Accounting Treatment And Disclosures Of Property, Plant, And Equipment (PPE) Under AASB 116

Key Issues Complexities and key issues involved in the accounting for PPE

During the last board meeting of the IPH Limited it has been observed by the Board that a strong qualitative reporting of financial information is of paramount importance to gain a completive advantage in the market and are seeking a reasonable assurance that the values of their assets along with the appropriate disclosures have been made in the Annual report of the company for the financial year ending 30^th June, 2017 by.

complying with the requirements of the AASB116 and general purpose financial reporting for which the CFO of the Company has been engaged to submit a report before the board regarding the valuation, disclosures and treatment of the property, plant and Equipment ( PPE) in order to enable the board to review that these are in compliance with the broader requirements of AASB 116 PPE (Das, 2017). Our review suggests that we have succeeded to a great extent to comply with requirement of the AASB 116 in relation to the Accounting treatment and disclosure requirements for the PPE.

Key Issues Complexities and key issues involved in the accounting for PPE

As per the guide to accounting for property under the cost model issued by the PWC in its September, 2010 publication, IAS 16 provides guidance as how the property carried at cost should be accounted for, no matter the same property is either held for using in process of production of goods or for the supply of services or for the purpose of rental or any other administrative purpose if it is expected to be used for more than one period (Dichev, 2017). The major issues involved in the process for accounting for the same as per this publication is discussed as under:

1. As per IAS 16 it has not been defined what constitutes the item of PPE, hence it completely lies on the judgment made by the entity considering the specific circumstances associated to take appropriate decision regarding the recognition of PPE.
2. IAS 16 does not provide a guidance in detail about the conditions under which a part of a building (Property) to be treated as significant to account for the depreciation of that part when component approach is being followed for the recognition of building in the books of accounts(Alexander, 2016).
3. There is no clear guidance provided by IAS 16 as how to identify the parts of the building.
4. IAS 16 also does not provide the methodology to allocate the costs associated with the significant parts of the building in order to initially recognize the building in the books of Accounts.
5. Detailed explanation of the PPE disclosures

      The key facts of the PPE disclosures in the Annual report for the year ending 30^th June, 2017 are described hereunder:

1. The total value of Property, Plant and Equipment in the statement of Financial position for the financial year ending 30^th June, 2017 is $3004000 consisting of leasehold improvements with the useful life ranging from six to fifteen years, Plant and equipment’s with the useful lives from two to Twenty years, Furniture, Fixtures and Fittings with the useful life ranging from five to twenty years and the Computer equipment having the useful live ranging from Three to Five years(Defond & Lennox, 2017).
2. Property, Plant and equipment have been valued at cost less accumulated depreciation less impairment losses.
3. The straight line method of depreciation has been followed to depreciate the cost or value of the asset less residual value of Asset over their useful lives.
4. At the end of each reporting period the review of the estimated useful life of the asset, residual value of the asset together with the method of depreciation followed is conducted in order to ensure that if there has been any change in the accounting estimates made on a prospective basis then such changes have been taken into account(Werner, 2017).
5. The basis of amortization of the financial lease are as similar as that of the owned assets, though after being ensured that certain assets cannot be owned after the end of the lease term, such assets were amortized with the lesser period shorter than lease period or useful live period(Choy, 2018).
6. The plant and equipment, one of the constituents of the property have been derecognized either at its disposal or after reasonably assured that no future economic benefits shall accrue to the company from any such assets.
7. The opening amount Plant and equipment stood as $459000 in which additions made were $24000and the depreciation charged during the year was $191000, similarly for leasehold improvements opening figure stood as $1680000, additions made were $98000 and depreciation charged during the year $208000, for furniture, fixtures and fitting opening stood were $567000, additions made were $117000, disposal value for the year was $157000and the figure for depreciation was $120000 and similarly for the Computer equipment opening figure stood as $1644000, additions made during the year was $469000,disposal came to $847000and amount of depreciation came to $565000 (DeZoort & Harrison, 2016).

Compliance of the PPE disclosures with the AASB116

The major compliances as per AASB 116 in relation to the disclosure requirement for the accounting for PPE are enumerated hereunder

1. AASB 116 primarily focuses on the two different aspects relating to the PPE first one being the initial recognition of the asset as PPE and the second one is the recording of the same either at cost or at revaluation method.
2. When the asset is recorded at cost the following things are to be complied with
3. The carrying amount of the asset shall be cost less accumulated depreciation less impairment losses(Trieu, 2017).
4. Considering the feasibility aspect, depreciation is required to be calculated separately for each part of the asset.
5. The profit and Loss account of the entity should reflect the amount of depreciation
6. The depreciated value of asset is to be allocated over the useful life of the asset on a systematic basis(Guragai, et al., 2017).
7. The provisions of the AASB136 are to be applied for the impairment of the asset.
8. The disclosure requirement includes reconciliation of the opening and carrying amount of the each asset at the and the end of the reporting period, the methods of depreciation to be used, the gross carrying amount, accumulated depreciation and impairment losses of each asset and the basis for measuring the carrying amount of the asset.
9. In addition to the above disclosure the other major disclosures are commitments relating to acquire the PPE, expenditures incurred for the construction of PPE, restricted title disclosures are required to be made(Heminway, 2017).

Analysis and observation

After observing the above provisions relating to the treatment and disclosures as prescribed by AASB 116, it is to be concluded that the IPH limited has complied with the maximum requirements of the AASB116.

Findings on the compliance of the PPE disclosures with the objectives of general purpose financial reporting

General purpose financial reporting serves the following basic purpose:

To provide useful information to the users of the financial statement so that to assist then in making and evaluating the decisions relating to the allocation of the scarce resources (Gooley, 2016).

The major compliances as per AASB 116 in relation to the disclosure requirement for the accounting for PPE

Considering the above objective of the General purpose financial reporting it can be concluded that the disclosure requirements as incorporated by the AASB 116 have been established by keeping in mind the very objective of the general purpose financial reporting only that aims to serve the variety of informational needs of the various stakeholders directly or indirectly associated with the enterprise.

Recommendations for improvement: The company should also disclosing the basis of using varied useful lives for different assets and how they are valuing the same in the case of revaluation model. Furthermore, the company should also be disclosing the assets which have been considered as expense and charged to Profit and loss account for low value assets (Linden & Freeman, 2017).

Conclusion

Based on our study and evaluation of the Disclosures and accounting treatment of the PPE in the financial statement of the IPH limited for the year ending 30^th September, 2017, we can conclude that the company has complied with the requirements of the AASB116 in a much satisfactory way.

References

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Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

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Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp. 591-627.

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