Financial Reporting Standards for Assets - Essay Example

? FINANCIAL REPORTING STANDARDS FOR ASSETS DUE: Financial reporting for fixed assets (a) i. International Financial Reporting Standards provides for the costs that should be added up to sum up the actual cost of a fixed asset. Some of these costs include the purchasing price of the fixed asset, the delivery charges incurred for the machine to move the machinery to the site, the testing cost and also the installation cost. The discount allowed on purchasing the machinery should however, not be considered in the total cost. The relevant costs of computing for Machine A in this scenario are therefore, purchasing price, less the discount allowed, then adding the delivery charge, installation charge and testing charge. Minor spare parts and service contract quotations are irrelevant in computation of the cost of the machinery. ii. IAS 16 provides for methods of depreciation on fixed assets. Under the straight line method, Machine B has an annual depreciation of 60,000 per year since it had an expected or useful life of 10 years. Since its acquisition date on June 2009 through to its revaluation in 2012, it had a carrying amount of 420,000 which is gained after deducting the accumulated depreciation through the first 3 years of its expected life. On a straight line basis and a remaining expected life of 4 years, the depreciation for Machine B is expected to be at 105,000 per year. The scope provides for a revision of the asset’s depreciation method, if the expected economic benefit to be consumed off it by the entity changes appropriately. iii. IAS 40 sets out the guidelines under which assets should be treated and the criterion for the treatment of investment property and also disclosures requirement in their reporting. Investment property is that which is held not for resale but for an economic benefit of the organization. It is that where future economic benefit is expected from. Under IAS 40, the company or organization is allowed to either use the fair or the cost model policy of accounting for these items. In fair value representation, the property (investment) is revalued where it is recognized as “an asset that could be exchanged between knowledgeable and willing parties in an arm’s length transaction” (Willey, 2011).  Since Building Y is an investment property, the revalued amount of 2million as at 31st December is the actual cost of the building at the end of this year. The increment in its value of 1 million should be treated as an income in the income statement for year 2011. Additionally, the buildings were revalued again and the investment property increased to 2.5 million. This should be treated by taking it as an income in the income statement at the value of 500,000, while reflecting the value of Building Y as 2.5 million at the end of year 2012. In the case of building Y, the scope provides the value of a fixed asset (such as Building X) to be treated on the fair value. In this case, the value should therefore be expressed on the current value less the depreciation. Revaluation amount should be computed and the current value is the amount shown on the balance sheet as the current value, while the gain in revaluation is shown on the credit of the balance sheet as a revaluation reserve. The revalued amount was done on the last day of the financial year and therefore be reflected on the following year 2012 as 2.5million. (b) Certain criteria should be followed when reporting these compilations of the costs of the assets, their depreciation amounts and their revaluation treatments. The scope provides for a detailed schedule that should be followed in the presentation of these analyses and as well, their reporting should be detailed and reported accordingly. The relevance in comparing the costing of Machine A and Machine B, as well as the treatment of Building X an Building Y best explains the financial reporting of these different circumstances of each of the two different genres of fixed assets of an entity. i. Machine A is purchased at a discounted price of 10%. Under the scope of IAS 16, some components are observed in trying to measure the value attached to the total actual cost of a fixed asset. Some of these are, price attached to its purchase, irrecoverable tariffs and taxes; and those relevant to this case are deductions of discounts, installation charges, testing charges and delivery charges. It goes on to provide that such costs incurred in the acquisition of minor spare parts should be carried to the inventory and recognized on their full exploitation by expensing in the income statement. Additionally, service contract charges will be considered in evaluating the useful life of the asset and are therefore considered in the income statement and amortized over a period. Therefore, although the asset was acquired at 900,000, its realizable amount at the beginning was 937,300. On the other hand, the treatment of Machinery B is contrary to that of A as the former does not have these expenses that should be capitalized. The realizable net value of an asset once its useful life has been evaluated since it proves to have a shorter life than that expected of it. Due to this reason, the expensed amount from depreciation also predominantly changes and therefore the increase of annual depreciation from 60,000 to 105,000. All expenses in respect to depreciation of machinery are however realized in the profit and loss account. ii. In the case of the Buildings, there are various treatments where different kinds of properties (that is buildings) demand different forms of treatments and financial reporting. Building A is used for direct economic benefits for Ballance PLC while Building Y is an investment property. The company has chosen to adopt the fair value model of valuation of investment property. The treatment is distinctly contrasting for such property as compared to actual fixed assets. In treatment of Building Y, the fair value of the buildings ends up as 2.5 million for each of the buildings. However, the accumulated depreciation of the buildings has to be treated differently and shown in the books in the appropriate sections that suit their translations as per the International Financial Reporting Standards requirements. The revaluation on investment property should simply be recorded in the income statement while that of Building Y should be recorded in the balance sheet with the gain in revaluation. Bibliography Willey, T, 2011, International Financial Reporting Standards (IFRS), John Wiley & Sons, New Jersey Read More