Property Plant and Equipment - Case Study Example

? IAS 16 Property Plant and Equipment IAS 16 Property Plant and Equipment IAS 16 Property, Plant and Equipment provides the general outline of the numerous accounting treatments to be applied to most types of property, plant and equipment. Initially, Property, plant and equipment were measured at its initial cost but has consequently with time changed it being measured using a cost revaluation model and depreciated with the depreciated amount being allocated systematically over its useful life (International Accounting Standards Board, 2006). The recent past has seen a period faced with identity crisis regarding whether practitioners need to follow the Generally Accepted Accounting Principles, popularly abbreviated as GAAP or the International Financial Reporting Standards popularly abbreviated as IASB (International Accounting Standards Board, 2006). IAS 16 requires that the recognition principle is applied to all property, plant and equipment costs only at their occurrence. Amongst other things, the costs include the initial costs incurred for either the acquisition or the construction of an item of property plant and equipment and the subsequent costs that are incurred for replacement of parts or service. There exists two types of accounting models under IAS 16. These include the cost model and the revaluation model (International Accounting Standards Board, 2006). While the cost model requires that assets are assessed at costs that are less than the accumulated depreciation and the impairment, the revaluation model requires that the assets be recorded at a revaluated amount hence making its fair value at the date of revaluation less the subsequent depreciation and impairment only with provisions that the fair value can be measured with much reliability. The company that we will be taking into consideration is ING Group N.V., a global financial services firm that is based in the Netherlands (ING Group, 2012). The company applies critical accounting policies that the management believes are not only important to the portrayal of the organizations financial condition and results, but that is also require the most difficult, subjective and complex judgement mainly resulting from the need to make estimations about the various effects of matter and that are also inherently uncertain. Key to note is the fact that various judgements and uncertainties that affect the application of the policies which may result reporting of different amounts that are significantly material under the various different conditions or through the use of different assumptions. The company considers financial reporting and disclosure practice and employs the use of accounting policies quarterly in a bid to ensure there is not only accuracy in the reported information that is not only relative to the prevailing economic conditions, but also the business environment. The company’s property, plant and equipment are reported at a cost that is less the accumulated depreciation. The depreciation realized on property, plant and equipment including even the assets under capital is computed on the straight line method over the estimated useful lives which in most cases range between 30 to 40 years in the case of buildings and 2 to 15 years in the case for equipment (ING Group, 2012). The company immortalizes leasehold improvements over the shorter of the leaseholds estimated useful lives or the related lease life that is mostly not less than 10 years. In the instances where the leases have the options of renewable periods, the company employs the use of original lease term that excludes renewal option periods aimed at determining the estimated useful lives. In instances where a failure to exercise a renewal option results into imposition of an economic penalty to the company, the company may determine at the inception of the lease about its renewal being reasonably assured and may include the inclusion of the renewal option period in the determination of the various appropriate estimated useful lives. The company includes the part of the depreciation expense that is related to both production and distribution facilities to the cost of sales that include occupancy sots on the consolidated statements of earnings. Additionally, the costs incurred in repairs and maintenance are expensed on occurrence while on the other hand the expenditures incurred on refurbishment and improvements significantly adding value to the productive capacity or that extend the useful life of an asset are capitalized. Retirement and selling of assets results into the asset costs and the related accumulated depreciation being eliminated with the resulting gain or loss being recognized in net earnings. It must also be noted that in instances where property, plant and equipment are stated at their revalued amount, there is need for additional disclosure as required by IAS 16.77. These include the stated date of revaluation, whether there was an involvement of an independent valuer and the various methods and significant assumptions employed in estimation of fair values. Others include the carrying amount that would have been recognised in the instance where the assets were carried under cost model and lastly the revaluation surplus which among other things include the changes during the period and the various restrictions on the distribution of the balance to shareholders inform of dividends (International Accounting Standards Board, 2006). The adoption of IFRS by the European Union has prompted many companies to shift to the application of the revaluation approach that is provided for in in IAS 16 in the valuation of plant assets (International Accounting Standards Board, 2006). ING Group N.V. started employing the use of Property in Own Use in 2005. A close examination of the most recent financial records of the company clearly reveals a better understanding of the various applications of the revaluation approach just as discussed in IAS 16. The auditor’s report to the shareholders and management begins the annual report with the audit report clearly stating how the audit was conducted in accordance with the Public Company Accounting Oversight Board (PCAOB) of the United States. Ernst & Young Accountants based in Amsterdam who were the auditors of the company issues an unqualified opinion with indications that financial statements of the company were fair and true with lack of material misstatements. The auditors also found the statements to be in conformity with the International Financial Reporting Standards as adopted by the European Union. The consolidated balance sheet of the company includes property and equipment as a line item and consequently directs the users of the information to Note 8 with section 2 of the financial statements critically discussing the various policies that have been implemented by the company during the preparation of the statements (ING Group, 2012). The property in use according to the section is stated at a fair value in concurrence with the date of the balance sheet with the fair value being determined by regular appraisals conducted by independent qualified valuers. Additionally, there is a summary of the company’s interpretation and implementation of IAS 16.39 on the part of Accounting and Policies for the Consolidated Balance Sheet and the Profit and Loss. Note 8 of ING’s consolidated financial statements continues to make an intuit analysis of the line item Property and Equipment exactly as listed on the balance sheet of the company through provision of a breakdown of the aggregate “property and equipment” amount which includes the revaluation amount. It is evident that the decision of ING to implement the revaluation approach has indeed resulted into various changes in the company’s financial statements. Despite the fact that the financial effect of the decision is yet to be determined, the financial statements of the company give clear indicator of the importance of having adequate disclosure. It is evident that a candid examination of the statements and the notes provide valuable help during explanation of the practical application of the various complex reporting and disclosure requirements of the revaluation approach. Based upon some measures of fair value, it is evident that the revaluation model presents a more accurate reflection of the current value of an entity’s assets compared to the cost model that is based upon the historical costs. It can therefore be postulated that the future will see the revaluation approach becoming more popular especially with the upcoming convergence of U.S and the International Accounting Standard into one single worldwide authority. In case there is this probable merger then there is need for both the current and the future practitioners having and intuit understanding of the various specifics of the revaluation model. References International Accounting Standards Board. (2006). Discussion Paper: Fair Value Measurements. London: IASB. ING Group, N.V. 2012 Annual Report. (2012). Retrieved from http://www.ingdirect.ca/pdfs/en/en_Balanced_Fund_FS_2012.pdf Read More