Corporate Accounting: IAS Application Report

This report provides a detailed analysis of the application of International Accounting Standards (IAS) in corporate accounting, focusing on non-current assets. It covers IAS 16 (Property, Plant, and Equipment), IAS 36 (Impairment of Assets), IAS 38 (Intangible Assets), IAS 40 (Investment Property), and IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations). The report includes practical business transactions and their applicability under each standard, along with the effects of incorrect treatments on financial performance and reporting. The conclusion emphasizes the importance of complying with accounting norms for uniformity and reliability in financial statements.

Corporate
accounting

TABLE OF CONTENTS
Introduction......................................................................................................................................3
International Accounting Standards.................................................................................................3
IAS 16 Property Plant and Equipment.........................................................................................3
IAS 36 Impairment of assets........................................................................................................4
IAS 38 Intangible assets...............................................................................................................4
IAS 40 Investment property.........................................................................................................5
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations....................................6
Effect of incorrect treatments on financial performance and financial reporting............................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9
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INTRODUCTION
International Accounting Standards are developed in order to promote uniformity and
reliability in accounting statements. Organization engaged in global operations are required to
comply these standards for recording of transactions for financial statements. Further, corporate
entities are also recommended doing accounting by considering these norms and standards for
better presentation (Van Greuning, Scott and Terblanche, 2011). Present project report is focused
on description and applicability of IAS by considering given business information. Al Falaj LLC
is involved in various project thus to ensure uniformity in accounting of recording of non current
assets they are considering use of IAS. In this report, description of accounting standards which
are linked to the recording of non current asset will be provided along with its practical
application.
INTERNATIONAL ACCOUNTING STANDARDS
IAS 16 Property Plant and Equipment
This accounting standard deals with the recording of property, plant and equipment by
making its appropriate valuation. In accordance with the provisions of this standard, these assets
are recorded at its cost and subsequently it is measured by using its cost or revaluation model.
Along with this, it is also depreciated on a systematic basis over its useful life (Cairns and et. al.
2011). Objective of this standard is to provide appropriate treatment of recording non-current
asset due to principle issues such as determination of carrying amounts, impairment losses and
depreciation charges. Recognition criteria of this IAS is as follows-
 It is probable that asset has association with the future economic benefits to the flow of
entity
 Reliable measurement of cost of asset is possible.
As per this standard, initial measurement is done by considering its cost (IAS 16.5). Further, cost
of an asset includes all necessary expenses incurred by business organization to bring asset in
appropriate working conditions for its intended use (Richardson and Eberlein, 2011). Example of
such expenses are installation charges, related professional fees and delivery charges. Further,
subsequent measurement of cost is done by considering provisions of cost and revaluation
model.
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Business transaction
Vacant land is purchased for its investment potential for Rials 96,000. It is expected that
after 10 years this land can be sold for Rials 600,000 but there is no rental income expected
during this period.
Applicability of accounting standard
This asset will be recorded at its cost as per the provisions of the described standards.
Potential profits will not be shown in the books of accounts.
IAS 36 Impairment of assets
This accounting standard is applicable in situation where an asset of an organization is
not carried at more than their recoverable amount. However, in exception to this in certain
intangible assets such as goodwill, impairment test is required for the indication of impairment of
asset (Bengtsson, 2011). IAS 36 is applicable on land and building, intangible assets,
investments and investment property carried at cost. In accordance with the provision 36.9, all
organization are required to check possibility of impairment at the end of accounting year for the
computation of recoverable amount.
Company is required to provide disclosure by the class of assets along with the
description of impairment loss or profit (Richardson and Eberlein, 2011). In addition to this,
suitable description is required to provided such as circumstances in which impairment is done,
nature and segment of the asset and fair value of measurement.
Business transaction
Company has a Plant and Equipment which due to a decline in activity is no longer
required and is now being held for sale at an expected price of Rials 48,000.
Applicability of accounting standard
This transaction is covered in provision of impairment because asset value of the AL
Falaj LLC is declined. As a consequence, they are make revaluation in the financial position
statement of the company. Thus, organization is required to make reduction in the value of asset.
IAS 38 Intangible assets
This accounting standard provides outline of the accounting requirements of intangible
assets (Ball, Li and Shivakumar, 2015). In accordance with the provision of this standard an
organization should recognize intangible asset only if it is supported by following criteria-
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 It must be separable (in this standard, separable refers to the capability of being separated
for the purpose of transfer, rent, sale or exchange either jointly or individually)
 This asset must be raised for legal or contractual rights (this aspect will not be supported
by fact that right of assets are transferable from other rights and obligations or not)
This asset is recognized in books of accounts, if it is able to provide economic benefit in future
period. Along with this, cost of asset can be measured reliably. In this aspect, all research cost
are treated as expense (Sözbilir, Kula and Baykut, 2015). Development cost of the asset will be
capitalized only after it attains commercial of technical feasibility. Appropriate disclosure above
described aspects should be provided along with its useful life, gross carrying amount,
impairment loss or accumulative amortisation.
Business transaction
In accordance with the given description research and development section of the
company is working on a development of new building material. This material has ability to
make reduction in the heat effect. For this development company had incurred RO 20,000 toward
cost of developing the material and producing the test. Along with this, management of company
is expecting an annual sales of RO 450,000 starting from next year.
Applicability of accounting standard
In accordance with the described provisions, it can be said that company can record this
transaction in present year because it will provide economic benefit from next year. Provision of
IAS 38 depicts that development cost can be capitalized only if it commercial or technical
feasibility. This feasibility will be attained in next accounting year. Thus, this asset will be
recognized accordingly.
IAS 40 Investment property
Provisions of IAS 40 is applicable for the accounting of property (land or building) held
for the earning of rentals or for the purpose of capital appreciation or both. Generally these
properties are recorded at its cost and subsequent recording is done by making use of fair value
of model (Kaplan and Atkinson, 2015). Ownership for the recording of asset is not essential
because it is also applicable in situation of lease. This accounting standard is not applicable in
following situations-
 Property held for the purpose of production or supply of goods and services.
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 Property is held by the company for the purpose of sale in ordinary course of business or
it is in process of construction for such future sale (IAS 2) (Ball, Li and Shivakumar,
2015).
 Property is constructed by business on the behalf of third party
 Property is occupied by owner (Financial accounting, 2014).
In this standard company is required to provide information about use of model in valuation,
significant assumptions and proposed amount that is to be recognized as profit.
Business transaction
Company had constructed and developed a shopping mall at the cost of Rials 450,000
one year ago. Mall is still vacant but the company is searching for the tenant.
Applicability of accounting standard
By considering the provisions of IAS 40, it can be said that company is in position to
record this property in form of their capital asset. It is because, organization had fully
constructed this asset and now they are only searching of tenants. Developed property by the
management of the company is able to provide economic benefit and along with this, it is also
not covered in the exceptions described by the accounting standard. The fact that tenant is not
available and mall is vacant will not affect the prospect of recording the transaction.
Business transaction
Company has constructed and developed a flat for MR Rashid at the cost of Rials 95,000.
Flat is completed this year and the cost plus 30 % amount will be received by the end this year.
Applicability of accounting standard
Flat developed by organization is covered in exception that Property is held by the
company for the purpose of sale in ordinary course of business or it is in process of construction
for such future sale. Henceforth, company is not entitled to record this flat as an assent. It will be
considered as inventory of business because it is revenue in nature. Recording of this transaction
will be done by considering provisions of IAS 2 inventory.
Business transaction
Vacant land is purchased for its investment potential for Rials 96,000. It is expected that
after 10 years this land can be sold for Rials 600,000 but there is no rental income expected
during this period.
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Applicability of accounting standard
By considering the provisions of this accounting standard it can be said that land is
purchased by the business for the purpose capital appreciation. Initially it will be recorded at its
cost and assumed profit will not be recorded due to concept of cost.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
This accounting standard is based on the accounting entry for the non current assets
which are hold for the purpose of sale or belong to the discontinued operations of the company.
Generally assets held for the purpose of sale is not eligible for the depreciation (The conceptual
framework for financial reporting, 2013). Along with this, such assets are measured at lower
than its carrying amount and fair value. These assets are disclosed separately in financial
statement position of the company. In addition to this, specific disclosures are also required for
the disposals of non current assets. For the measurement of such kind of assets following
provisions are applicable-
Situation 1: At the time of classification as held for sale
It is recorded at its carrying amount. This amount will be determined on the basis of
applicability of international financial reporting standard (Ball, Li and Shivakumar, 2015). In
addition to this resulting adjustments are also required to be done with the applicability of
relevant provisions of IFRS.
Situation 2: After classification as held for sale
In situation where asset is recorded after the classification for declaration of holding of
sale, then assets is measured at fair value less cost of selling expenses (Chen and et. al. 2011).
In both the situations, impairment adjustments are required to be done by organization.
Disclosure is required to provided regarding non current asset or disclosure group,
circumstances of sales and timing and other necessary information.
Business transaction
Company has a Plant and Equipment which due to a decline in activity is no longer
required and is now being held for sale at an expected price of Rials 48,000.
Applicability of accounting standard
By considering the provisions of this accounting standard, it can be said that asset is
required to be recorded at Rials 48,000. It is because, asset hold by the company is not have
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economical benefit for the organization. As a consequence, organization is planning for the sale
of asset. This transaction is covered in the situation 1, due to which company is required to
record it at its book value.
EFFECT OF INCORRECT TREATMENTS ON FINANCIAL
PERFORMANCE AND FINANCIAL REPORTING
In situation where norms of accounting standards are not complied, then it will lead to
incorrect treatments of assets. This will affect the accuracy of financial position of the business.
In addition to this, there will be high scope of risk of materiality in process of auditing
(International Accounting Standards Board (IASB), 2015). Users will not rely on the financial
statements of the company while making economic decision which will hamper image of AL
Falaj LLC. Along with this, company had to pay statutory penalty charges as they had
manipulated information of business.
CONCLUSION
In accordance with the present project report it can be concluded that organization
engaged in various projects are required to comply accounting norms described by accounting
standards and international financial reporting standards. By the applicability of these provisions
in accounting transactions company will be able to ensure uniformity in their financial
statements. In addition to this, they will be in position to increase reliability and relevancy for the
users of financial statements.
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REFERENCES
Books and journals
Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement
information prepared under IFRS: Evidence from debt contracts around IFRS
adoption. Journal of Accounting Research. 18(6). pp. 67-80.
Bengtsson, E., 2011. Repoliticalization of accounting standard setting—The IASB, the EU and
the global financial crisis. Critical Perspectives on Accounting. 22(6). pp. 567-580.
Cairns, D., and et. al. 2011. IFRS fair value measurement and accounting policy choice in the
United Kingdom and Australia. The British Accounting Review. 43(1). pp. 1-21.
Chen, F., and et. al. 2011. Financial reporting quality and investment efficiency of private firms
in emerging markets. The accounting review. 86(4). pp. 1255-1288.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Richardson, A. J. and Eberlein, B., 2011. Legitimating transnational standard-setting: the case of
the International Accounting Standards Board. Journal of Business Ethics. 98(2). pp.
217-245.
Sözbilir, H., Kula, V. and Baykut, E., 2015. A Research on Deferred Taxes: A Case Study of
BIST Listed Banks in Turkey. European Journal of Business and Management, 7(2), 1-
9.
Van Greuning, H., Scott, D. and Terblanche, S., 2011. International financial reporting
standards: a practical guide. World Bank Publications.
Online
Financial accounting. 2014. [Online]. Available through:
<http://www.e-conomic.co.uk/accountingsystem/glossary/management-accounting>. [
Accessed on 9 November 2015].
International Accounting Standards Board (IASB). 2015. [Online]. Available through:
<http://www.ifrs.org/About-us/IASB/Pages/Home.aspx>. [Accessed on 9 November
2015].
International accounting standards. 2015. [Online]. Available through:
<http://www.iasplus.com/en/standards/ias>. [Accessed on 9 November 2015].
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The conceptual framework for financial reporting. 2013. [pdf]. Available through:
<http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/English%20Web
%20Summaries%202013/Conceptual%20Framework.pdf>. [Accessed on 9 November
2015].
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