en
How is the purchase and sale of a vehicle formalized?
How is the purchase and sale of a vehicle formalized?
In many cases, one of the issues we encounter in practice is transactions where taxpayers purchase vehicles and then sell them shortly afterward. So how should such transactions be recorded in tax or accounting records?
Altay Jafarov provides clarification on this subject with examples.
Example 1: At the beginning of August, “AA” LLC purchased a new vehicle from a showroom for 100,000 AZN. At the end of August, the company’s management sold it for 105,000 AZN.
Example 2: At the beginning of August, “AA” LLC purchased a new vehicle from a showroom for 100,000 AZN. By decision of the management, the vehicle was sold in September for 105,000 AZN.
Example 3: At the beginning of August, “AA” LLC purchased a used vehicle from a showroom for 20,000 AZN. Later, the company’s management decided to sell it and sold it at the end of August for 21,000 AZN.
In these cases, should the LLC account for the purchased vehicle as a fixed asset in its tax and accounting records?
Some taxpayers in such cases record vehicles as fixed assets and, when sold, write them off as disposals of fixed assets.
Other taxpayers, however, record the vehicles as inventory and include them in the cost of goods sold when they are sold. To fully answer this question, we need to refer to the following provisions of the Tax Code.
According to Article 13.2.17 of the Tax Code, fixed assets are tangible assets with a useful life of more than one year and a value exceeding 500 AZN, and which must be depreciated under Article 114 of the Code.
Article 13.2.8 of the Tax Code defines goods as any tangible or intangible property (asset), including electricity, thermal energy, gas, water, etc.
Also, International Accounting Standard (IAS) 16 provides the following:
Recognition:
An item of property, plant, and equipment should be recognized as an asset only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.
As we know, vehicles are tangible assets. Moreover, according to both the Tax Code and IAS 16, in order to recognize tangible assets as fixed assets (property, plant, and equipment), their useful life must exceed one year. In our examples, vehicles indeed have a useful life of several years.
One of the main requirements of the Tax Code is that tangible assets subject to depreciation may be recorded as fixed assets. According to IAS 16, an asset must generate future economic benefits in order to be recognized as property, plant, and equipment.
So, what is meant by tangible assets subject to depreciation?
This expression has the same meaning as the future economic benefits described in IAS 16. A tangible asset is depreciated only when it is put into use.
If a tangible asset has not been put into use, it cannot be depreciated and will not generate future economic benefits for the taxpayer. Therefore, when analyzing our examples, the key issue is the purpose for which “AA” LLC acquired the vehicle and whether or not it was put into use. This is crucial in all three examples.
Let us note that in the first and second examples, the company purchased a new vehicle and obtained a state registration number. However, from the very beginning, the company’s purpose was not to use the vehicle but to sell it. In this case, since the vehicle was not put into use, no depreciation was calculated, no future economic benefits were generated, and it should not be accounted for as a fixed asset (property, plant, and equipment). Instead, the vehicle should be recognized as inventory at 100,000 AZN. Later, when sold, the income should be recognized as operating revenue, while the 100,000 AZN should be included in the cost of sales.
This also applies to the second example. Even though the purchase was in August and the sale in September, the tangible asset was not actually put into use.
In the third example, the vehicle was already recognized by the seller as a fixed asset (property, plant, and equipment). Here again, the key question is whether “AA” LLC put the asset into use. Since the vehicle was not put into use, the company will recognize the 20,000 AZN as inventory, and when sold, this amount will be treated as the cost of sales.
Now, suppose that in all three examples, the LLC acquired the vehicle, put it into use, and later decided to sell it. In this case, according to the requirements of the Tax Code and IAS 16, the vehicle should be recorded as a fixed asset (property, plant, and equipment) and, upon sale, written off at its residual value as a disposal of fixed assets.
The main purpose of presenting this to readers is to emphasize that correct and accurate accounting of such transactions is very important when submitting the annual corporate income tax return to the tax authorities and when preparing and presenting annual financial statements.
In other words, if an item is mistakenly recorded as inventory instead of a fixed asset, or vice versa, and declarations and reports are prepared accordingly, tax authorities will identify discrepancies during desk audits. Moreover, inaccurate information will be provided to users of financial statements. Therefore, accountants and auditors must be attentive in these matters.
In many cases, one of the issues we encounter in practice is transactions where taxpayers purchase vehicles and then sell them shortly afterward. So how should such transactions be recorded in tax or accounting records?
Altay Jafarov provides clarification on this subject with examples.
Example 1: At the beginning of August, “AA” LLC purchased a new vehicle from a showroom for 100,000 AZN. At the end of August, the company’s management sold it for 105,000 AZN.
Example 2: At the beginning of August, “AA” LLC purchased a new vehicle from a showroom for 100,000 AZN. By decision of the management, the vehicle was sold in September for 105,000 AZN.
Example 3: At the beginning of August, “AA” LLC purchased a used vehicle from a showroom for 20,000 AZN. Later, the company’s management decided to sell it and sold it at the end of August for 21,000 AZN.
In these cases, should the LLC account for the purchased vehicle as a fixed asset in its tax and accounting records?
Some taxpayers in such cases record vehicles as fixed assets and, when sold, write them off as disposals of fixed assets.
Other taxpayers, however, record the vehicles as inventory and include them in the cost of goods sold when they are sold. To fully answer this question, we need to refer to the following provisions of the Tax Code.
According to Article 13.2.17 of the Tax Code, fixed assets are tangible assets with a useful life of more than one year and a value exceeding 500 AZN, and which must be depreciated under Article 114 of the Code.
Article 13.2.8 of the Tax Code defines goods as any tangible or intangible property (asset), including electricity, thermal energy, gas, water, etc.
Also, International Accounting Standard (IAS) 16 provides the following:
Recognition:
An item of property, plant, and equipment should be recognized as an asset only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.
As we know, vehicles are tangible assets. Moreover, according to both the Tax Code and IAS 16, in order to recognize tangible assets as fixed assets (property, plant, and equipment), their useful life must exceed one year. In our examples, vehicles indeed have a useful life of several years.
One of the main requirements of the Tax Code is that tangible assets subject to depreciation may be recorded as fixed assets. According to IAS 16, an asset must generate future economic benefits in order to be recognized as property, plant, and equipment.
So, what is meant by tangible assets subject to depreciation?
This expression has the same meaning as the future economic benefits described in IAS 16. A tangible asset is depreciated only when it is put into use.
If a tangible asset has not been put into use, it cannot be depreciated and will not generate future economic benefits for the taxpayer. Therefore, when analyzing our examples, the key issue is the purpose for which “AA” LLC acquired the vehicle and whether or not it was put into use. This is crucial in all three examples.
Let us note that in the first and second examples, the company purchased a new vehicle and obtained a state registration number. However, from the very beginning, the company’s purpose was not to use the vehicle but to sell it. In this case, since the vehicle was not put into use, no depreciation was calculated, no future economic benefits were generated, and it should not be accounted for as a fixed asset (property, plant, and equipment). Instead, the vehicle should be recognized as inventory at 100,000 AZN. Later, when sold, the income should be recognized as operating revenue, while the 100,000 AZN should be included in the cost of sales.
This also applies to the second example. Even though the purchase was in August and the sale in September, the tangible asset was not actually put into use.
In the third example, the vehicle was already recognized by the seller as a fixed asset (property, plant, and equipment). Here again, the key question is whether “AA” LLC put the asset into use. Since the vehicle was not put into use, the company will recognize the 20,000 AZN as inventory, and when sold, this amount will be treated as the cost of sales.
Now, suppose that in all three examples, the LLC acquired the vehicle, put it into use, and later decided to sell it. In this case, according to the requirements of the Tax Code and IAS 16, the vehicle should be recorded as a fixed asset (property, plant, and equipment) and, upon sale, written off at its residual value as a disposal of fixed assets.
The main purpose of presenting this to readers is to emphasize that correct and accurate accounting of such transactions is very important when submitting the annual corporate income tax return to the tax authorities and when preparing and presenting annual financial statements.
In other words, if an item is mistakenly recorded as inventory instead of a fixed asset, or vice versa, and declarations and reports are prepared accordingly, tax authorities will identify discrepancies during desk audits. Moreover, inaccurate information will be provided to users of financial statements. Therefore, accountants and auditors must be attentive in these matters.