Advanced Financial Reporting and Regulation - Term Paper Example

Property Plant and Equipment IASB (International Accounting Standards Board) The IASC was replaced by IASB in 2001. Therefore IASB is currently responsible for development of global standards in accounting and financial disclosure activities. The job of IASB is to develop IFRS (International Financial Reporting Standards) for incorporated businesses. Under IASC (International Accounting Standards Committee) IFRS were called IAS (International Accounting Standards). The name IAS has not been changed for standards developed prior to 2001, however all new standards are called IFRS instead of IAS. The role of IASB is not only to develop these standards but also to promote their global application by facilitating their usage. To promote trust and reliability in IASB it has been structured as a privately funded organization. This has also enabled its recognition as a global body rather than a local one. Based in London, IASB has two main bodies i.e. Trustees and the IASB, as well as a Standards Advisory Council and the International Financial Reporting Interpretations Committee. IAS 16 History IAS 16 was officially conceived on August 1980 through exposure Draft E. The implementation however came almost two years late in 1982. In May 1992 changes were recommended to IAS 16 through Exposure Draft E43. The changes were finalized in December 1993 under ‘Comparability for financial Statements’ project of IASC. These changes were officially implemented in January of 1995. More changes were brought about in IAS 16 by IAS 36 (Impairment of Assets). These changes were implemented worldwide in 1999. In 2007 changes were made to IAS 16 regarding sales of rental property and plant. These were later implemented internationally in January of 2009. Objective The primary objective of IAS 16 is to prescribe a treatment for property plant and equipment when it comes to financial reporting in public limited corporations. The IAS allows users of these financial statements to understand investments made by a corporation in its property plant and equipment. This enables users to understand any changes in these values over time and compare this data with benchmarks. Three areas are closely monitored when it comes to PPE i.e. actual cost, depreciation and impairments. Underlying Rationale The underlying rationale for IAS 16 is that property plant and equipment is a major part of doing business especially for business which are capital expenditure intensive. The pricing of these elements can therefore totally change the financial outlook for a company. The valuation of share price would be totally different if companies do not follow specific rules and guidelines when it comes to financial disclosure. Moreover the value of depreciation charge directly affects the income statement. Therefore if values of depreciation are tempered with, EPS would become unreliable and volatile. The comparability across different companies would also be impossible if each corporation manages their PP&E differently from others. Conceptual Framework There are many different objectives of financial reporting as explained by IASB. These objectives are also withheld by IAS 16. If each company was allowed to report their Property Plant & Equipment in different ways it would become impossible for analyst and shareholders to compare investments. This is because in order to understand where a company truly stands, they would have to learn accounting principles of each company. The conceptual framework of IASB in relation to accounting standards promotes financial reporting by conservative methods. The word conservative here is used to suggest ways of reporting which would allow least amount of window dressing. IAS 16 also adopts stringent rules of depreciation and PP&E valuation which would give shareholders and other stakeholders a very conservative picture about the company. Measurement, presentation and disclosure The primary injunction of IAS 16 requires all corporations to assume their purchases at cost. This is actually the cost of purchase and not the market value. This condition has been applied because market value can fluctuate over time and therefore cannot be accounted for in statements. IAS 16 however does allow management to include costs associated with or incurred while bringing these assets into operation. For example if Apple Inc buys a special packaging machine for its UK operations from Costco, it will only get a receipt of price paid to Costco. The real picture is however a little different; whenever a corporation buys machinery it also incurs installment charges. Therefore IAS 16 allows installation charges to be included into Property Plant & Equipment account. On a similar basis IAS 16 also allows companies to impute interest rate charges for machinery that has been bought on loans. To keep interest rate additions to be reasonable a normal market interest rate can only be used. Sometimes in special circumstances companies can engage in exchanges of assets. These exchanges can create a problem as size and cost of assets being exchanges is usually not equal. In such cases IAS 16 requires corporations to calculate a fair of each individual assets and debt Property Plant & Equipment account respectively. In some cases it is not possible to calculate a fair value for certain PP&E, in such cases IAS 16 allows users to calculate PP&E on carry amount. This carrying amount is actually the cost on which these assets were recorded previous to exchange. When it comes to measurements which are subsequent to initial measurement, IAS 16 permits usage of two different models of accounting. The first one is called the cost model of accounting. Under the cost model of accounting assets are carried at cost minus charges of depreciation (i.e. accumulated depreciation). The second approach allowed by IAS 16 is the revaluation model. This model in accordance with IAS 16.31 carries assets at revalued amounts which is asset’s fair value on that particular date. The depreciation and impairment charges are however deductable. Revaluation IAS 16 gives some general conditions for revaluation of assets: If an asset has been deemed open for revaluation, it automatically means that all similar assets being held by the company should be revalued as well. If there is increase in value after revaluation, it should be credited to comprehensive income and added to equity under revaluation surplus. However if it is a reversal of previous revaluation decreases involving the same assets, it can be recognized as income. Similarly any decrease resulting from revaluation should be considered as deductable from income. After disposal of assets that have previously been revalued there are two different entries allowed by IAS 16.41. According to first option the additions to revaluation surplus can be transferred directly to retained earnings, or left under heading revaluation surplus. Depreciation IAS 16 allows for following treatments of depreciation: The method of depreciation chosen should be systematic in nature The residual value should be reviewed each financial year. Companies can however consider even small portions of a year such as quarters. The depreciation method being chosen for assets under IAS 16.6 should be similar in nature to natural usage of assets. For example in case of Airways, depreciation is charged using number of flights. This incorporated the damage to a plane during takeoffs and landings. The annual review of depreciation method must ensure that if there are any changes in economic consumption of equipment than depreciation method should also change itself. Depreciation should be accounted for in the income statement under IAS 16.48. Depreciation will continue to take place even if the assets are not being used as under IAS 16.55. Comparison with US GAAP When it comes to basis of property plant and equipment, IFRS allows usage of either historical or revalued cost under IAS 16. US GAAP however allows usage of historical cost only. When it comes to inspection of overhaul costs, IRFS differs in its treatment as compared to US GAAP. IAS 16 allows it to be included as part of an assets costs, US GAAP required this cost to be expensed. IAS 16 allows gains and losses to be recognized when it comes to exchange of PP&E, as explained above. US GAAP however does not allow gains and losses to be recognized. Nokia Corporations The examples shown below have been taken from financial statements of Nokia for the year 2008. These examples show Property plant and Equipment accounts of Nokia corporations. December 31 ASSETS Non-current assets 2008 2007 Capitalized development costs 12 244 378 Goodwill 12 6 257 1 384 Other intangible assets 12 3 913 2 358 Property, plant and equipment 13 2 090 1 912 Investments in associated companies 14 96 325 Available-for-sale investments 15 512 341 Deferred tax assets 24 1 963 1 553 Long-term loans receivable 16, 35 2710 The bold representation shows representation of PP&E. Discussions IF we compare the two different mode of financial disclosure we can see that US GAAP is stricter in its financial reporting. This is probably because orientation in USA is more towards shareholders and general public as compared to corporations. However in corporations have much dominance in countries which are in initial stages of development. In such countries try to facilitate growth in economy by whatever means necessary. This thinking is actually responsible for bad corporate governance practices, which result in diminishing investments by investors. IAS 16 allows more leverage to companies with its permission to recognize gains and losses on revaluations. IFRS principles are more commonly used in countries of Asia and Europe. North American and South American countries generally rely on GAAP for financial reporting. We can however expect that in near future both GAAP and IFRS will merge to form a set of accounting principles which are globally accepted. This step will not only facilitate investors in developing nations but underdeveloped countries as well. Their corporations will be able to benefit from international investments and global investors. References IASB: "IASB Work Plan" Retrieved from: http://www.iasb.org Tohmatsu, T. (2009) "The Framework for the Preparation and Presentation of Financial Statements". Deloitte Key Differences in IFRS and GAAP. IAS Plus: Deloitte. Summaries of International Financial Reporting Standards. IAS Plus Retrieved from: http://www.iasplus.com/standard/ias16.htm Process of Prescribing Accounting Standards. CCDG Retrieved from: http://www.ccdg.gov.sg/account.htm SEC Roadmap toward Global Accounting Standards. US Securities and Exchange Commission. Retrieved from: http://www.sec.gov/news/press/2008/2008-184.htm Read More