Many entities took advantage of the fall in sales and activity caused by the pandemic to use their resources in internal maintenance, construction, research, development and training projects. This way, the resources that were not in laid off could be put to use in some way in tasks that are useful to the entity.
The great question is how we can treat, in accounting terms, the use of these resources, human and others, in these tasks? Can we in some way, or in some cases, "reclassify" them as Assets, thus decreasing the detrimental losses caused by the pandemic?
Whenever the project developed by the use of these resources gives rise to a controlled resource for the company, that will generate economic benefits in the future, we are facing a situation of Internally Generate Asset that can be consolidated in the Financial Statements of the entity as such, depending on the framework of the respective Portuguese Accounting and Financial Reporting Standard (NCRF).
Let's take for example a company that used its coworkers to carry out the maintenance of its facilities, for example, painting the walls and doing small repairs; do we have, in this case, a change from Expense to Asset?
According to the NCRF 7 - Tangible Fixed Assets, the entity does not recognise in the carrying amount of an item of the asset the cost of maintenance, also called daily assistance; on the contrary, these costs are recognized in the results as incurred. Thus, there is no reclassification to do, since the resources that were consumed in this maintenance project are still recognized as expenses and should affect the result of the entity. On the other hand, if said expenses are incurred in the replacement of facilities or obsolete equipment or in the production of new facilities or equipment, thus increasing the ability to generate economic benefits in the future, these costs will have to be considered as Assets, that will be subject to depreciation throughout their useful life and to impairment testing whenever necessary. In practice, expenses incurred with such a project will be compensated by the recognition of an income (Work for the Company Itself) and by the constitution of said Asset. This way, the Financial Statements will better reflect the true financial situation of the entity, as well as its performance. What if we are talking about Intangible Assets?
Let's imagine that the company has allocated its human resources to a research and development project, for example, a new software.
According to the NCRF 6 - Intangible Assets, to assess if an internally-generated intangible asset meets the recognition criteria, an entity classifies the creation of the asset in:
- a research phase; and
- a development phase.
No intangible asset resulting from research (or the research phase of an internal project) should be recognized. The expenditure in research (or the research phase of an internal project) should be recognized as an expense when it is incurred.
In the research phase of an internal project, an entity can't demonstrate that there is an intangible asset that will generate probable economic benefits in the future. Thus, this expenditure is recognized as an expense when it is incurred.
Examples of research activities are:
- activities aiming at the obtaining of new knowledge;
- the search, assessment and final selection of applications for the research discoveries or for other types of knowledge;
- the search for materials, equipment, products, processes, systems or services alternatives; and
- the formulation, creation, assessment and final selection of possible new or improved materials, equipment, products, processes, systems or services alternatives.
An intangible asset resulting from development (or the development phase of an internal project) must be recognized if, and only if, an entity can demonstrate:
- the technical viability to conclude the intangible asset for it to be available for use or sale.
- its intention to conclude the intangible asset and use it or sell it.
- its ability to use or sell the intangible asset.
- the way the intangible asset will generate probable economic benefits in the future. Among other things, the entity can demonstrate the existence of a market for the production of the intangible asset or for the intangible asset itself or, if it will be used internally, the utility of the intangible asset.
- the availability of adequate technical, financial and other resources to conclude the development and use or sell the intangible asset.
- its ability to measure in a reliable way the expenditure attributable to the intangible asset during its development phase.
In the development phase of an internal project, an entity can, in somes cases, identify an intangible asset and demonstrate that the asset will generate probable economic benefits in the future. This happens because the development phase of a project is more advanced than the research phase.
Examples of development activities are:
- the creation, construction and testing of prototypes and pre-production or pre-use models;
- the creation of tools, utensils, molds and supports involving new technology;
- the creation, construction and operation of a pilot factory which economic scale isn't suited for commercial production; and
- the creation, construction and testing of an alternative choice for new or improved materials, devices, products, processes, systems or services.
To demonstrate how an intangible asset will generate probable economic benefits in the future, an entity assesses the future economic benefits that will be received thanks to the asset using the principals of the NCRF 12 - Impairment of Assets.
Thus, although this scenario is more complex than the one involving Tangible Fixed Assets, there is a possibility to convert expenses into intangible assets, through the recognition of work done for the company itself.
Internal or external training expenses can never be recognized as an asset, since the resources are not controlled by the company; as a result, said amounts must be recognized as an expense.
The impacts caused by the pandemic crisis were oftentimes lessen by an adequate use of resources. This reality should, whenever possible, be conveyed in the Financial Statements, so it can represent truthfully and appropriately the Financial situation of the entity.