Accounting Standards
Accounting standards are set as guidelines for businesses, on how accounting transaction should be treated. Accounting standards are needed so that financial statements will fairly and consistently describe financial performance. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies would be difficult. For this assignment the main focus would be on standards governing accounting treatments relating to tangible assets (non-current) and accounting treatments relating to tangible assets and any implications they might have.
IAS 16 (International accounting standard) sets the accounting treatments for property, plant and equipment (PPE). IAS 16 addresses issues regarding the recognition of the cost of the assets, the depreciation that should be charged, the estimates of the carrying amount and the impairment loss needed to recognise in relation to PPE.
IAS 16 applies to tangible fixed assets except where another accounting standard prescribes a different accounting treatment i.e. assets held for a sale are treated according to IFRS 5 (A Melville, 2009).
An item of PPE should be recognised as an asset when it’s probable that the future economic benefits associated with the asset will flow to the entity and the cost of the item can be measured reliably (B Elliot et al, 2012). This recognition principle is also applied to all PPE costs that were incurred whilst acquiring the asset and is applied to future costs, which are incurred by replacing part of or servicing the asset (IASB, 2011). The PPE is firstly recognised at cost. All the direct cost associated with getting the asset so that it can be used should be capitalised as part of the asset. An example of direct cost associated with the asset, can be delivery or installation cost. In some cases things such as borrowing costs or any direct overheads can be included in the cost that is capitalised (CGA, 2011). Cost that incur due to day to day repair and maintenance are not capitalised and are included in the income statement.
IAS 16 requires that an asset be examined by the business to identify parts that may need replacing sooner than the others or parts that are separate from the initial asset. The parts indentified should be the ones that have significant costs in relation to the total cost of the initial asset (IASB,2010). By breaking the whole asset into parts, the business can see that these different parts have different economic lives and therefore can be treated separate, as a separate asset. Example an airplanes engine will be replaced much more often in comparison with airplane seats, so rather than keeping the airplane as one big asset, the business can have the engine as a separate asset and depreciating it according to its economic life and deterioration. This approach to recognition is referred to as the component approach (T Doupnik et al, 2011).
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