Financial Report for Balance Plc - Essay Example

Guidelines are provided on how certain items of fixed assets should be accounted for, the components of cost are considered, a review of the useful life of a machine, the treatment of buildings bought for business use and buildings bought for investment purposes. Introduction The method of accounting for property plant and equipment sometimes poses a problem due to uncertainties about what should be included as part of cost and what should not be included. There are different methods of accounting for changes in the life of property, plant and equipment.

However, the method chosen depends on the type of asset and whether it is specific to a particular entity. Accounting for investment property also has some technicalities in terms of when the fair value model should be considered and what constitutes an investment property. Cost of acquisition and treatment in the accounts The standard which applies to property, plant and equipment generally is IAS 16 – Property, Plant and Equipment. This standard was last revised in 2012 and considers among other things definitions, measurement, disclosures, valuation, and components of costs (Deloitte 2012).

BPP (2009) provides a list of the items that should be included in the cost of property, plant and equipment are: i. Purchase price after deducting trade discounts and rebates; ii. Customs duties paid for importation of the item as well as other purchase taxes that are not refundable; iii. Direct costs that can be attributed to bringing the asset to working condition for its intended use including, costs of handling and delivery in the initial stages, installation, testing, site preparation, and professional fees; The standard also indicates costs that should not be included such as administration and general overheads; any losses incurred in the initial stages before the asset attains the level of planned performance; and start-up costs or any other cost incurred prior to the commencement of its use to produce goods and services (Melville 2011).

It therefore means that the cost provided for Machine A should be revised as shown in Table 1 (See Appendix1). Table 1 shows the calculation of the cost of Machine A. The service contracts to June 2015 of ?57,000 represent prepaid expense for servicing the Machine A over the next three years and should be expensed over the period. Therefore, the relevant cost to be included in the accounts is ?943,000. The IFRS was amended based on discussions on matters that came to the attention of the standard setting body – the International Accounting Standards Board (IASB) between 2009 and 2011.

If the spare parts conforms to the definition of property, plant and equipment given in IAS 16 then it should be included. IFRS (2012a) defines property, plant and equipment are tangible items that are held for use in the manufacture of goods and services, for rental or for own business purpose and are expected to be used in excess of a 12 month period. The calculation in Table 1 assumes that the spare parts meet that definition. However, if it does not then it should be expensed and the cost of Machine A would be reduced to ?937,300. Additionally, if the amount of ?

5,700 is considered immaterial then it should be