IAS 16: Accounting of Tangible Assets
In this report, an analysis and evaluation over the regulatory and conceptual work, a study over the IAS 16 and IAS 38 and an analysis over the methods, types of creative accounting and how to company could take benefit of creative accounting have been analyzed. This report describe about the accounting rules and regulation in consideration of final financial reports and statements.
This report has been done over the IASB and IFSB and its rules and regulations, accounting standards, international accounting standards etc to understand all the concept of accounting deeply. Conceptual framework is not an accounting standard or some rules and regulations which set out the concepts and principles to help the user in preparing the final statements. International accounting standard 16 depict about the accounting of tangible Assets. This standard regulate the professional that how to do accounting treatment of all the tangible Assets.
International accounting standard 38 depict about the accounting of intangible Assets. This standard regulate the professional that how to do accounting treatment of all the tangible Assets. Creative accounting is those techniques that do not authentically symbolize the underlying activities of business and hence not neutral.
Conceptual framework is not an accounting standard or some rules and regulations which set out the concepts and principles to help the user in preparing the final statements. Basically, it is just a set of some rules which must be considered in an organization while preparing the financial statements (Arena, Conte and Melacini, 2015). It ensures the external stakeholders about the reliability of financial statements.
IASB has introduced a framework for the helping the professions to prepare the financial statements and present it in 1989. It is referred as conceptual framework. This framework sets the concept which states the presentation and preparation of financial reports and statements for the external stakeholders. This conceptual framework also helps an organization to prepare the financial statements with the help of many international regulations, it provide depth knowledge about the preparation of statements as well as accounting standards (Barth, 2007).
It helps the auditors in forming their opinion about an organization’s financial statement. It helps the users of financial statements to interpret the figures according to their benefits.
The internal users of a financial statement are all the top level mangers such as finance director, production manager, marketing manager and all other company officers. They use the financial concept to make decision about the organization and its future. The entire stakeholder takes a look over the financial statements for different purpose. Such as managers look for decision making, owner for the purpose of looking over the growth of business, workforce for the purpose of take a idea about the financial health of the company (Bezemer, 2010). Creditors look over to analyze the risk; government look to analyze the tax return etc. conceptual framework has depicted about the four characteristics, which are as follows:
IAS 38: Accounting of Intangible Assets
However, it has been observed that for meeting all the characteristics of conceptual framework, materiality must be analyzed. An asset could only be registered in the financial statement when it is material, If an asset is not material than it is of no use in understanding, checking reliability, relevancy and comparability (Csikszentmihalyi and Larson, 2014).
Understandability is analyzed to ensure that financial reports are in understandable state to the users so that users could easily interpret the knowledge if financial statements are not in understandable state than there are no objective of preparing it. Relevance is analyzed to ensure that financial statements are according to the need of users (Daly and Farley, 2011).
Reliability depict that reports of finance must be in a manner that all the users could reliable upon it. It is quite complicated because everybody has different purpose to look over the financial statement of an organization. The financial statements must be faithful and must be audited (Glasson, Therivel and Chadwick, 2013). Comparability depict that all the users must be able to contrast all the final statement of an organization with the time in order to analyze the trends in its financial performance and position.
Regulatory framework refers to all the rule making activities by the courts and legal. All the constitutions, subordinate legislation, orders, norms, decrees, parliamentary laws, codes, plans, licenses and even some administrative guidance.
The different aspect of regulatory and legal framework has some important implication for all the financial statement users. The basic behind regulations is it must be totally followed by the organizations (Evangelinos, Nikolaou and Leal Filho, 2015). Because ignoring the regulatory framework could be harmful for an organization.
In order to make all the organizations more comparable the IASB is trying to handle all the accounting industries (Speice, 2013). It has been found that conceptual framework set by IASB and FASB guides the accountant in the beast manner to complete the job. Conceptual and regulatory framework helps the users in analyzing the fair value of organization.
Conceptual framework and regulatory framework came into the existence for easiness of the external and internal users. It had been analyzed by IASB and FASB that users are not able to understand the financial statements (Jones and Wolnizer, 2003). The data of statements were quite manipulated so boards have decided to implement the new standards and rules and regulation so that the main objective of financial statements could be achieved (FASB, 2007).
Conceptual and Regulatory Framework in Accounting
Through this study it has been analyzed that conceptual framework is the one which sets the main concept of the accounting, it is not obligatory for the organizations but it helps the preparer to prepare the best of statement and present it in best manner (Deloitte, 2008). Regulatory framework is set by the IASB for accounting standard, rules and regulations etc. Accountant is obligated to prepare the final statements with this conceptual framework.
Tangible Assets are those Assets which are in a physical form. Tangible Assets could be current as well as fixed assets. Such as furniture, machineries, computer, equipment, building and inventory. Certain assets are always offered some special treatment for the accounting purpose. Tangible Assets are one of them. The accounting of tangible Assets totally depends over the useful life, depreciation method and amount etc.
International accounting standard has provided some regulations for the accounting professionals to do accounting of tangible assets.
International accounting standard 16 depict about the accounting of tangible Assets. This standard regulate the professional that how to do accounting treatment of all the tangible Assets such as plants, equipment, property etc. mainly, it says that the principle issue while accounting the tangible Assets is recognition of asset, determine their carrying amount, recognize impairment losses and depreciation charges of the asset (Kim, 2011).
This IRS could only be applied to the tangible Assets. It does not apply on agriculture activities, assets comes under the category of IFRS 5, IFRS 6, mineral reserves and mineral rights. This standard explains all the terms related to accounting of tangible Assets. According to IAS 16, carrying amount is the total amount after excluding the accumulated depreciation charges and impairment losses (Laux and Leuz, 2009). Cost is the total cash equivalent amount paid by company to acquire a new asset.
Depreciation amount is the asset’s cost less its residual value. Depreciated amount is allocated systematically in the useful life of an asset. Fair value is the total amount in which an asset could be transfer to someone else. Entity specific value is the present value of an asset after deducting the depreciation value (McGregor and Street, 2007). Impairment loss is the total amount due to which recoverable amount of an asset get higher than the carrying amount.
Tangible Assets are that asset which are kept in the company for the production purpose, administrative purpose, for supply the Assets and for rental to others. Recoverable amount is fair value of asset less cost to sales (Manfredi et al, 2015). Residual value of an asset could be determined by the disposal of an asset less estimated cost of disposal. Useful life is a total period in which the asset would be available.
Importance and Implications of Regulatory Framework
The IAS 16 allows the companies to choose one valuation method among two i.e. revaluation method or cost model. Cost model requires PPE to be agreed by deducting the accumulated depreciation from cost. The revaluation method depict that assets must be carried at a revalued amount. For calculating the revalued amount fair value add accumulated impairment loss less accumulated depreciation, formula must be applied.
This model describe that an organization must set the different classes of asset according to their nature so that the revalued amount of asset could be calculated easily. This standard also depict that the assets amount must be revaluated continuously to know the real worth of the assets (Uno and Bartelmus, 2013). Revaluation gains could be recognized in assets unless any loss of revaluation is occurred. Revaluationgains could be identified through the analysis of income statement of an entity.
This accounting standard says that every tangible asset must be measured at its cost. Cost is the total amount company has paid to buy that asset. After recognition, the asset could be measured by the company either on revaluation method or cost model (IASB, 2007 b). In revaluation amount, the accounting is done on the basis of revalued amount and in cost method, accounting is done on the basis of cost less accumulated depreciation. If the revalued amount of an assets has increased than accountant have to show it on the comprehensive income statement.
Intangible Assets are those Assets which are not in a physical form and don’t have any physical existence. Intangible Assets are basically the legalized assets which enhance the financial strength of a company. Trademarks, copyrights, patents, goodwill, brand recognition etc. are the intangible assets. It is totally opposite to the tangible assets. It could be classified as either definite or indefinite. Definite assets are those when a company enter into a contract with some other company and use the patent of another company then the life of that patent if limited whereas indefinite assets are company’s own asset which could be extend by the company till indefinite period.
International accounting standard has provided some regulations for the accounting professionals to do accounting of intangible assets.
The main objective of IAS 38 is to offer the accounting treatment to intangible assets. This standard helps the accounting professional to identify the tangible goods, recognize the carrying amount of the asset and identify certain disclosures in concern of intangible goods.
This standard is applied over all the intangible assets except financial assets, evaluation asset, exploration asset, expenditure on extraction and development of oil, natural gas, minerals and other similar resources, intangible assets held for the sale and all the intangible asset which have taken place due to insurance contract.
According to the IAS 38, intangible assets are those identifiable non-monetary asset which do not have any physical substance (ICAEW, 2006). It is a resource which is controlled by an organization as a result of some past activities and which also offer some future benefits. Mainly it has 3 attributes i.e. control, future economic benefits and identifiability.
An asset could be identifiable when it is separable or arises from legal rights or contractual, regardless of whether those rights could be separable or transferable from an organization or other obligations and rights (ISAB Framework, 2001). Intangible assets could be acquired by government grant, part of business combination, self creation, separate purchase etc.
IAS 38 offers two methods to do accounting of intangible assets. It offers two methods to an organization to do accounting of intangible assets. One is revaluation model or cost model (Jone, 2006). Cost model depict that an asset must be carried at the cost amount less impairment losses and accumulated amortization (ISAB, 2008). Revaluation model depict that intangible asset could be accounted as fair value less impairment losses and subsequent amortization.
Intangible assets could be classified as finite life and indefinite life. Finite life is when the life of intangible asset is fixed and infinite life is when the life limit of asset is not fixed. The finite assets could be measured according to the cost model with systematic basis (King, 2006). The accounting could be done in the following ways:
- Amortization method must be reflected all the pattern of benefits.
- If pattern could not be determined reliably then straight line method must be amortized.
- The amortization charges must be identified in income statement unless other regulation interpreted in it.
- Amortization must be reviewed on an asset annually.
The asset with infinite lives could not be amortized. Its life could be recognized through the continuing operations and the state of operations of an entity. This helps the accountant to consider the true value of asset.
Thus it could be said that both the tangible as well as intangible asset are treated differently in the concern of accounting. The nature of both the assets is different from each other. IFRS has set different rules and regulations for both type f assets. IAS 16 helps the professionals to measure the worth of tangible goods whereas IAS 38 helps the professionals to measure the worth of tangible goods.
IAS 16 introduced two methods to evaluate the asset value and identify the real worth of the asset so that reports could be reliable and it become easy for everybody to know the real worth of a business. IAS 38 introduced two methods to evaluate the asset value and identify the real worth of the asset so that reports could be reliable and it become easy for everybody to know the real worth of a business.
Creative accounting of tangible and intangible Assetsare generally depict the treatment of property, buildings, furniture, inventory, goodwill, patent, copyrights etc. Such as creative accounting is used by the companies to identify the development cost of an asset or consider the amortization policy.
Before analyzing the impact and benefits of creating accounting, it is important to understand the theories and meaning of creative thinking and the reason behind using this technique in accounting. Blake and lunt (2000) explained that creative accounting is those technique that does not authentically symbolize the underlying activities of business and hence not neutral.
It is a process through which accountants use their accounting knowledge and rules to change the data and figures which are reported in the files of a business. Creative accounting is basically used by the accountants at the time of preparing the final documents to hide some data from external stakeholders or for making the files more attractive (Chorafas, 2006). Companies use creative accounting technique to show more profits so that investor could get attracted towards that company and the market share price of company could also enhance.
Every stakeholder has different opinion about the creative accounting. Some investor finds it difficult to analyze the manipulated data and some find it easily to check the real worth of the business. Some investor believes that it is a legitimate business tool. In a research it has been found that 91% of analyst believes that creative accounting could not be resolved (Amat et al, 1999).
It has been found that analyst was thinking that after the introduction of the concept of fair value accounting, it would be difficult for the companies to manipulate the data by using the creative accounting concept (Power, 2010. But the creative accounting concept is still used by the companies to enhance the final reports and attract more investors.
Earlier, there were many creative accounting methods and all were used by the companies in different manner. The most popular method of creative accounting is “income smoothing”. This method is used by the companies to present the income in such a manner that a growth could be shown in financial year in such a way that upcoming years could not get affect (Scott et al, 2013). It could be done by the companies through manipulating the accruals and provisions.
Another method of creative accounting is “manipulating the financial results”. This method has a clear vision of an organization to manipulate the profit of a particular period and transfer it to the next period (Vollmer, Mennicken and Preda, 2009). They manipulate this data by showing the sales an purchase of assets or make changes in the total profit.
Another method of this is manipulating the balance sheet to attract more customers. Thus many methods could be used by the companies to manipulate the data of the company and change the figure of profit to make the final data more attractive.
It has been analyzed above that accountants manipulate the figures and data of the company to change the earnings, revenue and value of business. The purpose of creative accounting could be differed from company to company (FASB, 2007).
Firstly, creative accounting could be used by the company to provide benefits to the close stakeholders of the company such as management team. This is done because the salaries and bonus of top level management depends upon the profits of the company. More, the minimum salary is decided by the company for the managers whether they meets the target or not, they could easily take benefits of that minimum salary.
Further, it is also done by the companies to enhance the reputation of managers and it could also be done by the managers to make some changes in future prospectus of the company (Dean and Clarke, 2007). Managers could easily make changes in the figure by changing in the salaries and earnings of the company.
Further, it is also done by the companies to transfer the amount of local business to an international business (IFRS, 2008). It is done by the managers to manage the political pressure at both the places. More, it is also done by the companies to invite more investment and enhance the reputation of company in the industry.
Many issues could take place due to manipulation in IAS 16 and IAS 38. The most obvious issue is internal viewpoints which could be arises at the time of manipulation. Further, it is mandatory to revise all the assets of a class at the same time so it causes more cost consumption (ICAEW, 2006).
Further, there is also an issue of mixture in measurement choice. More, the manipulation could also impact adversely in relation with comparability. Accountants need to have special knowledge of standards for manipulating the data (Deloitte, 2008). More, due to manipulation of figures the main goal of company could be affected and company could face some issues due to ignore the main regulations of the company.
Through the above discussion of creative accounting it has been concluded that creative accounting used to be the best technique for management of a company and professionals to manipulate the accounting and finance figure of a company. Creative accounting offers every professional a way to attract more investors, enhance the value of company in market, changes the market condition according to the company need. After the implementation of fair value accounting it has been observed that it would not be possible for the people, managers and professional to manipulate the data but still somehow it has been managed by them. In this study it has been found that there are many ways of creative accounting to change the figures.
It has been concluded through this study that creative accounting helps the companies the most to hide something and show off something. Companies uses this technique for their improvement or beneficial. This accounting is used by almost all the companies without ignoring the main concept of accounting. People believe that it is not possible to analyze the real worth of the business, it data has been manipulated through using the methods of creative accounting.
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