Accounting Standards - Essay Example

Accounting standards The creation of accounting standards was as a result of the great depression in the United States where much money was lost. International Accounting Standards (IAS) sets standards in the accounting sector to ensure that there is uniformity in the accounting industry. This body also has the responsibility of coming up with auditing standards. It has the duty of ensuring that firms and organizations follow the set standards and that they work within the set framework (Alexander, 234). The standards also ensure that there is a common place for reference regarding all accounting challenges and problems on how to handle accounting for non-current assets. The paper will look at two standards by the IAS, which are the IAS 16 and IAS 38 regarding non-current assets. This paper attempts to analyze the standards that IAS sets regarding accounting of non-current assets. It sets these guidelines on how organizations and companies should handle both tangible and intangible non-current assets. IAS is responsible for setting international auditing standards so that they act as guidelines for auditors and accountants to follow regarding non-current assets (Kirk, 234). Each part in the accounting profession has its own standards as a guide on how to handle it. For instance, handling plant and machinery under IAS 16 is different from dealing with intangible non-current assets under IAS 38. This creates a form of independence when dealing with various aspects in the accounting process. IAS standards on Property, plant, and equipment IAS 16 defines handling of property, plant and equipment which is different from IAS 38 which defines handling of intangible assets in financial statements. Property, plant and equipment are all fixed tangible assets; therefore, adoption of a common method when dealing with them in the accounting process. It is important to note that the method of handling fixed assets according to the accounting and IAS standards is different from that of non-fixed assets (Alexander, 300). This paper analyzes accounting standards and IAS regarding property, plant and equipment as fixed assets. IAS provides a codification for property, plant and equipment. The code includes certain guidelines for the above fixed assets. The first guideline is their initial measurement which entails the initial cost and all other cost necessary to make the assets ready for use. It also includes capitalization of interest costs. The other step is the subsequent measurement of the fixed assets which entails depreciation and disposal of assets (Kirk, 234). The rule of Impairment and disposing of the assets indicates how to dispose of such assets in terms of the guidelines. Accounting standards regarding these three assets provides a guideline on how to classify long-lived assets that are held for sale and those held for use. Long-lived assets that are meant to be held for sale do not depreciate; therefore, their presentation should be separate. They should be placed separately in a statement of financial position. This is because they are not in the business for use, rather they are for sale; hence, their selling price does not fall. The accounting standards provide rules and formula regarding how to measure this type of fixed assets (Kirk, 250). The other guideline regarding plant, property and equipment is the discontinued operations for those assets held for sale and those held for use. The impairment test and recoverability test give rules regarding recoverability of fixed assets and those that are not recoverable. There are also rules on the impairment loss on plant, property and equipment under the accounting standards. The standards provide for impairment loss that can be reversed, and that is unversed. This indicates how these types of losses are recognized when preparing financial statement (Alexander, 359). The standards also give conditions on when such losses cannot be reversed, for instance in situations where there is an increase in the fair value of plant, property and equipment. The accounting standards provide formulae for calculating the impairment loss of the fixed assets. IAS 16 provides the use of three principles when handling these fixed assets. The first principle is that of their initial value also known as their capitalization cost. The other principle is the depreciation cost. The third principle is the remaining cost after replacement. The above principles are applied during the evaluation process of fixed assets after a full financial year. This is done when preparing financial statements using the accounting standards. All this creates uniformity in how accounting of tangible assets is carried out when preparing financial statements. IAS 38 on intangible non-current assets This rule describes treatment of intangible assets and the criteria for recognizing and disclosing them in the financial statements. It guides how accountants should handle the information for each financial year and the subsequent years. This particular standard also explains the measuring of intangible assets at cost, methods of acquiring and the criteria for disclosing it in financial statements. It explains intangible assets as assets in an organization that cannot be seen and does not have any physical substance. Examples of such assets include copyrights and patents, software, licenses, import quotas and franchises among many other intangible assets in an organization. Under IAS 38, intangible assets are separate meaning that they have the ability to be sold or rented. Their creation can also be from legal rights like licenses and patents (Alexander, 400). In case an intangible asset does not meet the recognition criteria under IAS 38, then it is recorded as an expense in the financial statement as expenditure. It requires that acquisition of intangible assets can be either externally or internally generated. The assets should also have potential so that they have economic benefits for the organization or business in the future. It does not allow recording of an intangible asset as expenditure when reinstating. IAS 38 provides that when carrying out initial recognition of such assets, accountants should charge costs relating to the resources as expense. Costs relating to development should be capitalized in the statements (Charles et.al, 45). This should be done after establishing the feasibility of such assets meant for sale or use in the organization. This is because an asset should generate some economic benefits whether in the present or in the future. It should generate the economic benefit whether it is meant for sale or use. IAS 38 provides that intangible assets be measured at cost. It contains the provision for measuring subsequent to acquiring the asset and provides a cost model for that. This means that an organization can choose between the cost model and the revaluation model when measuring an intangible asset. The cost model provides that such assets be measured at a lower cost than amortisation and impairment losses. The revaluation model has a provision of valuing assets on the basis if the fair value of the revaluation amount. That means that it is less than the subsequent amortisation and impairment losses. It also entails basing assets on active markets like in production quotas or fishing licenses (Charles et.al, 45). This standard classifies intangible assets basing them on their useful life in the organization. It classifies them under indefinite where it serves the business for an unlimited period of time and finite life that serves the business for a limited time. There methods that IAS 38 provides for measuring the two types of intangible assets. Disclosure of intangible assets varies depending on the class that each asset belongs to in a business. For instance, there is the amortisation method, the gross carrying method among others. Reconciling the carrying amount for each financial year should indicate additions, revaluations, retirements and disposals of assets and impairments. Disclosure of assets is also important for assets under research and development. Work Cited Alexander, D & Archer, S. International accounting/ financial reporting standards guide 2009: CCH. 2008, Pg. 234-456. Lasb. International financial reporting standards (IFRSs) 2009: official pronouncements as issued at 1 January 2009: Kluwer, 2009, Pg. 567-789. Previtis, G. J. Research in accounting regulation, volume 20. Elsevier, 2008, pg. 290-335. Wittsiepe, R. IFRS for small and medium- sized enterprises: Springer, 2008, Pg 98-256. Smith, K. E, Tully, R. T & Charles, I. IAS 38, Intangible assets: Accountancy Tuition Centre Limited, 2000, 45-67. Kirk, R. J. International financial reporting standards in depth: Theory and practice: Elsevier, 2005, Pg 234-298. Gupta. Contemporary Auditing, 6e: Tata Mc-Graw-Hill Education, 2004 Pg. 890-906. International Accounting Standards Board. Disposal of non-current assets and presentation of discontinued operations: International Accounting Standards Board, 2003, Pg. 3-8. Read More