Non-Current Assets - Essay Example

? Non-current assets Contents Introduction 3 Differences in accounting treatment 3 Conclusion 6 References 7 Introduction IAS 16 Property, Plant and Equipment analyze the treatment of accounting for most types of property, equipments as well as plants. Property, plant and equipment is preliminarily measured at its cost but successively measured using the revaluation or the cost model. It is depreciated so that the amount depreciable can be distributed on a systematic basis over the life cycle. IAS 38 was first released on September, 1998. The standard was revised and re-released in March, 2004. Subsequent amendments were made on the accounting standard on May, 2009. The effective date on the basis of IASB was the fiscal periods on or after the financial year ending on 2004. Differences in accounting treatment The accounting standard of IAS 16 refers to the tangible noncurrent assets as property, plant and equipment and identifies that they hold a physical substance which can be used for delivery of goods or services or for purposes of administration. The physical substances are expected to be in use for more than a single accounting period. There are some problems accrued to the definition (Friedrich and Friedrich, 2009). Freehold as well as leasehold land, plants and machinery and buildings are included in the PPE. The aim of the accounting standard is to lay down the treatment for accounting relating to recognition of assets, the willpower of the carrying amounts and the charges of depreciation as well as the loses that relates to them. The accounting standard should be followed in the accounting process for PPE as using another PPE requires the use of different treatment. A business should have the capability to recognize the associated risks and rewards correlated with the asset (Kelly, n.d. p. 1-3). The business controls the asset. The rewards are the custodies. The cost of risk and repairs are treated as costs. Any loss emerging from the assets are treated as costs as well. Under the accounting standard it is expected that the future anticipated economic benefit will find the way to the owner and the associated costs can be measured reliably. IAS 16 accounts for two models namely the cost model and the revaluation model for measuring PPE. In the first model, an item under PPE is carried at the cost which is less than the accumulated depreciation as well as less than any accumulated impairment losses. In the second model, the item in PPE is carried at fair value less than accumulated depreciation and impairment losses. The standard is in line with the definition of the asset set in IASB. It is possible to have a reliable cost of PPE by the transaction cost of the market in cases where the asset has been acquired. The incidental acquisition cost includes the attributed cost of carrying the asset to the site (The Institute of Chartered Accountants of Pakistan, n.d.). The import duties, the cost of preparation of the sites and the fess of professionals are included in the incidental cost of acquisition. The inclusion ceases once the asset is made ready to use. The asset may not be brought into use but it should to ready to use. The costs that are excluded from the standard are cost of generating a new facility, overhead costs of the administration and the cost associated with introducing the new produced product. An obligation often arises to dismantle the product after the life cycle and the obligation is recorded s the liability at the time the asset is recognized. In the cases where the assets are self constructed the costs of the materials that were acquired, the costs related to labour and the other associated costs must be recognized. IAS 38 provides the definition of asset recognition and specifies the ways the carrying amounts should be measured in the following periods as well as guides on the disclosures. The accounting standard can be applied to all intangible assets except the assets that are within the scope of another standard. It is inapplicable to the intangible assets held by someone in the course of business for sale, the acquired goodwill in the process of business and to the intangibles grouped for sale in line with the IFRS 5. Under the accounting standard an asset is considered as identifiable if it is separable and arises from legal rights. It is irrelevant whether the rights are transferable or not. If an asset is identified as intangible then it is to be recognized if and only if the anticipated economic benefits will get accrued to the entity under consideration and the cost of the asset is measurable reliably. If the idea as well as the criteria for recognition are met, then for separately intangibles that was acquired the cost will include the buying price including the duties related to imports, the non refundable taxes on purchases after subtraction of the discounts on trade and other related discounts (Financial Reporting Manual, 2011-12, pp. 5-6). The cost will also include the costs that are directly attributable for organizing the asset for the anticipated usage. The accounting standard provides additional guidance on the determination of the measurements amounts for the cases when the intangible asset is acquired by way of grants of the government or there is presence of asset exchange. The goodwill generated by the business is not recognized as cost because it is not a resource that can be identifiable and controlled by the entity. An entity must classify the assets into two phases, a phase of research and a developmental phase in order to assess whether the internally generated intangible assets meets the criteria for recognition of development (IFRS, 2012). The expenditures incurred during the phase of research are expensed as incurred. In this phase it is not possible for the entity to demonstrate that the intangible asset will provide economic benefits in the future. An asset that is intangible can be recognized if and only if an entity can replicate the scientific viability of completing the asset so that it is prepared for use or sale, the intension of the entity to complete the asset so that it can be used or sold, the ability of the entity to either sell or use the intangible asset, availability of adequate resources of technical and financial to complete the development and the capability to compute reliably the spending that are attributable to the intangible asset in the period of development. Conclusion Conclusively it can be stated that the two accounting standards under consideration namely the IAS 16 and IAS 38 provides two different techniques of accounting. Although there are many other standards of accounting yet it cannot be ignored that the accounting standards are at par with other standards. The existence of physical substance is the key in IAS 16. The physical substance is in place for many accounting periods. The contribution of physical substance lies in efficient transportation of the goods as well as services. The aim of the accounting standard has been discussed in the assignment. IAS 38 contributes in providing the definition of recognition of assets. The accounting standard also acts as the guide in specifying the ways on how the carrying amounts be measurable. References Financial Reporting Manual, 2011-12. “Tangible non-current assets”. [pdf]. Available at: http://www.hm-treasury.gov.uk/d/2011_12_frem_chap06_tangible_assets.pdf. [Accessed:1st December, 2012]. Friedrich, B. and Friedrich, L. 2009. “International Accounting Standard 16 (IAS 16), Property, Plant and Equipment”. [pdf]. Available at: http://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/IFRS_E/IAS_16.pdf. [Accessed:1st December, 2012]. IFRS. 2012. “Technical Summary”. [pdf]. Available at: http://www.ifrs.org/IFRSs/Documents/English%20IAS%20and%20IFRS%20PDFs%202012/IAS%2038.pdf. [Accessed:1st December, 2012]. Kelly, M. n.d. “Property, Plant and Equipment”. [pdf]. Available at: http://www.cpaireland.ie/UserFiles/File/students/2011%20Examinations/Exam%20Related%20Articles/2011%20P1%20CR%20Property%20Plant%20and%20Equipment.pdf. [Accessed:1st December, 2012]. The Institute of Chartered Accountants of Pakistan, n.d. “INTANGIBLE ASSETS”. [pdf]. Available at: http://www.icap.org.pk/userfiles/file/Professional_S_C/PPT_%20IAS_38.pdf. [Accessed:1st December, 2012]. Read More