What are the attributes of a high quality accounting standard? Globalization is a fact of life in today’s worldwide economy. They are many barriers to achieving a true global market; one of these barriers has to do with accounting standards or the presentation of accounting information. Various users have diverse needs for financial information. Companies in different parts of the world had their own methods in preparing their financial statements. Trying to compare the accounting rules of these different companies would have been difficult.
As a result, accounting bodies were created in order to standardize the accounting principles in order to avoid any difficulties in the future and make these methods comparable and uniform. As a result, this is how accounting standards were evolved. There are two major standard setting bodies in the world. These are the U. S Financial Accounting Standard Board (FASB) – the standard they created is called the US GAAP (Generally Accepted Accounting Principles). American companies create statements that follow the US GAAP and the International Accounting Standard Board (IASB) – the standard they create is IAS or IFRS.
As far back as 1967 the Accountants International Study Group (AISG) began a foundation to publish papers on important topics. This led to an agreement in March 1973 to establish an international body writing accounting standards for international use. This is how International Accounting Standards Committee (IASC) came into existence. The objectives of the committee were to formulate and publish, in the public interest, standards to be observed in the presentation of financials statements and to promote worldwide acceptance.
Some of the Characteristics of high quality accounting standards: •Transparency: The information presented should be to be economically significant and an investor should be able to tell what is happening at the company by looking at the financial statement. • Comparability: The information provided should have common framework to enable review, analysis and interpretation of financial information across entities, countries and regions. The information should also allow an investor to compare the financial results for this year versus last year or the year before that within the given company. Credibility: With standard the companies produce financial reports that disclose similar results, which gains credibility. There is Uniformity in financial reports. •Discipline: Mandatory accounts impose systematic on going regulations – others can rely on information for making loan, credit and investment decisions Financial information should be as useful as possible for many different types of users for example investors, analysts, tax authorities and many more.
An investor who wants to understand what is going on at a company will be able to look at the financial statement and come to a decision or develop an understanding of the company. Financial statements also allow an investor to compare across different companies; if they are looking to invest to two companies ideally, they should be able to look at the financial statement of the two companies and make a comparison. Financial Reporting Standards (FRS) has 30 standards and International Accounting Standards (IAS) has 41 standards.
FRS 15 and IAS 16 have to do with Plant Property and Equipment (PPE). The accounting standard FRS 15- PPE ensures that tangible fixed assets, with the exception of investment properties, are accounted for in a consistent manner. In order to recognize the PPE in IAS 16 as an asset, it will have to receive the risks and rewards of the ownership transferred to the company and expect future economic benefits, for instance revenue. The cost of the asset must also be reliably measured. These two conditions apply for both initial cost and subsequent cost.
Some assets that don’t bring future economical benefits still qualify for recognition as an asset. For instance assets that are required by law for safety or environmental reason to operate other resources. In relation to subsequent cost, some assets require regular major inspection, over hauling, replacement of major parts. All these should be included in the carrying amount of an item although incurred subsequently. This principle has conditions that are mandated worldwide which includes high quality standard by allowing fixed assets between any companies.
An item of PPE qualifying for recognition shall be measured on the cost basis, which is purchase price and any directly attributable cost for example delivery, legal fees and any sort of testing cost that might occur. If they are any expected removal costs at the end of the ownership or before disposal of the assets, the company may be obliged to account for the removal costs. You normally find that this will occur toxic industries. High quality standards come into play in this section by allowing the results to be credible.
If the rules were not set out world wide, then the final amount for different companies would differ, as some might include the attributable cost and some not. Subsequently there are options on how to measure the PPE, one of them is that you can use cost model or the revaluation model. If a company use’s the revaluation model, it should revalue it regularly. Depreciation is the reduction values of the asset due to wear and tear, normally done over time, or on a use basis.
The three things a company needs for depreciation is depreciable amount, useful economic life of the asset, and this is either based on time or usually based on the amount of units it is going to produce. Lastly, the company will have to apply it on a systematic basis, by basing it on units produced, a diminishing value or on a straight-line basis. Sometimes components of the asset can depreciate separately. Derecognizing an asset is usually because that company has disposed of it, sold it or realized there is no future economic benefit left in the asset.
Any gain or loss where the asset is derecognized is sent to the statement of comprehension income, not as revenue but as a sale of PPE. For investorsto make a decision to invest in a company, they would need high quality accounting standards to compare and decide which company to invest in, whether it may be in China or the UK. High quality accounting standards play a big role in all companies world wide, they provide useful, relevant information where the standards are comparable and result in full disclosure. Without them investors would not be able to make their decisions.