«Abstract In this paper we have tried to measure the impact that crisis it had over the revaluation process of buildings from Romania. This study ...»
Annals of the „Constantin Brâncuşi” University of TârguJiu, Economy Series, Issue 2/2013
CRISIS EFFECTS ON TANGIBLE ASSETS REVALUATIONS
A STUDY OVER ROMANIAN BUILDINGS
Doctorand, Universitatea Babeş-Bolyai, Facultatea De Ştiinţe Economice Şi Gestiunea
In this paper we have tried to measure the impact that crisis it had over the revaluation process of buildings from Romania. This study includes a sample of 239 buildings from a district from Romania.
Buildings belong to 67 shares companys. The period we have analyzes is between 2008 to 2011 but we have also used data about the past years of revaluation in order to establish the differences. The study involves observing the values fluctuations of buildings during financial crisis. To measure buildings fluctuations we have used fair value obtained during revaluation and inventory value recorded before revaluation, also used as imposable value. Having this two important values, we have compared them in order to observe if exists an increase or a decrease during the years of financial crisis. We have followed the evolution of revaluation differences whithin years and values observing both apreciations and depreciations. Also, we have analysed the periodicity with which buildings are revaluated and its importance over the taxation. Results show that the majority of the buildings have experienced a decrease from initial value in the period when our country passed through the famous crisis. In the years following the crisis buildings values have increased slightly, most registering increases up to 25%. Also, it shows that most companies which make reassessments of buildings, usually are done at 3 years to pay a minimum tax.
Keywords: Asset reevaluation, economic crisis, buildings, Romania JEL classification : M40, M41
1. Introduction Revaluation has known an increasingly interest because revalued operating assets are more value relevant than non-operating assets (see Barth M.E. and Clinchf G., 1998). Also, Missonier-Pieraal F. (2007) suggests that asset revaluation improve financial image for stakeholders and creditors and borrowing capacity.
Revaluation represents a credible signal for potential investors (Gaeremynck A. and Veugelers R., 1999) and borrowing capacity (Cotter J. and Zimmer I., 1995).
Revaluation according to romanian regulations, involves the use of fair value instead of net accounting value, taking into account inflation, market price, utility and asset condition. But, the revaluation of tangible assets must be done by qualified persons in this purpose. Assets from the same class of tangible assets will be reassessed simultaneously to avoid selective revaluations and inconsistent reportings.
If after the revaluation will result an added value, it will be recorded as an increase of revaluation reserve and contrary will be recorded as a decrease in revaluation reserve (Pântea P. & Bodea G., 2006:65).
According to some studies, aproximately 40% from the net value of tangible assets is asigned to revaluation (Stafford A. et al., 2010).
Tangible assets are revalued for maximum efficiency usually at 5 years and here we mean a complete revaluation of assets categories and one interim at 3 years. Specialized lands and buildings are revalued at depreciated replacement cost and for the rest of the lands and buildings is used value in use. Other tangible assets are revalued at market value ( Ristea M. et all, 2006).
Lin Y.C. and Peasnell K.V. (2000) observe that companies which made their revaluation at the specific terms are not correlated with prior revaluations because it doesn`t exist a developed theory of regularity of revaluations.
Researchers have correlated and analyzed revaluation with many issues and indicators during their studies. Brown et al. (1992) and Whittred and Chan (1992) find that revaluations are associated with the existence of debt contracts, high leverage, reduction of political costs, simultaneous issues of bonus shares, and avoidance of hostile takeover bids. Also, Lin Y.C. and Peasnell K.V. (2000) present a positive correlation of revaluation with indebtedness, poor liquidity, size and fixed asset intensity. And Ghicas D.C. et al. (1996) study the connection between tax benefits of fixed assets revaluation and stock returns finding significant association for several years. Revaluation implications are: increase in the book value of the fixed assets and an increase in „ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 1844 – 7007 Annals of the „Constantin Brâncuşi” University of TârguJiu, Economy Series, Issue 2/2013 owners` equity. Contrary to the previous literature, future cash flows and market returns were not related to the (size of the) revaluation indicating that the revaluation decision is not viewed as being informative or timely by the market (see Barlev B. et al. 2007).
Revaluation also involves both advantages and disadvantages. Cotter J. (1999) considers that revaluation advantages are the reduction of leverage and it provides credible signals of exit values of assets in his study about the relationship between asset revaluations and debt contracting. And, revaluation disadvantages are the additional out-of-pocket costs according to Lin Y.C. and Peasnell K.V. (2000).
Revaluation process may be influenced by several factors and by many requirements. Lin Y.C. and Peasnell K.V. (2000) have identified that decision of revaluation may be influenced by economic factors like issuance of bonus shares, strike frequency, takeover threats, size, tightness of lending agreements, indebtedness, raising new debt, declining operating cash flow, liquidity, growth prospects, existence of assets which can be revalued, and prior revaluation pattern. Barlev B. et al. (2007) showed that revaluation motives can be related to financial needs, capital intensity of the form and issues related to political costs. And Demski J. et al. (2009) surprise a vast array of revaluation requirements imposed by GAAP, including lower of cost or market for inventory, net realizable value for receivables, a less restrictive variant of lower of cost or market for long lived assets, and fair value for a variety of financial instruments. But when the level of initial investment is readily observed, the revaluation policy that maximizes aggregate expected surplus imposes no revaluation requirements.
Where there is a policy revaluation, there will be an increase of private information that would reduce balance sheet error. This policies are optimal if is more costly to verify the worth of high-value assets than of low-value assets (see Demski J. et al. 2009).
Revaluation constitutes a major departure from historical cost (Lin Y.C. and Peasnell K.V., 2000), giving place to fair value in selected areas (Barlev B. et al., 2007). Still, accounting regulators disclaim the importance of historical cost specially in inflation periods trying to impose as a solution, revaluation of fixed assets, with change in value added to revaluation reserve (see Ghicas D.C. et al., 1996).
If an asset can`t be revaluated, that good will be presented in balance at cost minus cumulative value adjustments. If the fair value can`t be determined, will be presented in the balance sheet at a revalued amount minus cumulative value adjustments (OMFP 3055/2009).
Fair value under international accounting standards represents the amount an asset can be traded or a liability settled, voluntarily, between parties which are in acknowledge, in a transaction where the price is determined objectively.
Most of the times, fair value doesn`t coincide with market value because not always exists an active market for that goods. Even fair value is not considered a valuation basis according to accounting framework, there are different ways of its manifestation like: current cost, realizable value, present value. But, more international accounting norms regard fair value as a valuation basis ( see Berhenci, M., 2010).
The cases where is mentioned valuation at fair value in accounting regulation according to European directive are: valuation of assets obtained free, valuation of tangible assets, which is done at fair value from the balance sheet date, fair valuation of financial intruments in the consolidated financial statements etc.
(Berhenci, M., 2010).
It should be used fair value in order to present financial reportings at values according to the reality because it reflects more precisly company`s financial position while historical cost lead to a fictive accouting (Berhenci, M., 2010).
Fair value offers utill information if the markets are liquids and transparents and play a determinant role in investment decision (RFCP 1/2009). Also it seems to be the most adequate valuation basis according to Hooper, K., Kearins, K., (2005), due to the fact that represent the exchange value of future economic benefits.
Eccles, T., ( 2005) enhances that fair value is more relevant that the cost even if present a certain dose of uncertainty.
2. Data and research methodology
In this study we have tried to measure impact that crisis it had over the revaluation process of buildings from Romania.
This study includes a sample of 239 buildings from a district from Romania namely Bistriţa-Năsăud.
Buildings belong to 67 shares companys. The period we have analyzes is between 2008 to 2011 even we use data about the past years of revaluation in order to establish the differences. The study involve observing the values fluctuations of buildings during financial crisis. To measure buildings fluctuation we have used fair value obtained during revaluation and inventory value recorded before revaluation, also used as imposable value. Having this two important values, we have compared them in order to see if there is an increase or a decrease during the years of financial crisis. We have followed the evolution of revaluation differences whithin years and values observing both apreciations and depreciations. Also, we have analysed the periodicity with „ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 1844 – 7007 Annals of the „Constantin Brâncuşi” University of TârguJiu, Economy Series, Issue 2/2013 which buildings are revaluated and its importance over the taxation, in the conditions that buildings revaluated at 3 years pay 1,3% tax and buildings revaluated at 4 or 5 years pay 10% tax while nonrevaluated buildings which overcome 5 years pay a 30% tax.
In table 1 are presented the descriptive statistics of all variables used. These are: revaluation value, prior revaluation value, revaluation differences, prior year of revaluation, the year of revaluation, peridiocity of revaluation and tax rate.
Differences in revaluation between fair values resulted after revaluation and the value recorded before
revaluation, given in percentage are presented in the following table:
„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 1844 – 7007 Annals of the „Constantin Brâncuşi” University of TârguJiu, Economy Series, Issue 2/2013 Most of the reassessed buildings have recorded differences from the past inventory value in the database. These differences were both positive and negative. The majority of the buildings have registered an increase up to 25 % numbering 101 buildings in percentage of 42,3%. The next category is represented by the buildings whose value have depreciated totaling 91 buildings in a percentage of 38,1%. Only 7,1% from buildings have registered increases between 25-50%, 2.9% increases between 50-100% and a percent of 9,6% increases over 100%.
Buildings reevaluation has been done between 2008-2011 years. Below we can observe the frequency of reevaluation for every year.
For the variable presented in table, most of the revaluations are done for 2010 with a number of 92 buildings, followed by 2009 year with a number of 77 buildings. Prior to the actual reassessment, the majority of the buildings have been reassessed in 2006 and 2007 with a percentage of 37,7 % followed by the buildings revaluated in 2008 in a percent of 12,1%. The smaller percent is recorded for the buildings revaluated previously in 1994, 1997 and 2004.
The most frequent periodicity of revaluations is at 3 years for a percent of 74.9%, followed by a periodicity of 2 years in 17,2% from the cases.
The companies are paying taxes for buildings depending of revaluation frequency. Thus, for the buildings revaluated in the last 3 years they pay a tax of 1.3% from the inventory value of buildings and for those revaluated 4 or 5 years ago will be settled a tax of 10% from the value declared. Due to the 3 years reassess, the most common tax rate is of 1,3% reaching a percent of 92.9% and 4,2% pay a 30% tax rate because of a valuation made over 5 years ago.
After setting imposable value for revaluated buildings is established rate tax over building. After revaluation can result differences between taxes payed before and after, due to the increase and decrease of buildings values.
Table no. 4. Crosstabulation – percent of revaluation differences – year of revaluation
„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 1844 – 7007 Annals of the „Constantin Brâncuşi” University of TârguJiu, Economy Series, Issue 2/2013
If we make an analysis of the obtained data based on the percentage of revaluation differences for every year we observe that in 2009 and 2010 are taking place the most important changes. Thus, in 2010 is recorded the biggest increase of the differences of revaluation, approximately 17,2%, differences between 0-25%, precede in the previous year, respectively in 2009 of an increase of the value with 15,5%. In 2010 and 2009 is recorded the biggest decrease of 15.5% respectively 11.3%. The greatest gap can be observed at the crossing from 2008 to 2009 when the value of buildings decrease with 8% from 2009 to 2008, even if in those years the buildings whose values have increased between 0-25%, increased overall with 10,9%. Another gap between values can be observed during 2010 and 2011 where the number of depreciated buildings reduces with 18%, respectively 7,6%. Still, in the same period we noticed a decrease of buildings that record differences from revaluation between 0-25% with 12.2%.