On 9 September 2015 Michel Prada, Chairman, IFRS Foundation Trustee gave a speech entitled “The Success criteria of global standards”. This outlined 3 areas for the success criteria of global standards namely:-
• A clear and supported purpose
• Global standards must be widely used and applied consistently
• Global Standards must deliver benefits
A copy of this speech is available on SunSpace VLE.
In the conclusion he stated that “In summary, evidence shows that all three criteria for global accounting standards are being met. Critically evaluate this conclusion.
By using the regulatory discussions and relevant international accounting standards (IASs) which are taught in the module APC311, you are required to provide a critical evaluation of the following area of financial reporting.
Accounting for Noncurrent Assets looking at the specific area of depreciation
Global Standards or standards for Financial Reporting or IFRS is a set or group of guidelines on how a firm presents and prepares its accounting information or the results of all its transactions and statements of its assets and liabilities. The history of the project of implementing the international financial reporting standards has its way back to 15 years when the project of establishing and implementing the international financial reporting standards was added to the agenda of IFRS. The foundation for IFRS was established to develop the set of standards which ensure preparation of globally accepted, understandable, accountable and highly standardized financial statements. (Barnier, , Hill, 2014)
International financial reporting standards were developed with a clear purpose of bringing efficiency in the money markets all over the world through transparent financial reporting. The transparent accounting through these standards increases and develops trust among the stakeholders and brings stability in the worldwide economy. It enhances the sustained quality of the preceding standards by including accounting rules that the global stage on accounting accepts. This fosters trust among the stakeholders, economists, corporate by ensuring stability and growth in the world economy. The basic aim of the standards is to provide clear and true picture regarding the capital and money that the investors and other market participants provides to the market. Further, these standards has the purpose of ensuring the management accountability and providing information to the regulators so that they can strengthen the regularity and compliance in the global markets to build and create more trust among the investors and can assure the compliance of various rules and regulations that the market is bound to comply. (Barnier, Hill, 2014)
Further, international financial reporting standards help investors to analyze and study the market, thereby, creating opportunity to identify risks which prevails in the market which ensures and results in allocation of capital in an efficient manner. The implementation of standards that are accepted on the global platform by the stakeholders, authorities, investors helps in reducing the international reporting cost and breaking down the limits of the territorial markets and providing the privilege of investing and financing in a market which is global and limitless with vast opportunities of creating wealth and enhancing growth. International financial reporting standards provides direction for measuring the financial performance of the company and these standards are a reliable measure to make comparisons in the financial performance and due to the explicit feature of standard accounting across the globe, it also lowers the cost of capital.
International financial reporting standards were developed with a view to bring the financial reporting on the global platform and to a large extent, the objective has been met. The international data shows that more than 80% of the countries have adopted IFRS and the adoption is not voluntarily, rather it is compulsorily. The remaining few are on the way to adopt these standards and furthermore, in some countries, companies with a perspective of being global have commenced their reporting on the basis of the international standards globally. If we come to examples, then Japanese Companies forming 20 per cent of the Japanese capital market have officially announced their plans to adopt international financial reporting standards. Further, India has compulsorily and legally applied usage of Indian Accounting Standards (Ind-AS) by all the listed companies from the year 2016. Ind-AS are locally developed accounting standards which are fully aligned with international financial reporting standards, thereby, replacing the previously used Accounting Standards (AS). In China, Chinese Companies forming 20 per cent of the Chinese capital market has officially announced their plans to adopt international financial reporting standards; the advantage of dual listing in the Hong Kong was one of the reasons behind this adoption. Further, United States is the largest overseers of the IFRS complied financial statements of a large number of foreign investors which are reported to United States Securities and Exchange Commission and U.S., since inception of the standards has been a supporter of Japanese Companies forming 20 per cent of the Japanese capital market have officially announced their plans to adopt international financial reporting standards implementation. Thus, the globe will pretty soon be completely shaded with the colour of IFRS compliant countries. (Barnier, Hill, 2014)
Most of the reviewers during the whole process of transition to the implementation of global standards for financial reporting have a positive attitude towards the standards. The enhanced quality and greater consistency in financial reporting standards have been of benefits to both the companies and the investors. IFRS have always been helpful to the European investors and these standards provide encouragement to the remaining jurisdictions.
The limitations that may arise in the implementation of international financial reporting standards are that the cost of transition to IFRS is huge and the benefits of the transition will not be seen immediately, rather, it will be seen at a later point as the harmonization and consistency of the standards will take time. Further, when it comes to application of international financial reporting standards to the small and medium entities, they will not be largely benefitted as these entities will be hit by large transitional cost and will need expert manpower to sustain the changes and the consistency in the reporting arising out of implementation of these standards. Further, it will be difficult for the companies to absorb the huge transitional cost. (Rafael, n.d.)
The other issues involved are non-recognition of extraordinary loss or gain and the accounting of assets and liabilities on fair value basis. Adoption of IFRS will result in the monopoly of International Accounting Standards Board as the sole body of structuring and implementing accounting standards.
Michel Prada was correct in concluding his speech concluding that the international financial reporting standards have met the criteria for adoption as global standards as:
The worldwide demand of a set of standards that are global and common for all the countries for financial reporting have been fulfilled by implementation of global standards. The purpose of similar and a group of standards for international companies have been met and the desire of the reduced capital and reporting cost has been fulfilled. The clear and stated purpose of a market with efficient capital allocation and a common economic platform which could help in a more trustworthy environment of finance and a stable and growing money market with the ability of raising capitals cross border due to proper transparency and compliance fulfilled environment has been met. European market has seen tremendous growth with much increased number of foreign investors increasing the market base and capitalization. The initiative for commitment to convergence has made the existing standards compatible and the work is more coordinated and the financial information is aligned with the global standards. (Prada, 2015)
International financial reporting standards are the guidelines that have gained tremendous success in a very short time. These standards have been adopted by a large proportion of companies. Many countries have seen the promising results in the interest of their industries, investors from the implementation of IFRS. All the international authorities and regulatory have already shifted to international financial reporting standards for promoting this standard platform of financial reporting. Countries have established mechanisms for adoption of international financial reporting standards either formally through national law or through legislative and regulatory authorities or through voluntarily or individual jurisdiction of the company. Some have introduced this convergence either as a compulsion or some have introduced the adoption over a transitional period. Review reports have showed that the compliance mechanisms should ensure that the financial statements should be in full compliance with the standards. The countries which have not adopted the standards are responding the assertions and the variations that they come through the adoption of international financial reporting standards as single set of financial standards. The IFRS should be seen with hopes and intentions. As per the data of IFRS foundation, the companies which have adopted international financial reporting standards as their reporting standards contribute to the world’s gross development product to the extent of 56 per cent. (Prada, 2015)
The benefits of adopting International Financial reporting standards have been seen by various developed economies of the world and the world as a whole, the adoption has improved the economic networks and the direct benefits, and the direct benefits that are accruing due to adoption are both in the form of economic and political value, the capital flows and the trade has become more globalized and flexible. It has become easy for market participants and the investors to understand analyze and study financial statements that are similar and standardized. The adoption of IFRS attracted huge amounts of cross border investments in various economies, ranging to the extent of $23.5 trillion. However, it has been seen that countries which are culture sensitive in trades are much likely to adopt global standards, like if the countries with which they trade usually, then the country is much keen to adopt these standards. Evidences shows that the adoption of international financial reporting standards has improved the citizen wealth, international harmonization in financial information and the governance policies and lowered the auditing cost. (Prada, 2015)
Non current assets, often termed as long term assets are the assets which an organization expects to hold for a period exceeding one year and which is of economic benefits to the organization and which is not held for sale and which is not expected to be converted to cash within one year. The assets whose full value will not be realized in one accounting year are also termed as non current assets. However, non current assets are not exclusively defined; non current assets have been given a residual definition in International Accounting Standard 1: The presentation of financial statement. The explicit property which distinguishes any asset as current or non current is that any asset which is a part of a normal operating cycle would never be considered as non current asset even if such asset is held for a period of more than 12 months or period beyond the reporting period. Further, this classification of asset can take place on the basis of nature of usage and the nature of business, the owner of the asset carries on, for example, office furniture owned by automobile distributor is a non current asset while if similar furniture will be owned by a manufacturer of furniture, it will be classified as inventory. Non current assets are assets which are permanent in nature and which are expected to produce benefits for the organization. (Accounting Tools, n.d.)
For the purpose of accounting, non current assets are basically classified into two parts, out of which one part is the accounting for property, plants and equipment which are expected to provide future benefits, which are a form of non current assets only and the second part is the accounting for non current assets held for sale or disposal. International Accounting Standard 16 itself defines the equipments, plants and properties that are held for production or future benefits and the benefits are expected to arise for more than one period. (Deloitte, n.d.)
During the initial phase of a non current asset, the asset is accounted for and recorded at cost in the financial statement, where cost includes the purchase price of the asset, the directly attributable cost of the asset and the costs incurred to install the asset, to bring it into a condition where it can be put to use and all the taxes, duties which have been paid and which are non refundable in nature. Direct attributable costs are the costs which will not be incurred in case the asset is not brought into the existence. Some examples of such cost are installation cost, site preparation cost, delivery costs, set up costs and cost of any professional to be hired for running the asset. (Deloitte, n.d.)
Subsequently, the non current asset may be evaluated and accounted for at the value obtained by using any of the two alternative approaches which are the cost approach or the revaluation approach. However IFRS 5, the assets which are held for disposal will not be depreciated and will not be accounted by any of the two alternative approaches mentioned above, i.e., the cost approach or the revaluation model. Further, such assets will be shown separately. Such assets will be accounted in the disposal group if the asset is available for sale and the organization is committed to sell the asset. All the classification, presentation, measurement stated in IFRS 5 also applies to non current assets. (Deloitte, n.d.)
Any asset is depreciated over the life of the asset as per International Accounting Standard 16. Depreciation is the difference between the cost of any asset and the residual value of the asset, which is systematically allocated over the effective life of asset where effective life of the asset is the expected life of the asset over which an asset will produce economic benefits for the entity and the residual value is the estimated value which an asset is expected to recover if the asset is sold at the current point of time after deducting the cost of disposal of the asset. Depreciation is a non cash expenditure which symbolizes the economic consumption of the asset over its effective life. The method of depreciation should be such that ensures systematic allocation of consumption of economic benefits over the life of the assets. Para 62 of International Accounting Standard 16 provides a variety of method of depreciation. (Deloitte, n.d.)
The assets which are to be depreciated are to be grouped under same classification, like roof, parking lots shall be grouped under building and engines, frames shall be grouped under aircraft. The assets which cannot be grouped significantly may be grouped together and depreciated together. The depreciation method can be selected on the basis of the pattern in which the economic benefits will flow to the entity. The method of depreciation may be the straight line method, reducing balance method and the usage method. In the straight line method of depreciation, the asset is expected to produce uniform benefit throughout the life of the asset. The amount of depreciation under this method is calculated by dividing the difference between cost of asset and the residual life of asset by the effective life of the asset. Reducing balance methods is somewhat similar to the life cycle of the product where the benefits arising from a product shrink as the time passes; similarly, under reducing balance method, the depreciation claim is higher in initial years and it lowers as the time passes. This method of depreciation is applied by using a percentage rate which is applied to the cost of the asset to work out the amount of depreciation. The usage method of depreciation uses the units of output to determine the claim of depreciation to be accounted for. (Deloitte, n.d.)
The accounting for non current assets as per the global standards is under the scope of the following reporting standards:
IFRS 5 governs the assets held for disposal and discontinuing operations which defines the non current asset and provides accounting for the assets which are available for sale. (Deloitte, n.d.)
International Accounting Standard 16 covers property, plant and equipment within its purview which states that these assets are also non current asset and provides for the accounting of any asset both initially and subsequently and depreciation charge on such assets. (Deloitte, n.d.)
International Accounting Standard 23 covers borrowing cost and states that the cost of borrowing for financing any asset will be covered in the cost of that asset.
International Accounting Standard 36 regarding impairment of assets which provides for impairment of value of any asset which is held for disposal or where the going concern assumption is violated, i.e., the value of the asset is reduced to the recoverable amount. (Deloitte, n.d.)
International Accounting Standard 20 for Government Grants which provides for reducing the carrying amount or the book value of any asset if any grant by government or any other organization is received against such asset. (Deloitte, n.d.)
Any item shall be recognised as non current asset if such item is expected to provide economic benefits to the entity for a period more than one accounting period and the risks and rewards from the assets are expected to arise only to the entity and such asset is owned by the entity. (Deloitte, n.d.)
Initial Recognition and Measurement of Non Current Asset:
Cost of Purchase xxx
Add: Direct attributable Cost (Installation Cost
Site Preparation Cost, and Professional Fees) xxx
Add: Cost of restoring the site xxx
Less: Government Grant/ Subsidy xxx
Cost of Asset xxx
The Asset will be initially recognised at the cost arrived as above.
Once the asset has been recognised, then the asset will be recognised at the carrying value, i.e., the value at which the asset has been initially recognised deducted by the incidental impairment and depreciation calculated by any of the following suitable method selected by the entity:
Depreciation = Cost of Asset – Residual Value
Life of Asset
Depreciation = Value of Asset or Value of Group * Rate of Depreciation
Depreciation: Value of Asset * Number of Units produced by the asset
Total number of units’ asset is expected to produce
Further, if the revaluation method is opted for subsequent recognition of the asset, then the recognition of the asset should be at the fair value, if the fair value can be reliably estimated and the revaluation gain should be credited to equity and the revaluation loss shall be recognized as an expense. (Silivia, n.d.)
The assets are de-recognised when the assets are expected to provide no economic benefits to the entity and the asset is disposed off. The gain or loss thereby arising is recorded in the income statement. (Silivia, n.d.)
International Accounting Standard 16 provides for the following disclosures (Silivia, n.d.):
Prada, M, September, 2015, Introductory remarks: The success criteria of global standards, Viewed on 10/01/2016, <https://www.ifrs.org/Alerts/Conference/Documents/2015/Michel%20Prada%20speech%20Eurofi-Sept%202015-FINAL.pdf>
Prada, M, September, 2015, successful criteria of global standards, Viewed on 10/01/2016, < https://www.iasplus.com/en/news/2015/09/prada>
Barnier, MM, Hill, LJ, October, 2014, IFRS, Viewed on 10/01/2016, <https://ec.europa.eu/internal_market/consultations/2014/ifrs/docs/contributions/individuals-and-others/ifrs-foundation_en.pdf>
Rafael, C, n.d., Challenges of IFRS Adoption Amongst SMEs, Viewed on 10/01/2016, <https://www.academia.edu/8052302/CHALLENGES_OF_IFRS_ADOPTION_AMONGST_SMES_IN_NIGERIA>
Accounting Tools, n.d., Non Current Assets,Viewed on 11/01/2016, <https://www.accountingtools.com/noncurrent-asset>
Deloitte, n.d., IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations, Viewed on 11/01/2019, <https://www.iasplus.com/en/standards/ifrs/ifrs5>
Deloitte, n.d., IAS 16 — Property, Plant and Equipment, Viewed on 11/01/2016, < https://www.iasplus.com/en/standards/ias/ias16>
Deloitte, n.d., IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance, Viewed on 11/01/2016, < https://www.iasplus.com/en/standards/ias/ias20>
Deloitte, n.d., IAS 36 — Impairment of Assets, Viewed on 11/01/2016, < https://www.iasplus.com/en/standards/ias/ias36>
Silivia, M, n.d., IAS 16 Property, Plant and Equipment, Viewed on 11/01/2016, <https://www.ifrsbox.com/ias-16-property-plant-and-equipment/>
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