Thread: Non Current Assets aquired at 0 Value

Can anybody help me with this issue?

Assets (manufacturing equipment) have been given at a 0 value by our customer, reason being clause in contract that we will manufacture product exclusively for this customer using these assets at discount for the certain period of time.

Issue is being complicated by owners desire to revaluate assets (initially recognising them at 0 cost) thus increasing owners equity.

Could I get an advice how these assets to be recorded on books?
Actual value of them is ~ 1mln sterling, therefore not a petty cash.

this really is a case of revenue recognition. The owner did not contribute this property, therefore it shouldnt be added to equity. I could be wrong but i would record the asset at FMV and the other side of the entry would be revenue. Maybe defferred revenue until you start completing projects. Lets say you fill an order for 1000 dollars with a discount of 200. So bill 800 and recognize 200 of the deferred income. It sounds pretty close to a Barter situation. I would contact your CPA or whomever prepares your tax return and get their advice.

Originally Posted by Mike@boiron

this really is a case of revenue recognition. The owner did not contribute this property, therefore it shouldnt be added to equity. I could be wrong but i would record the asset at FMV and the other side of the entry would be revenue. Maybe defferred revenue until you start completing projects. Lets say you fill an order for 1000 dollars with a discount of 200. So bill 800 and recognize 200 of the deferred income. It sounds pretty close to a Barter situation. I would contact your CPA or whomever prepares your tax return and get their advice.

Mike,
Thank you for the advice. In fact I sought it to confirm my thought that owners cannot present it as equity unless (according to international standards) they revalue it and record revaluation into reserves. However (I am in UK by the way) with revaluation, you must revalue the entire group, not just selected item, and this could open a can of worms, not even mentioning cots of it.
Unfortunately our tax return people were in agreement with owners () that this is doable and it took quite a battle for me and auditor of subsidiary (the equipment was delivered to sub) to prove that it cannot be done this way. Problem is not as sharp at the moment, but assets still needs to be recorded.
Thank you for the deferred revenue suggestion. My thought was to record deferred liability (JE would be pretty much the same), and release it into P&L as production (and sales) advances, but deferred revenue reflects nature of transaction much better.

Originally Posted by Rasasuntree

Mike,
Thank you for the advice. In fact I sought it to confirm my thought that owners cannot present it as equity unless (according to international standards) they revalue it and record revaluation into reserves. However (I am in UK by the way) with revaluation, you must revalue the entire group, not just selected item, and this could open a can of worms, not even mentioning cots of it.
Unfortunately our tax return people were in agreement with owners () that this is doable and it took quite a battle for me and auditor of subsidiary (the equipment was delivered to sub) to prove that it cannot be done this way. Problem is not as sharp at the moment, but assets still needs to be recorded.
Thank you for the deferred revenue suggestion. My thought was to record deferred liability (JE would be pretty much the same), and release it into P&L as production (and sales) advances, but deferred revenue reflects nature of transaction much better.

could you be a bit more specific on who is giving and getting the equipment. i thought you said it was a customer, but what you just wrote sort of indicates a subsidiary.

I thought the standard on asset acquisition is clear.

You recognise the asset at cost which is zero, then you revalue the asset and the otherside goes to asset reval reserve.

You need to revalue the class that asset belongs to to fair market value.

The fact that you have certain other problems in the reval of the asset class is just too bad.

I dont think you can use deferred income that brings in a whole gammit of revenue recognition problems.


Ps Im in australia so I referring to standards here which should be similar to yours.

Hi Rambler, Mike

I do appreciate answers a lot.
Mike has asked regarding sub so I will consolidate my answer here and pour more light on the matter.
The initial cost
The matter would be clear if the equipment was given at 0 cost indeed, however if to take substance of the transaction it was not so.
The substance is that equipment is fact was given at a discount for forfeiting future cash flows, therefore has value. My suggestion is to record equipment at a cost which is PV of future cash flows forfeited.
True purpose of transaction:
The entire problem appeared because owners of sub (I work for parent company) by law were required to increase equity.
It could be done by:
Capitalising debts to owners
Absorbing losses (owners covering up losses from own funds without increasing share capital)
Increasing share capital
Increasing reserves
Since the sub is loss making owners didn’t’ want to pour in any additional capital, nor did they want to capitalise debts.
This plant thing coincided with the necessity to increase equity. However it was not as clean cut as owners would’ve wanted it to be.
Supposedly plant was recorded at the value in use. Supposedly value in use is lower than NRV, which would allow thinking of revaluation; however here sub is getting stuck with requirements to revalue entire group, which as described before would be very unbeneficial.
As a cure to this problem owners, advice by auditors (!) decide that they would contribute plant as an increase in share capital, but this should be a different ball game. Ownership of plant in that case should be of owners, which was not a case.

Resuming above, there was a desire of owners to find a loophole allowing them to increase equity without additional contributions.
I sought advice to back up sub auditor’s and my own opinion that plan to fiddle with plant was not a bit more than just creative accounting.
Ironically, as time passed by it appeared that it is not clear whom does plant belong to. Plant is on premises of sub, but no official transfer documents have been obtained from customer as of yet.

Looks like you have got a real good one there well I certainly agree with the discounting of the asset to NPV and crediting deferred revenue in that case but it looks like its a little more complex than that

Good luck with the transaction.

Let us know the final outcome.