Accounting standards and treatments
The divorce of ownership and control in businesses leads to a need for some form of assurance of the information presented by the business to the owners. The owners or shareholders of a business rely on the financial statements and annual reports to satisfy themselves of the value or return from their investment in the business. Furthermore, there is a need for stakeholders such as investors, shareholders, banks and other creditors or suppliers to be able to assess the viability of one business as compared to another and this is only possible if there is some consistency across the financial statements and reporting requirements.
The International Accounting Standards Board operate within the International Financial Reporting Standards Foundation and are the independent standard setting body of the organisation. The IASB publish IFRSs but they also adopted the standards that were in place when they replaced the IASC. The adopted standards are International Accounting Standards. There are currently 28 IASs and 13 IFRSs in force. Accounting standards should remove subjectivity that could lead to inaccurate information.
The main purpose is to try to reduce or eliminate variations in accounting practice and reporting. The reason for this is to allow users of the statements to have some confidence that the financial statements adequately reflect the performance of the business and it should allow those users to compare financial statements with a degree of confidence that they are comparing ‘apples with apples’.
The IASB have developed a conceptual framework which considers the objective of financial reporting and the qualitative characteristics of useful financial information. The conceptual framework serves as a guide to prepare and present financial statements and acts as a reference to anchor new standards against. The framework sets out six ‘qualitative characteristics’ of useful financial information; relevance, faithful representation, comparability, verifiability, timeliness and understandability.
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The module examines the common standards that are both applicable to many companies and subject to some degree of subjectivity, including:
IAS 2 Inventories- which defines inventories as ‘assets:
- Held for sale in the ordinary course of business;
- In the process of production for such sale; or
- In the form of materials or supplies to be consumed in the production process or in the rendering of services’.
The standard allows two methods to determine the cost of inventory: first-in, first-out or weighted average cost.
IAS 16 Property, Plant and Equipment- defined as ‘tangible items that are:
- held for use in the production or supply of goods or services, for rental to others, or for administration purposes; and
- expected to be used during more than one period’.
IAS 17 Leases - defined as ‘an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time’.
IAS 36 Impairment of Assets - defined as ‘the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount’. The standard only expects a business to determine the recoverable amount of an asset if there is an indication that the asset may have been impaired with the exception of intangible assets and goodwill.
IAS 38 Intangible Assets - defined as ‘an identifiable, non-monetary asset without physical substance’. The standard is clear that the item must be an asset first and foremost. That means that the item must be able to demonstrate future economic benefit and the business must have control of that future economic benefit, i.e., own the asset.
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