04-18-2007, 09:24 PM
Dear,
IAS 16 does not provide for any materiality criteria for recording the property, plant and equipment. The stipulation laid down by IAS is the probability of future economic benefits by virtue of holding such asset and the reliable measurement of its cost.
I know this practice is prevelant in many companies to settle some threshhold for this purpose. However, I cannot understand that how flowing of future economic benefits could be ascertained by deciding a threshhold. There is no such stipulation or guidance in IFRSs. Simply saying that, IFRSs are not meant for immaterial items, will not lead us to conclude that some thresh-hold is likely to be settled for differentiation between capital and revenue expenditure.
In my view, if any item (asset) has a life for more than one year and its utility remains for the entity then it should be capitalized. This is the best tool to place the physical control on misplacements / movements of such assets. Because, if capitalized, it will also appear in the fixed assets register with all location and custodian information. Any entity normally does not maintain same registers for revenue items. Safegaurding of assets is main responsibility of the management. TR-06 issued by ICAP has stipulated certain minimum requirements of fixed assets register and also stipulates the physcal verification of fixed assets after specified intervals. So that the balances appearing in fixed assets register could be verified with physical balances and adjustements be made for the shortages found during physical verification.
I cannot understand how an entity will ensure safegaurding of all its asset of whatever value if it will not maintain the fixed asset register. Further, if items below the threshhold are not capitalized, how their physical existence and control on their misplacements can be ensured. In my view, recording the assets as capital expenditure has direct linkage with careful custodianship of such items. If these items will be charged to revenue, the management, in my view, will hardly be able to safe gaurd them even if these are calculators of Rupees 500 each. What requires to be decided is, does it has useful life of more than one year. If this condition is met, in my view, IAS 16 does not allow to expense it out. A company cannot affoard losing such items solely with the reason that these fall short of thresh-hold decided by it.
I understand that so many accounting policies adopted traditionally by various companies need to be evaluated. For example, besides above, IAS 16 (para 8) requires capitalizing all major spares and stand by equipments when an entity expects to use them during more than one period. Only minor spares and servicing items are to be kept as inventory. All major spare parts and supporting equipments qualify for capitalization along with the property, plant and equipment. I rarely see this accounting treatment by companies although wherever new plants are errected, so many of such major spares and stand by equipments are accompanied by the main machinery. These are normally kept by entities as inventories. I want to clear that these qualify for capitalization, even if these are not issued for installations and are kept in stores. Huge expansion is seen in cement sector. But I expect Companies will rarely follow this stipulation of IAS 16.
Further to above, para 16 of IAS 16 explains the components of cost of an item of property, plant and equipment. I recommend you to see its sub para/clause (C). It stipulates the following to be recognised as part of cost of an item to be capitalized
"........the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period........."
This mainly happens in sugar manufacturing and oil extraction and refining business. However, it can happen in even other businesses. If such an estimated expense is to be capitalized at the time of initial recognition of the asset, the relevant provision will also be required under IAS 37 to complete the double entry.
Except for OGDCL, I rarely see this accounting treatment by companies.
I know I am talking on more complex issues than the simple issue raised by you. In fact I just endeavor to point out that so much happening as traditional acounting practice in Pakistan needs to be re-considered and evaluated.
I have full regard and respect for the opinion of any other professional and I know that I cannot alter any conclusion that may be drawn by any one else on this forum. However, in my view, this accounting policy needs to be properly evaluated specially where even the thresh-hold decided cannot be implemented with a clarified difference. I mean the situation pointed out by you. I may be wrong as I am not one of those who make the pronouncements. I just shared my views on this matter raised by your goodself.
Best regards,
Kamran.
IAS 16 does not provide for any materiality criteria for recording the property, plant and equipment. The stipulation laid down by IAS is the probability of future economic benefits by virtue of holding such asset and the reliable measurement of its cost.
I know this practice is prevelant in many companies to settle some threshhold for this purpose. However, I cannot understand that how flowing of future economic benefits could be ascertained by deciding a threshhold. There is no such stipulation or guidance in IFRSs. Simply saying that, IFRSs are not meant for immaterial items, will not lead us to conclude that some thresh-hold is likely to be settled for differentiation between capital and revenue expenditure.
In my view, if any item (asset) has a life for more than one year and its utility remains for the entity then it should be capitalized. This is the best tool to place the physical control on misplacements / movements of such assets. Because, if capitalized, it will also appear in the fixed assets register with all location and custodian information. Any entity normally does not maintain same registers for revenue items. Safegaurding of assets is main responsibility of the management. TR-06 issued by ICAP has stipulated certain minimum requirements of fixed assets register and also stipulates the physcal verification of fixed assets after specified intervals. So that the balances appearing in fixed assets register could be verified with physical balances and adjustements be made for the shortages found during physical verification.
I cannot understand how an entity will ensure safegaurding of all its asset of whatever value if it will not maintain the fixed asset register. Further, if items below the threshhold are not capitalized, how their physical existence and control on their misplacements can be ensured. In my view, recording the assets as capital expenditure has direct linkage with careful custodianship of such items. If these items will be charged to revenue, the management, in my view, will hardly be able to safe gaurd them even if these are calculators of Rupees 500 each. What requires to be decided is, does it has useful life of more than one year. If this condition is met, in my view, IAS 16 does not allow to expense it out. A company cannot affoard losing such items solely with the reason that these fall short of thresh-hold decided by it.
I understand that so many accounting policies adopted traditionally by various companies need to be evaluated. For example, besides above, IAS 16 (para 8) requires capitalizing all major spares and stand by equipments when an entity expects to use them during more than one period. Only minor spares and servicing items are to be kept as inventory. All major spare parts and supporting equipments qualify for capitalization along with the property, plant and equipment. I rarely see this accounting treatment by companies although wherever new plants are errected, so many of such major spares and stand by equipments are accompanied by the main machinery. These are normally kept by entities as inventories. I want to clear that these qualify for capitalization, even if these are not issued for installations and are kept in stores. Huge expansion is seen in cement sector. But I expect Companies will rarely follow this stipulation of IAS 16.
Further to above, para 16 of IAS 16 explains the components of cost of an item of property, plant and equipment. I recommend you to see its sub para/clause (C). It stipulates the following to be recognised as part of cost of an item to be capitalized
"........the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period........."
This mainly happens in sugar manufacturing and oil extraction and refining business. However, it can happen in even other businesses. If such an estimated expense is to be capitalized at the time of initial recognition of the asset, the relevant provision will also be required under IAS 37 to complete the double entry.
Except for OGDCL, I rarely see this accounting treatment by companies.
I know I am talking on more complex issues than the simple issue raised by you. In fact I just endeavor to point out that so much happening as traditional acounting practice in Pakistan needs to be re-considered and evaluated.
I have full regard and respect for the opinion of any other professional and I know that I cannot alter any conclusion that may be drawn by any one else on this forum. However, in my view, this accounting policy needs to be properly evaluated specially where even the thresh-hold decided cannot be implemented with a clarified difference. I mean the situation pointed out by you. I may be wrong as I am not one of those who make the pronouncements. I just shared my views on this matter raised by your goodself.
Best regards,
Kamran.