Corporate accounting

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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.

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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. 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-

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. 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.

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. 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-

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.

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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-

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.
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 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.

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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.

References

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