IFRS: IMPACT IN THE ASSET ACCOUNTING CYCLE
An asset accounting cycle is akin to our Working capital cycle. It comprises of a purchase or in house production, consumption for business or capital appreciation and final disposal. This article envisages the application of various IFRS in the asset accounting with some significant changes brought out in the new standards.
To start with a depiction to capture the important Accounting standards during the asset accounting cycle,
|
Purchase/In House creation
|
IAS-16 / IAS – 40, IAS-17, IAS-38 and IFRS-3
|
|
Consumption and Maintenance
|
IAS-16, IAS-20, IAS-21, IAS-36, IAS-38, IAS- 40
|
|
Holding until Disposal
|
IFRS-5
|
|
Disposal
|
IAS-16 /IAS – 40
|
On Acquisition:
When asset is acquired, the accounting has to be done based on the mandates in IAS-16 or IAS-40 depending on the holding intentions of the management. IAS-40 can be called a sub sect of IAS-16 in so far as the definition of the Property, plant and Equipment (PPE) is concerned due to inclusion of the words ‘for Rental or administrative purpose’ within the definition of PPE. As per both these standards, the initial recognition has to be done on ‘Cost’ Basis. The word ‘Cost’ is fine tuned to make it cash equivalent or in other words, the finance charge implicit due to deferred credit terms is not included in the asset cost. This falls in line with the revised definition for ‘Revenue’ in IAS-18. The major inclusions for arriving at cost as prescribed in the new standard is as below,
· Inclusion of an initial estimate of future dismantling cost if there already exists an obligation at the inception. We already know that cost to bring to the current location and condition is an inevitable portion of cost whether it is inventory or fixed asset. Care is needed to include the dismantling cost only once and not again for cost of the next replaced asset under the caption’ Costs to bring to the current location and condition’. This also requires a change of mindset.
· Major Inspection cost is sought to be included if it is necessary to start operation of the asset. Record Maintenance upsurges with this.
· Cost of Major spare parts is proposed to be capitalized. All along there was no clear guidance except for those spares which are used only for specific machinery and could be capitalized.
Don’t these changes impact the P&L favorably? All other governances by IAS-38 on Intangible assets, IAS-17 for leased assets or IFRS-3 for takeover in Business combination remain status quo in more than one ways, except that the IFRS-3 narrows down the initial recording of assets and liabilities at ‘Fair Value’ basis ONLY and also mandates inclusion of any contingent consideration at Fair value basis.
Consumption and Maintenance:
Asset consumption is nothing but depreciation. In IAS-16 Depreciation is defined with a wider corridor by suitably including the words’ number of production or other similar units’ in the meaning of the term ‘Useful life’. This implies allowing the usage of Production unit method to calculate Depreciation. In fact production unit method is more suitable for manufacturing companies since the depreciation so computed can be a best representative of ‘Asset turnover Ratio’.
The other significant path breaker is allowance of depreciation till the time of actual de recognition of the asset from the books. Earlier depreciation was made to stop once the asset is retired from active use and account at Net Realizable value. In effect the entity has a choice to either classify the asset as ‘Noncurrent asset held for sale’ as per IFRS-5 and adopt ‘fair value’ basis or carry on with depreciation until realization.
One more thought provoker is the treatment prescribed for subsequent component replacements. Whenever a component is to be replaced, the replacement cost of the new component has to be added and the unamortized cost of the replaced old component has to be reduced. But tough times are ahead for the corporate world since the cost of each integral component of an asset and Inspection costs has to be maintained separately. This can be facilitated if it is an in house production. But can/will suppliers issue an Invoice setting out the price component wise? This may be a little harsh as it implies the supplier has to literally share his cost sheet with the buyer!
Subsequent Measurement of a PPE can be using ‘Revaluation Model’ whereas for an Investment Property what is permitted is ‘Fair Value’ Model. There are two differences between these two models,
1. Depreciation is permitted after revaluation, whereas not permissible under Fair value Model. Inherently a Fair value measurement is more frequent than ‘Revaluation’, since the latter once adopted will need revaluation only at an interval of 3-5 years (as per standard) unless there is more fluctuation in market values.
2. Any Revaluation surplus is stashed in the ‘Other Comprehensive Income’ whereas changes to Fair value are routed through P&L. The logic exhibited is, once fair value is adopted there is an association with the market which is a synonym of ‘short term’ where the related changes will impact the current period and hence debited/credited to P&L.
Other incidences such as Impairment testing, accounting for Government grants, foreign currency fluctuations and amortization of intangibles are governed in the same manner except for few minor changes.
Holding till Disposal stage:
Subject to the conditions specified in the IFRS-5 being satisfied, the management can account a Noncurrent asset held for sale on ‘Fair value’ basis. On Common sense basis there is no possibility/need for depreciation during this stage. The essence of our current AS-24(Discontinuing operations) is visible in this new standard. All changes to Fair value are effected through P&L.
On Disposal:
There are no major changes in this area. All gain/loss are debited/credited to Income statement.
On the whole there has been an attempt to bring in more discipline and accuracy in Asset accounting. Though there are bound to be practical difficulties in initial stages, with the advent of new technology and sophisticated ERP software anything can be made easier.
CAclubindia
