Supporting International Standards

Rethinking the Value of Used Parts – The Accounting and Financial Management Implications

Christine Lundberg Larsen | May 3, 2021

ReValu-Parts, Rethinking the Value of Used Parts is a new white paper providing a starting point for establishing a trusted methodology to evaluate the financial value of used parts in the balance sheet. A working group led by Circular Economy Solutions GmbH has developed a cross-industry accepted evaluation methods of used parts to improve the access to finance for circular businesses handling used parts.

In many companies, sustainability work is moving from the communications manager and over to the finance manager. It is no longer enough to describe how the company works to become more environmentally friendly, take more social responsibility or reduce its CO2 emissions. Investors, banks, customers and partners are increasingly demanding the hard facts. To be able to call itself sustainable in the future, a company must be able to document data and figures on various criteria. It is expected that clear and quantified goals are set, the status of the business today is documented, and a clear plan is presented with concrete measures to achieve the goals. In the same way as for the financial information, there is a need for common standards and measurement methods for the sustainability reports.

When it comes to the actual economic activity, there are three core factors that ensure a real green shift. Firstly, there is a need for innovation in the business models. Secondly, these business models affect the accounts and financial management.  Thirdly, they create a need for new financing solutions.

One example of such a connection is circular start-up companies that base their business model on used materials. There is currently no accounting standard for valuing used materials in the balance sheet. This leads to start-up companies ending up in repeated discussions with the lender and investors about what is the value of the inventory - which in turn affects the valuation of the company.

To solve this challenge, Circular Economy Solutions GmbH took the initiative to establish a European working group under the auspices of the Ellen MacArthur Foundation in 2018. The working group has consisted of participants from different European countries from different disciplines, as well as participants from the Ellen MacArthur Foundation. Through a series of workshops, discussions and individual work, we have developed a proposal for a standard for valuing used materials in the balance sheet, in line with IFRS standards.

The work is based on the car market, where several circular processes are used today, such as reuse, repair, reproduction and recycling. For example, 10% of the total turnover of spare parts in the car market comes from reworked parts from used cars. We have prepared a proposal for a method for valuing these used materials based on IAS 2 and IFRS 13.

By establishing a common method for valuing used materials, all stakeholders can be confident in how the values ​​presented in the balance sheet have been arrived at. This will hopefully make it easier for circular companies to enter into a constructive dialogue with their stakeholders and create increased predictability for expected returns for investors and lenders.

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