Fixed Assets and Depreciation for a Company - Essay Example

1. Asset has been defined as anything which is tangible or intangible which can be possessed and helps in the generation of economic value is being termed as assets. Different accounting standards have defined assets differently but all looks to convey the same meaning and is aimed at the same thing. IAS states assets to be anything where it is probable that future economic value will be generated through it and the cost of the asset can be measured accurately and reliably. The reliable principles look at ensuring that the cost are those which are incurred at the time of installation of the plant and subsequent addition is made in case some service arrangements or replacement is carried out (IAS, 2015). This thereby helps to identify the mechanism through which identification of assets is done and needs to produce value for the future. IAS 16 doesn’t look to provide the unit of measure of recognition but requires that the cost model is used and different items like plant and equipment and property should be shown in relation to the total cost and depreciation should be shown separately. It is also seen that some plant and equipment requires constant replacement so the cost of replacement must be included in carrying amount of the assets if the same has been incurred and should be clearly recognized (IAS, 2015). The carrying amount of those parts which are replaced should be derecognized according to the guidelines prescribed in IAS. IFRS has looked to define assets as one which is controlled by an entity and is present due to past events which will help to generate future economic benefits from it. The principle lays down that assets need to be controlled and need not be owned which thereby provides an opportunity to highlight an asset which doesn’t belongs to the entity but is owned by someone else but controlled by the entity (IFRS, 2015). For example, a plan and machinery might be taken through a hire contract where the plant belongs to the owner but since it is controlled by the business it can be adjudged as being an assets in the books of accounts. The most important thing which needs to be considered from the perspective of IFRS is that the asset should be capable of producing some value in the near future and should have some economic value and the cost of the asset should be measurable easily and reliably (IFRS, 2015). This will help the asset to be adjudged as one in the balance and will help to provide future earning capability for the organization thereby ensuring that the business will be able to use it in its future transactions. 2. Financial accounting provides business with an opportunity to either capitalize the assets or charge it as expenditure depending on the nature of the business, the purpose of the assets, the value of the assets and accounting principles and regulations which are followed. An organization adopting a particular method has to follow the same throughout and making changes would require making changes for all the past years so that consistency is gained. Therefore organizations look to adopt the method which is most feasible and will help them over a longer period of time. Capitalization of assets means recognizing assets as part of the financial statement and removing it from the income statement and showing it in the balance sheet. The entry is made on the premise that the asset will help to generate economic value in the future and charging all the cost in the same year would be incorrect as it would be recognizing expenses before they are met. This would also have a negative impact on the financial position and would not reflect the true position (Putra, 2010). Not capitalizing the cost of assets and charging it to the income statement would mean underestimating the profits for the current year and overstating the profits of the future year. This is incorrect so capitalization of assets should take place only when the business estimates to render the gains in the future year and the business is expected to make economic profits from it. The expenditure method of recording assets states that the cost which has been spent on the assets should be charged as and when they are met. The method stresses on the fact that since the cost has already being made and carrying forward the same cost to the next year doesn’t make sense. Instead the business should look towards making it as a charge in the income statement as cash outflow has already taken place. Not capitalizing the cost of assets and charging it to the income statement would mean underestimating the profits for the current year and overstating the profits of the future year (Putra, 2012). Further while looking to treat an asset as being an expenditure it is essential that the business understands the fact that the economic benefits of the same should be reaped in the same year. If the business is not able to reliably estimate the future earning capability of the asset then it should be considered as a charge against income and should be charged in the same year when it has been paid. This will thereby work on the principle of recognizing assets only when they have an economic value for the future and else will be a charge against income. 3. The difference between the three kind of depreciation method are as Straight Line Depreciation Method: This method of depreciation looks to charge the same value of depreciation every year and assumes that the same degree of depreciation takes place each and every year. For example suppose that the value of the asset is 10,000 and depreciation rate is 10% so that value of depreciation will be 1000 every year. This method also looks towards having greater depreciation in the latter years as the same value of depreciation is charged every year. This process also helps the investors to rely more as it ensures a consistent depreciation claim each year which thereby provides an opportunity to maximize the depreciation cost at the end of each year (Depreciation, 2015). This is a much simpler method and also helps to estimate the total value of depreciation which will be charged every year from the beginning of the life of the assets. Diminishing Value Method: This method of depreciation looks to charge different depreciation every year where the value of depreciation keeps on decreasing each year. For example suppose that the value of the asset is 10,000 and depreciation rate is 10% so that value of depreciation will be 1000 for the first year. It will then have a residual value of 9000 which would mean that the depreciation for the second year would be 10% of 9000 i.e. 900 and would thereby keep on decreasing each year. This method also looks towards having lower depreciation in the latter years as the value of the depreciation keeps on reducing every year (Depreciation, 2015). This process increases the risk for the investors as the value of the depreciation keeps on changing and reduces at the latter year. This is a complex method and also requires continuous evaluation of the depreciation which has to be charged every year and keeps on decreasing. Pool Depreciation Methods: This is a method of depreciation where assets which have a small value are pooled together and a single depreciation is charged by considering the asset to be a single one. This method requires the usage of diminishing depreciation method where depreciation changes every year and is higher in the beginning and reduces in the latter year as shown above. The different assets which are pooled together should have an individual cost of less than $2000 or the depreciated or adjustable tax value should be less than $2000. In addition to it those assets are to be used 100% for the business or will provide fringe tax benefit in case the use of the asset for the business is less than 100%. This method also requires that the depreciation rate which is chosen will be the lowest rate of depreciation which any pool asset has (Depreciation, 2015). This method helps to ensure that business have to look at a single depreciation charge for all the assets thereby simplifying the work which has to be carried out. 4. Assets in New Zealand are recognized on the same principle that is anything which is tangible or intangible which can be possessed and helps in the generation of economic value is being termed as assets. It is further stated that assets to be anything where it is probable that future economic value will be generated through it and the cost of the asset can be measured accurately and reliably. The reliable principles look at ensuring that the cost are those which are incurred at the time of installation of the plant and subsequent addition is made in case some service arrangements or replacement is carried out. This thereby helps to identify the mechanism through which identification of assets is done and needs to produce value for the future. The most important thing which needs to be considered is that the asset should be capable of producing some value in the near future and should have some economic value and the cost of the asset should be measurable easily and reliably (New Zealand. 2015). This will help the asset to be adjudged as one in the balance and will help to provide future earning capability for the organization thereby ensuring that the business will be able to use it in its future transactions. This thereby looks to determine the manner in which assets are recognized in New Zealand and the manner in which different principles have to be followed Further, the authority of New Zealand provides the flexibility in choosing the depreciation method which businesses think to be the best one. The only requirement is that any method which is chosen has to be adopted for all the assets and the procedure which is followed should be followed continuously so that consistency is ensured. In case change in deprecation is done than the same has to be carried out for prospective year so that the financials are consistent and helps to provide the user with correct position of the financial statement. The government has provided the required flexibility where local businesses in New Zealand can choose the method which they think is best. This has helped to ensure that the financials are better presented and has helped the economy to ensure that the mechanism is as per the requirements. The rate of depreciation which has to be charged has been provided and businesses has to ensure that the different assets are charged the depreciation which has been provided by the different standards (New Zealand. 2015). Thus the process has helped to reduce differences and have ensured that all businesses are prepared based on the same dimensions and reflects the manner in which different financial planning is being carried out. References Depreciation, 2015. Depreciation Method for Fixed Assets. Retrieved on May 6, 2015 from https://www.ird.govt.nz/business-income-tax/depreciation/bit-depreciation-methods.html IAS, 2015. Recognition criteria for Assets. Retrieved on May 6, 2015 from http://www.iasplus.com/en/standards/ias/ias16 IFRS, 2015. Recognition Criteria of Assets. Retrieved on May 6, 2015 from http://accounting-simplified.com/assets-recognition.html Putra, L. 2012. Deciding Whether to Expense or Capitalize Fixed Assets Related Expenditure. Retrieved on May 6, 2015 from http://accounting-financial-tax.com/2012/02/deciding-whether-to-expense-or-capitalize-fixed-asset-related-expenditures/ Putra, L 2010. Accounting for Fixed Assets Purchase & Cost Acquisition. Retrieved on May 6, 2015 from http://accounting-financial-tax.com/2010/06/accounting-for-fixed-asset-purchase-and-cost-capitalization/ New Zealand. 2015. Accounting Regulation. Retrieved on May 6, 2015 from www.IRD.govt.nz Read More