6BUS1003 – Advanced Corporate Reporting |
With reference to the measurement of tangible non-current assets, critically evaluate whether financial statements prepared using IFRS’s provide useful information. Use specific examples from the annual reports of FTSE 100 companies to illustrate your points.| |
3rd December, 2012|
Word Count: 2004|
As the business environment grows and companies find new ways to expand into their respective - or even new – markets, it is important that reporting standards stay up to date with changes and continue to assist companies in providing their users with useful accounting information. Information is labelled as being useful when it meets the qualitative characteristics set out by the International Accounting Standards Board (IASB). The IASB is responsible for “the development and endorsement of International Financial Reporting Standards (IFRSs)” (IFRS, 2011). The qualitative characteristics consist of both fundamental and enhancing features. This paper will focus on the main characteristics which are: relevance, faithful representation, comparability and the ability to understand the information, and will be applying these to the techniques used to reliably measure tangible non-current assets. In order to reliably measure these assets it is essential to be consistent with the measurement technique chosen. At a recent conference Hans Hoogervorst, the chairman of the IASB, admitted that he was “struck by the multitude of measurement techniques” and realises that measurement is a “thorny issue” which needs tackling (Hoogervorst, 2012). Indeed, when it comes to techniques there is: historic cost, fair value, realisable value, value in use and many more. In response to this plethora of measurement techniques it is clear to understand why Hans Hoogervorst believes that “accounting standard-setters come under so much pressure” (Hoogervorst, 2012). Considering this stems the first issue concerning multiple measurement techniques – comparability. As soon as more than one option is provided and choice is open to organisations, comparability is lost as you cannot usefully compare the two business’ non-current asset values. In addition to this, the multitude of techniques also introduces a problem of conflict; a ‘trade-off’ in the dominant characteristic. Information which is relevant may not be reliable and vice versa; yet both need to be considered in order to label information as being useful. To faithfully represent a transaction indicates reliability; hard evidence that this is the reality. However, reliability often conveys a sense of the information being out of date – especially when taking a historic cost approach – and therefore lacks relevance. A relevant example of this would be the figure representing a vehicle in the Statement of Financial Position (also, balance sheet). A reliable figure would be what was paid for the vehicle; proof of this can be provided in the form of an invoice or receipt. Relevance however is now somewhat lacking due to this information not portraying the true value of this vehicle a year on at the date of the annual reports being published. The definition of a tangible non-current asset under the relevant standard – IAS 16 ‘Property, Plant and Equipment’– is: “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”, which has physical substance and “can be measured reliably” (IAS Plus, 2012). However, as already discussed, measuring reliably is not an easy task. Consider the historical cost approach in more detail; a backward looking view is adopted. When measuring tangible non-current assets with this approach, a useful life is calculated. This useful life however is only an estimate, a subjective approach to measure how long an asset will be producing economic benefits for. Also, avoiding material error with this estimate is...