Financial Reporting Theory and Practice - Essay Example

Financial Accounting Theory and Practice Accounting standards vary in different parts of the world due to the different boards which imposes unique accounting policies which are adopted by companies. In the United Kingdom, firms adhere to the Financial Reporting Standards (FRS) set by the Accounting Standards Board. However, countries in various parts of the globe use the International Accounting Standards (IAS) implemented by the International Accounting Standards Board. Differences in the accounting standards adopted have important implications for business entities.

Since the reporting of a company's performance greatly depends on which accounting standard is utilized, the firm's health often depends on the policies in financial reporting. One of the most important issues in financial reporting is the valuation of the company's assets. Since a firm's asset is often measured by the amount of resources it holds in its asset account, companies should not overlook the valuation measures they use. This paper will examine the valuation of tangible, fixed assets as set by FRS and IAS.

Valuation of fixed assets is laid out on FRS 15 entitled Tangible Fixed Asset and in IAS 16 with the heading Property Plant and Equipment. However, standard setters differ in their requirements regarding revaluation. FRS 15 states that "none specialized properties should be valued on the basis of the existing use value, with the addition of notional directly attributable acquisition costs where material (53a)." Meanwhile IAS 16 necessitates that asset be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. (64)" Furthermore, "if the acquired item is not measured at fair value, its cost is measured at the carrying amount of asset given up (24).

" Put simply, the typical valuation method mandated by the FRS is the "existing use value" which does not take into account the "development" or "change" in the assets' potential. We can see that FRS favors the cost valuation method which an asset is valued at its historical cost less depreciation and impairment. On the other hand, the IAS asserts that these properties should be measured at "fair value." Though the definition of fair value is not fully elaborated, it can be deduced that IAS recommends a valuation method far different from FRS requires.

Fair value, in the context of IAS depends on a lot of factors like more favorable location and condition. Properties with these attributes imply higher fair value which is usually dictated by the market. Clearly, IAS adheres and mandates a more "non-historic valuation model" which has significant implications in the company's financial reporting (IASB 2005). We can further say that IAS prefers a more market-oriented valuation method. The implication of the said policy can be seen when a company revalues its resources.

If an asset is revalued and its book value exceeds the fair value, this reduces the total asset account of the company and can in turn, lessen the useful life of the said asset. Also, this type of revaluation will make the company incur a "revaluation expense" which diminishes the firm's income. The opposite is true if the book value of the asset is less than the fair value. In this situation, the equity account will mount as a "revaluation surplus" is debited. There is also a mount in the firm's income and it will have to incur deferred taxes.

These additional deferred taxes, however, will definitely reduce net assets. In conclusion, different accounting policies set by dissimilar standard setter will often state different evaluation even when applied in a single company.List of ReferencesAccounting Standards Board, 2003, Financial Reporting Standards 15, Available at http://www.asb.org.uk/asb/technical/standards/pub0104.html International Accounting Standards Board 2005, International Accounting Standards 16, Available at http://www.iasplus.com/standard/ias16.

htmPerrin, Sarah 2004, Impact of IAS on Property Leases, Available at http://images.vnunet.com/v6_static/oracle/pdf/fd/fdjune_iasproperty.pdfRobins, Paul 2003, FRS 15, Tangible Fixed Assets, Available at http://www.accaglobal.com/publications/studentaccountant/28340Stein, Neil 2003, Bookkeeping Basics: Fixed Assets and Bad Debts, Available at http://www.accaglobal.com/publications/studentaccountant/