Noncurrent Assets and Distinction between Revenue and Capital Expenditures
1.Disucss about the Implications of accounting procedures for the recording and management of non current assets in australia.
2.Effects Of Legislative Power on the Non Current Assets In Australia.
Assets consist of the current assets and the noncurrent assets. Current assets are those which can be readily converted into cash and its equivalents and normally within the period of twelve months and noncurrent assets are those which cannot be readily converted into cash but it provides the economic benefits in future years and which cannot be realized within the period of twelve months. Noncurrent assets are required to meet the recognition criteria and threshold tests for the capitalization of the amount incurred for the acquisition of the asset (Marshall, 2014).
Before discussing any accounting procedure, a distinction is required to be made between the revenue expenditure and the capital expenditure. Both these expenditure plays the very important role in the financial statements of the company. Revenue expenditure on assets is that expenditure which consumes an organization’s normal operating cycle and which helps in converting the benefits into cash and that too within the operating cycle of the company. On the other hand the capital expenditure on assets is those expenditures which remain available for use for the number of the accounting periods. These capital expenditures embody the number of economic benefits that the assets will accrues to the company in the future years to come (Guthrie, 2016).
Noncurrent asset includes the following:
- Property plant and equipment as per AASB 116 – Property plant and equipment is defined as the items which are tangible in nature and has been used by the company for the purpose of the production and supply of goods and services and for the purpose of administration (AASB 116, 2011).
The accounting procedures for each and every part of the noncurrent assets are different and have been prescribed under the different accounting standard. Each accounting procedure has the different impact on the recognition and the management of the noncurrent assets in Australia. Accounting procedures are the step by step process which will help the company to make accounting entries in the books of accounts of the company. These procedures have been laid down in accordance with the provisions of the Australia accounting standards and the international financial reporting standards and in accordance with the principles of the accounting commonly known as generally accepted accounting policies (Hung, 2015). The accounting procedures for the noncurrent assets have been defined under the following heads and the impact thereon has been explained below:
Initial Recognition – Initial recognition is related to the recognition of the assets at the time when they are acquired. The amount includes the cost of the acquisition and the other costs that are incurred in bringing the asset to the present location and condition. The noncurrent asset is recognized at the cost so incurred and shall be capitalized as on the date of purchase. This, the initial recognition is done with all the initial costs and has the effect of increasing the value of the noncurrent assets of the reporting entities. Only those items of the property plant and equipment will be considered which will have the capability of the providing the economic benefits to the company in the future years to come.
Accounting Procedures for Noncurrent Assets and Their Impact
Post Acquisition Expenditure – Once the noncurrent assets are initially recognized, then the expenditure incurred in relation to the maintenance and management of that asset will be covered under the head of post acquisition expenditure. The post acquisition expenditure in terms of the accounting standard is referred to as the subsequent costs incurred by the company. The paragraph number 12 of the Australia accounting standard number 116 prescribes that any expenditure which is incurred by the company in relation to that particular asset or group of assets after its recognition will be transferred to the statement of the profit and loss. The major effect that this accounting procedure is that the expenditure is not treated as the capital expenditure and rather has been charged to the statement of the profit and loss account. Sometimes if the repair so made is very huge and which will provide the benefits to the company in economic terms in the future years then the same shall be capitalized to the value of that assets.
Annual Changes in Value – The value of the noncurrent assets changes due to the fact of its usage over the time and the term that has been given in the accounting standard for the loss in the value of the asset has been termed as the depreciation. The depreciation is defined as the decreased in the value of the asset due to the normal loss of wear and tear and loss of obsolescence. As per the provisions of the Corporations Act 2001 read with the relevant accounting standards the depreciation is required to be calculated on the useful lives of the assets and will be charged at the end of the financial year to the statements of the profit and loss account. The major impact that it has is the reduction in the value of the asset.
Impairment events – In accordance with the AASB 136, the assets are required to be checked for the impairment and that too at the end of the financial year or the reporting period or at the end of the regular intervals. Impairment is charged only when the amount at which the asset is carrying exceeds the amount which the asset would give if it is sold in the market (AASB 136, 2012). The former amount is known by the name of the carrying amount and the later amount is known by the name of the recoverable amount. The AASB says that in case the carrying amount of the particular asset exceeds the recoverable amount then the difference is treated as the impairment loss and the same shall be charged to the statements of the profit and loss account and also charged to the value of that asset and in thus bringing down the value of asset to the recoverable amount. The recoverable amount is defined as the amount higher of the value in use or the net selling price. For the calculation of the value in use, the future cash flows are required to be estimated, cash generating units are required to be identified and so on. Thus, for these type of calculations judgment as well as the management view is required and is thus implemented.
Implications of Accounting Procedures on Initial Recognition of Noncurrent Assets
The events that led to this charge are the changes in the market conditions, changes in the government policies and so on. As these events led to the impairment along with the aforementioned calculations, the impact on the accounting of the noncurrent assets has been the major one.
Revaluation – Revaluation is the situation when the assets of the company are valued above its carrying amount or less than its carrying amount. The upward move is known as increments and the downward move is known as decrements. AASB 1041 deals with the revaluation of the noncurrent assets. The revaluation if any done is charged to the statement of the profit and loss on one hand and the other effect goes to the noncurrent assets. It is treated as the timing difference and hence shall be considered for the purpose of calculating the deferred tax assets and the deferred tax liabilities and thus have the major impact on accounting.
Disposal – Disposal is the activity whereby the assets of the company are sold. Under this the profit and loss if any arising out of it shall be treated as the revenue income or expenditure as the case may be and the difference between the carrying amount and the amount at which the asset is sold shall be transferred to the statement of the profit and loss. Secondly, the asset will not be present in the balance sheet.
Thus, in this manner the above events have significant role in affecting the accounting.
2.Australian Accounting Standards Board has the statutory power to detail and provide the standards so as to make the accounting for each and every item in the correct manner in the books of accounts of the company. It is in the manner that each and every transaction or the event has its own treatment and for formulating that the standard setting bodies plays a very important role. As per AASB 136, impairment is to be charged at regular intervals so it is defined that all the calculations are required to be made at the end of every year and thus have the powerful impact on the accounting (Barth, 2011).
Thus, Assets are the backbone of each and every company whether it is the small company or it is the large company. Assets are generally referred to as the source which helps in generating the revenue of the company. If the assets are not utilized in an efficient and effective manner then the company will not survive for the future years otherwise the company will be able to work and survive for the future years to come. Accounting for each of the above asset is very important to present the financial statements of the company to the shareholders and the investors. Therefore, the accounting for noncurrent assets has the material impact.
References
AASB 136, (2012), “Impairment of Assets” , available on https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07 -07.pdf accessed on 21-05-2018.
AASB 116, (2011), “Property, Plant and Equipment”, available on https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07 -09.pdf accessed on 21-05-2018.
Barth, M. E., (2011), “The relevance of the value relevance literature for financial accounting standard setting: another view”, Journal of accounting and economics, 31(1 -3), 77-104.
Guthrie, J. (2016), “Application of accrual accounting in the Australian public sector–rhetoric or reality”, Financial accountability & management, 14(1), 1-19.
Hung, M., (2015), “Financial statement effects of adopting international accounting standards: the case of Germany” Review of accounting studies, 12(4), 623-657.
Marshall, D. H, (2014), “Accounting: What the numbers mean”, Accounting Review, 121(2), 42 -59.
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