Implementation of IAS 16 Properties, Plant and Equipment - Essay Example

Contents Executive Summary 2 Objective 3 Scope 3 Recognition 3 Initial Measurement 4 Measurement subsequent to initial measurement 4 Revaluation Model 5 Cost Model 6 Depreciation 6 Impairment 7 Recoverability 7 De-recognition 8 Conclusion 8 References 9 Executive Summary The report presents the way IAS 16 is being used by business units and the way it will help business units value their assets. The report presents the scope IAS 16 has for business units. It also presents the how the non current assets value will be found, situations when the assets need to be treated as long term, the treatment relating to deficiencies and surplus and impairment The report thus shows the way it will help business value their assets correctly which will act as a guide and help the users of financial statement to ascertain the value of the organisation correctly. Objective IAS 16 deals with matters relating to the “treatment of assets, especially plant and equipment and property”. (Deloitte, 2010) It tries to explain how the non current assets value will be found, situations when the assets need to be treated as long term, the treatment relating to deficiencies and surplus and impairment. This thus helps to “ascertain the correct value of the assets that will help the user of the financial statement gauge the correct value of the enterprises”. (Deloitte, 2010) Scope The usefulness of IAS 16 has rapidly grown over time. Still there are certain areas where IAS 16 is not used. They are as follows “Assets which are procured to be sold again” (Putra, 2009) specifying the fact that the business trades in those and need to be treated as stock or current assets Exploration assets (Putra, 2009) Assets related to “agricultural field and being biological in nature” (Putra, 2009) Assets which are held as “mineral mines and reserves like coal, petroleum products etc” (Putra, 2009) Recognition Business units need to recognize and classify those assets as long term in nature and being capital assets if they meet the following criteria The assets will help to “generate income in the future and that benefit will flow to the entity” (Issac, 2004) The “cost associated with the asset can be measured accurately”. (Issac, 2004) It is important that when cost is ascertained all the cost like fitting of plant, transportation and labour should be included in the cost. In relation to the depreciation it should be ensured that “all parts which have value should be depreciated separately based on the useful life of the assets”. (IAS, 2007) Also, some parts need to be replaced regularly and the value for those should be ascertained in the cost. Initial Measurement After determining the assets as current or capital it is important that the initial measurement of the value of asset is correct. For this steps should be taken to ensure that “all cost associated with the assets are included to bring the asset in working condition including the interest cost if paid in instalments”. (Graf, 2009) This will help to ascertain the correct value of the assets. Measurement subsequent to initial measurement IAS 16 provides business units with two methods that can be sued to ascertain the fair value. It depends on the business unit to identify one and mostly it is seen that business take up those models followed in the industry so that comparison becomes easy. The methods are as follows Revaluation Model: In this method “assets are re-valued at the correct value after deducting depreciation and impairment cost at fair value”. (KPMG, 2005) Cost Model: In this method “assets are ascertained at cost after deducting the depreciation and impairment cost”. (KPMG, 2005) Revaluation Model This model is being used by many business concerns. This model states the fact that assets “provide the fair value at the balance sheet date therefore needs to be done at regular time interval so that the measurement of value in the balance sheet is correct”. (Malik, 2010) It also stresses the fact that when an assets has being re-valued it should be seen that the “entire class of the asset is re-valued”. (Malik, 2010) The measurement of increase or decrease in the value calls for special entries that have to be made so that the routine cycle of the business in not hampered and the profits are neither over nor under estimated. This thus also checks that those profits are ascertained correctly. This model lays stress on the fact that “if revaluation increases the value of the assets then the increase in the value should be credited as income and accumulated as equity in the balance sheet under the head revaluation surplus”. (Holt, 2010) Opposite entries need to be passed, it the value of the assets falls on the revaluation date. Example: Suppose the initial value of an asset is $1, 00,000. Accumulated depreciation on revaluation date is $55,000. Fair value is $65,000. Then the business unit need to treat and pass the following entries on that day. The business has to debit accumulated depreciation by 55000 and credit the asset cost by 55000. To eliminate the depreciation cost to ascertain the fair value the business needs to pass the following entries. The business has to debit asset cost by 20000 and credit revaluation reserve by 20000. This will help to bring the value of the asset at fair value as 100000-55000 + 20000 = $ 65,000. Thus we see that adjusting entries help to revalue the fair value correctly. Cost Model Under this model the value of the asset are ascertained at cost. This lays stress on the fact that “assets need to be reduced at cost and that value needs to be placed in the balance sheet so that it shows that assets are valued at cost”. (IASC, 2010) This is an easy and convenient method but does not always give a fair value. Organisations also are saved from the extra pressure to ascertain the value each time. Depreciation The business units can choose the depreciation method that suits them. They can choose between Straight line method: In this method assets are “depreciated with the same value over the estimated life of the asset after deducting the recoverable amount at the end of the estimated life”. (Putra, 2010) It is an easy and simple way. Written down method: In this method assets are “depreciated at a rate on the depreciated value after ascertaining the estimated life and residual value”. (Putra, 2010) This provides a better picture and provides the actual value. Organisation using this methods need to ensure that they use the same method else it needs to be re-valued for the past years and the necessary changes needs to be accounted for in the profit and loss statement and balance sheet. Impairment Business units need to ascertain that impairment is accounted for. It should be seen that any “loss accounting due to impairment which decreases the value should be deducted from the revaluation reserves and any increase should be added to the revaluation reserve”. (Holt, 2010) This will help to ascertain the correct value and will help to determine the value with reliability. Recoverability IAS 16 also lays stress on correct value recognition. It is important that assets are recognised at the “recoverable amount which is higher of the two i.e. fair values of the assets after deducting the residual value and the present value of using the asset”. (Binani, 2009) This also includes claims. Thus it becomes essential that the recoverable amount is found out with certainty and is true. De-recognition It is important to ascertain the time when the asset will be de-recognised from the balance sheet. Business needs to see that when an asset is “disposed or is unsuitable for further use and does not derive any future benefit then those asset should be removed from the balance sheet”. (Kamran, 2008) This should be done as it does not meet the criteria for a capital asset and removing it will help to find the correct picture. It should also be seen that if a capital assets is being used as a current one then it should be de-recognised. For example suppose an asset which was used in the manufacturing process is rented then it should be treated as a current one and the income should be treated as receivables. Conclusion IAS 16 thus deals with the mechanism of identifying assets as capital and current and also ascertaining the correct value of that asset. Business units need to see that the values are ascertained properly so that the users of the financial information are able to draw a correct picture. Business units need to adhere to these international standards so that they are able to raise money from the public and also help them meet the standards set internationally. Thus, business units which use IAS 16 and ensure that the assets are properly valued and the true and fair picture is reflected. This will help business units to see that assets are replaced at the right time and this will not hamper the progress of the business units thereby enabling them to grow and multiply themselves. References Binani M, 2009, “Implementation of IAS 16 Properties, Plant & Equipment”, Executive Accounts, CA, ClubIndia.com Deloitte, 2010, “IAS 16 Property, Plant & Equipment”, IAS Plus, Deloitte Touche Tohmatsu Graf B, 2009, “International Accounting Standard IAS 16 Property, Plant & Equipment”, IAS 16, European Union Holt G, 2010, “IAS 16 Property, Plant & Equipment”, Accounting & Business Magazine, CPD Articles, ACCA, Manchester Metropolitan University Issac C, 2004, “IAS 16 Property, Plant & Equipment”, RICS IASC, 2010, “IAS 16 Property, Plant & Equipment”, International Financial Reporting Standards, IASC Foundation Education IAS, 2007, “IAS 16 Property, Plant & Equipment, retrieved on August 3, 2010 from http://www.worldgaapinfo.com Kamran, 2008, “IAS 16 Property, Plant & Equipment”, Accountancy in Advance Studies, IASC Foundation KPMG, 2005, “IAS 16 Property, Plant & Equipment”, Audit, Tax & Advisory, KPMG Malik R, 2010, “IAS 16 Revaluation”, Financial & Managerial Accounting, 2nd edition, Pearson Publication Putra, 2010, “Depreciation Methods- IAS 16”, CPA, Costa Mesa Putra, 2009, “Accounting for Property, Plant & Equipment”, CPA, Costa Mesa Read More