1: Welcome to listen to the podcast of the ACES project! My name is Ulrika Lindblad, and I’m here with my colleague, Heli Kortesalmi. We both work at Haaga-Helia University of Applied sciences as senior lectures of accounting. Welcome Heli!

2: Hi Ulrika and thank you! It’s nice to be here.

1: Today, we will dive concretely into how the circular economy affects accounting.

2: We deal with, among other things, the valuation of recycled materials, the recording of rental activities, gift cards and VAT related marginal taxation – these are some examples of the topics that many circular economy businesses and their accountants face in their everyday lives according to the 25 company interviews we did in our ACES project.

Valuing recycled materials

2: So Ulrika, Let’s start with a perhaps surprising point – the purchase price of raw materials can be zero in a circular economy company!

1: Exactly! For example, if a company uses as a side stream from another company, such as surplus soil or collects plastic collected from the sea.

2: However the work, cleaning, transportation, analysis of this raw material material costs. So if the purchase price is zero, should the acquisition cost, meaning inventory value of this raw material in balance sheet include these costs? Ulrika what do you think?

1: Spot on. The balance sheet value really is the whole acquisition cost – not just the purchase price. But still, according to Finnish accounting law, activation of acquisition expenses is not always acceptable if the purchase price is zero. This is due to the principle of prudence in the law.

2: But on the otherhand, for example THE IFRS International financial reporting standards require the activation of such costs into balance sheet.

So you should always check your local accounting legislation!

Special features of rental activities

1: Another interesting topic is rental business. one circular economy business models is to intensify the use of products which can be done by renting. It has become more common in clothes, household appliances, even mattresses. So clothes, do you really have used clothes is your balance sheet…?

Not quite typical, I guess, but lets think of a company renting valuable clothes or accessories. For example a Chanel bag costs thousands of euros. in rental business, the bag remain in the company’s ownership, and is recorded as a fixed asset. But what should the depreciation period be?

1: And what about the residual value of your Chanel bag at the end of the lease? Actually, the value of an used Chanel can be higher than the value of a new one. Should we actually increase the price, not depreciate it? According to Finnish law, this would not be possible, depreciations are mandatory.

2: Ulrika, a Chanel bag, I don’t have much experience on them… But It is also important to estimate the residual value – sometimes a used device can be a raw material for the next product. For example a laptop contains valuable materials, but when it is so old that it can no longer be used, it can either be a liability but also an asset if recycled properly.

Provisions and return rights

1: Heli, what would you like to say about warranty and return policy for used products? Nowadays, a longer return period can be granted for used than for new products, just to encourage people to buy recycled items.

2: Well Ulrika, If refunds can be made, a provision should be recorded, if the value is essential. It’s a good practice to use a historical return rate calculation.

1: What about gift cards or bonuses? In some companies, the customer receives a refund, such as some bonus points, for returning a product, for example a preloved clothing and can use these bonuses on the next purchase.

2: In principle, it is a liability to be recorded in the balance sheet – the points or gift card are valid for example one year and can be used at any time. Accounting should keep track of these. These have been considered such an exceptional cases that many national accounting boards and IFRS have published special instructions on these.

Marginal Taxation for Second-Hand Goods

2: Ulrika, One of the main challenges in accounting seemed to be marginal taxation which is a specific VAT Value added tax topic. Still, it is often significant and beneficial for a circular economy company.
1: If the second-hand product is purchased from a private individual – the purchase price does not include VAT. Marginal tax is calculated only on the margin.
2: Yes, but This method often requires separate accounts, and the accounting software may not support marginal taxation.
1: That is, manual monitoring, Excels, accurate documentation. This causes more administrative expenses. But the benefits can be significant.

2: But it is still a good opportunity for companies purchasing and selling second hand products as it can lower the sales prices.

Heard from the field – the role of the accountant

1: Heli, do you remember as in the interviews, many entrepreneurs said that they would like advice on how to record these new operating models correctly.

2: Yes, circular economy brings a new kind of role to the accountant – not just a “reporter”, but more like a consulting partner. Our interviewees appreciated their accountants’ help in these questions.
1: These new business models need a new way of thinking, also in accounting! Consideration, substantive expertise and often also conversations between accountants and entrepreneurs are needed.

2: You are absolutely right Ulrika!

Conclusion
1: To summarize: the circular economy is not only changing business – it is also changing accounting and reporting.
2: And that’s exactly why we need more expertise, discussion and good practices – thank you for listening!
1: Check out the ACES project’s online course at erasmusaces.eu – and let’s continue the discussion on LinkedIn!

This podcast is part of ACES, Accounting of Circular economy and sustainability, project which has been co-funded by the European Union. Neither the European Union nor the European Education and Culture Executive Agency can be held responsible for the content of this publication.