rate of, say, 55%, meaning its value is now 155,000.00. If you’re a business owner, the value of your fixed assets is variable, and in the world of finance and accounting, it’s very important that the value of your fixed assets in the books reflects their actual value, which is a prerequisite for preparing and fairly presenting financial statements.
With the amendment to the FBiH Budget Accounting Regulation[2] which came into force on August 31, 2023, the rules related to the valuation of fixed assets are changing – the valuation of fixed assets through REVALUATION is completely removed, and ASSESSMENT is now introduced as the valuation method.
Until 2022, the rule was clear: if prices rose by more than 10% in one year or cumulatively over several years, companies had to adjust the value of their tangible assets in their books. This means that if you bought a machine for 100,000 KM, and prices increased by more than 10%, you must state that the machine is now worth more, even if it hasn’t physically changed.
Why is this important? Because inflation changes the value of money. If you don’t adjust the value of assets, your financial statements won’t provide an accurate picture of how much your assets are really worth. This can lead to problems in decision-making, future planning, and can even affect investor confidence. This particularly applies to public finances, where the stated value of assets concerns what we have at our disposal and in whose acquisition we had both individual and collective contribution.
However, even with these rules in place, many public sector organizations did not follow these recommendations. In this text, we will explore why this was the case and what the consequences of such choices were.
Revaluation of fixed assets is a process that changes the book value of assets to better reflect their market value or fair value. This process can significantly affect a company’s financial performance through changes in depreciation, increased asset value, taxes, and impact on balance sheets.
As mentioned, this was an audit recommendation that budget users did not comply with until 2022, and there still exists an obligation based on it to adjust the valuation of fixed assets through revaluation. The first step in valuing fixed assets is to determine the cumulative inflation rate, i.e., the amount of increase in industrial producer prices, which is published by the Federal Bureau of Statistics. The second step is calculating the effects of revaluation, i.e., the effect of increasing the value of fixed assets in class 0 and increasing permanent sources of funds in class 5 of the income statement, and if you have value adjustment, as is the case with buildings, then the value adjustment increases so that the revaluation effect exists only for the net book value.
Why is it important to follow all recommendations, including this one? Following audit recommendations is crucial for an organization for several reasons. Implementing these recommendations contributes to transparency, increases operational efficiency, ensures compliance with laws and standards, minimizes risks, improves internal controls, preserves reputation, and enables more efficient use of resources. Through a serious approach to audit recommendations, an organization builds a responsible business environment, achieving long-term stability and success.
From now on, the old rules no longer apply, but audit recommendations and obligations remain, and budget users until 2022 should value fixed assets using the revaluation method, and from 2023, the Federal Ministry of Finance should take a clear position on when to start applying the Regulation and conduct valuation through asset assessment.
The adoption of the new Regulation raises numerous questions regarding the valuation of fixed assets. Should someone now be hired to perform the assessment, how often will assessments need to be done, will this require additional costs, and must budget rebalancing be done to secure additional funds for these needs?
The answer to all these questions is YES! You need to hire an appraiser, frequently – if required by turbulent times such as current situations like wars, weather disasters, market instability, etc., because then all indicators are red, making the need for more frequent assessment necessary. Regarding the funds needed for assessment, depending on what is being assessed and the purchase value of the fixed assets being assessed, assessments can cost from 10 thousand to 100 thousand convertible marks of public money.
The non-compliance of many budget users with previous revaluation rules until 2022 indicates a lack of consistency in applying accounting rules in the public sector. To ensure consistent application of new regulations, budget users need to align their practices with the new Regulation. Inconsistency in applying rules can result in inaccurate financial statements and distrust from investors and interested public, as well as other business stakeholders.
Since non-compliance may result from a lack of understanding of new regulations, it’s important to conduct education and training for employees working on fixed asset valuation to ensure they are aware of changes and properly apply new methodologies. Introducing monitoring and control systems will help budget users ensure consistency in applying new rules, and systematic oversight of the valuation process can prevent oversights and improve the overall quality of financial statements.
Transparency regarding changes in valuation methodology will contribute to building trust and understanding of the changes themselves. Budget users should consider strategic financial planning to anticipate needs for additional funds. This includes considering frequent assessments to predict potential impacts of turbulent times on fixed asset values. Engaging appraisers will contribute to assessment accuracy; however, it’s important to ensure transparency and control of appraiser engagement costs. Budget users should be ready to quickly adapt to new changes in legislation and rules to avoid unnecessary disagreements and delays in fixed asset valuation.
In essence: consistency, training, control, and transparency are key factors for successful implementation of new rules on fixed asset valuation. Otherwise, if budget users don’t consistently apply new rules related to the Regulation on fixed asset valuation, serious consequences are possible, including inaccurate financial statements, loss of investor and public trust, risk of non-compliance with regulations, and reduced transparency and operational efficiency.
[1] (“Official Gazette of FBiH”, No. 34/2014 and 66/2023)
[2] (“Official Gazette of FBiH”, No. 34/2014 and 66/2023)
