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IFRS Criteria and Evaluation of Financial Statements

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions: IAS 16 was issued in December 1993 by the International Accounting Standards Committee, the predecessor to the IASB. It was reissued in December 2003 and has been amended multiple times, most recently in May 2012.

IAS 16 applies to property, plant and equipment . The standard itself defines PPE as “tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one [accounting] period.”

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions:Recognition and measurement

IAS 16 prescribes that an item of property, plant and equipment should be recognised as an asset if it is probable that the future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably.Future economic benefits occur when the risks and rewards of the asset’s ownership have passed to the entity.

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions:Measurement after recognition

IAS 16 permits two accounting models for measurement of the asset in periods subsequent to its recognition, namely the cost model and the revaluation model.

  • Under the cost model, the carrying amount of the asset is measured at cost less accumulated depreciation and eventual impairment. Under the cost model, the impairment is always recognised as expense.
  • Under the revaluation model, the asset is carried at its revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be determined reliably.
    • If a revaluation results in an increase in value, it should be credited to equity , unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income.
    • An asset should also be impaired in accordance with IAS 36 Impairment of Assets if its recoverable amount falls below its carrying amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. An impairment cost under the revaluation model is treated as a revaluation decrease to the extent of previous revaluation surpluses. Any loss that takes the asset below historical depreciated cost is recognised in the income statement.

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions:Fixed assets

Fixed asserts also known as tangible assets or property, plant, and equipment , is a term used in accounting for assets and property that cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.
IAS 16 (International Accounting Standard) defines Fixed Assets as assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably. Fixed assets belong to one of 2 types: “Freehold Assets” – assets which are purchased with legal right of ownership and used, and “Leasehold Assets” – assets used by owner without legal right for a particular period of time.

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions:

Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a firm’s consumers/end-users. As an example, a baking firm’s current assets would be its inventory, the value of sales owed to the firm via credit, cash held in the bank, etc. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc. While these non-current assets have value, they are not directly sold to consumers and cannot be easily converted to cash.

These are items of value that the organisation has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery. These often receive favourable tax treatment over short-term assets.

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions: Objectives 

It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location.

The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period.

The use of assets in the generation of revenue is usually more than a year, i.e. long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.

IFRS Criteria and Evaluation of Financial Statements of Credit Institutions: Value

Net book value of an asset is basically the difference between the historical cost of that asset and its associated depreciation. From the foregoing, it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relate table to record and report the value of fixed assets at its net book value. Apart from the fact that it is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset should be carried at the net book value, it is the best way of consciously presenting the value of assets to the owners of the business and potential investor.

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