Australian Accounting Standards Board - Case Study Example

AUSTRALIAN ACCOUNTING STANDARDS BOARD 140 (AASB 140) Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction Australian Accounting Standards Board 140 is the Australian Board which is set to regulate the investment property (AASB 2006). This was amended from the International Accounting Standards Board. These standards were made under the Australian corporations’ act 2001. It also contains the AASB amendments up to 2010. The main objective of the Australian Accounting Standards Board is to identify how the investment property should be treated in accounting situation. AASB will be applied upon recognition, measure of the investment property and also will be applied when there is disclosure of the property invested. It is applied in the financial statements of the lessee of the property. AASB 140 excludes all matters which are discussed in the AASB 117 including; the types of finance leases, how income from the invested property is identified and the transactions of selling and leasing back property. AASB 140 is not applicable in Agricultural related assets and minerals such as oils and gases (Australian Bureau of Statistics 2006). The most common terms which are used in this Standard are; carrying amount- this refers to the recognition of the amount at which a property is valued. Cash which is the amount of the monetary value paid for an asset. Fair value refers to monetary payment which the two parties agree to transact business. Finally there is the property which refers to the investment and can be either a building or land. The purpose of the Australian Accounting Standards Board is to enhance the provision of the standards that guide the accountants in their financial obligations. It also provides useful information to be used by managers of Companies when making decisions of investments. After separating the assets into individual and Company assets the accountants will be able to adjust their financial statements. Arguments and principals of AASB They argue that any property that under the lessee can be recognized and held responsible as the investment (Matolecsy &Wyatt 2006). This is only possible when the property can be defined as the property for investment and fair value is charged by the lessee. The assets by asset basis make this classification possible. All the investment which is recognized as the property for investment will only apply fair value for its accounting. Any property that is held will earn profits or an appreciation (Chalmers & Godfrey 2006). Sometimes the investment property can earn both profits and appreciation of the capital. In this regard the cash flows which are earned by the property investment are independent of other property. This aspect separates the property that is owned by the individual and the property investment. Examples of property investment include land which is used for long terms business, land that is held now whose future has not been recognized, a building that is held an organization, building which is not occupied but held for later lease and finally any property which is being maintained for the future investment (Chalmers & Godfrey 2006). On the other hand the property which is not under AASB 140 includes the property which the owner intends to sale under the normal business operations, investment which is being held and maintained by a third party as recognized in the law of contracts, the property of the owner like the land held by the owner for future use, investment held by the owner for future improvement and any property of the owner which is due for disposal and finally we have the property which has been leased to another organization in account of finance lease (Chalmers & Godfrey 2006). Furthermore the entities which are non -profit making, the investment property can be invested so as to meet the delivery of services and its objectives instead of earning the profits or the appreciation of capital (Treasury 2012). In this case this property cannot be classified as investment property and therefore it will not be accounted for in the AASB 140. This property includes the long term property for special purposes and any property which is held for services which generate cash flows as a result of holding the property. There are properties which serve as multipurpose because they earn profit or capital appreciation and at the same time they are being held for production of good and services (Ritter &Wells 2006). If these portions can be leased differently the owner or the property will account them as different properties. But if they could not be leased together and a portion held for the production of goods and services, it becomes an investment property. Sometimes an entity can provide support services to the occupants of the property. In such cases the entity regards the property as the investment if the preparations of the services are made as a whole. A good example of this scenario is in the case where the owner of the building offers ancillary services like security, maintenance and cleaning of the building to the tenants who occupy the building. Significant services can also be offered. For instance in the case where the owner or the entity is in charge of the building the services which the guests receive are significant a whole according to the arrangements (Clikeman 2002). In this case, the owner of the building occupies the property and not the investment property. In this instance it is difficult to assess whether the significance of the services is so influential so that the property does not qualify to be an investment property. This is because the investment owner may delegate some responsibilities to third parties which will have different terms of the contract. AASB 140 argues that judgment is needed to evaluate if the asset belongs to the investment property or not. In this case the owner of the property will design a criterion so that the entity will be able to decide if the asset is an investment property. This criterion should be applied consistently so that financial statements are correct and in accordance with the law. AASB 140 also proposes that an entity shall disclose its financial statements and due to risk involved, this board proposes that the following information should also be disclosed; the Company should state clearly its policies and procedures regarding accounting and the various regulations governing the decisions made by the management. This is very important because these policies have significant impacts on the recognition of assets and when preparing the financial statements. There are cases where the entity can own leased property or the property occupied by a subsidiary. This property cannot be regarded as the investment property in the statements of accounts (Thorton 2010). The reason for being regarded as the property investment is that the property is being occupied by the owner from the group perspective. Furthermore because of the disclosure risks involved in business, the AASB proposes that an entity shall give out information about their future assumptions. Theses assumptions should include the uncertainty of measurements of asset because they will have significant risks which affect the carrying amounts of property and liabilities. This disclosure need to include the nature of the property and the carrying amount which is carried by each property. Under the standards of AASB 140 it recognizes property as assets under the following conditions; the probability of the asset will bring in cash flow to the Company in the future as it will be linked with the investment property and the asset will be recognized as the asset if it can be measured reliably in terms of cost (Ritter &Wells 2006). This principal is so important when accounting statements are being made. It will help the accountant to distinguish between the investment property and assets. Under this principal of accounting a Company assesses its investment costs at the time they incur. The recognition principal of AASB 140, any Company does not account for any costs incurred by the investment property in the process of maintaining that property like the servicing costs (Rowland 2009). These associated costs are identified in the profits made or the losses suffered. The daily running of the property includes costs of labor and the costs of purchasing minor parts to be used in the servicing. This accounting principal enables accountants to separate all the costs correctly so that they will get the correct figure of either the profit made or the loss. The investment property can be acquired by replacement of other assets. For instance the old walls of a Company can be replaced by new walls. In this case the recognition principal recognizes the carrying amount of that property. This carrying amount is in the context that cost was incurred when replacing the old walls for new ones at the exact time cost is incurred and therefore they should be reflected in the financial statements effectively. The AASB 140 also has the principal of measuring recognition (Ritter & Wells 2006). This principal of measurement recognizes the initial cost of the property. This initial cost is inclusive of any cost incurred during the transaction. However in the case of non-profit making organizations properties are acquired at no cost therefore the cost of this property will be recognized at the time of acquiring that property. The purchasing price of a property is considered as an expense and it includes the costs for legal services, tax and transaction cost. The factors that increase the cost of a property include material wastage, losses and costs for starting up the investment. Conclusion The main objective of AASB 140 is to determine how investment should be treated in the accounting scenarios (AASB 2006). AASB is the board that recognizes and separates the property investment regulations. The Australian Accounting Standards Board is responsible for separating different assets so that it will be easier for accountants to assess their investments (Chalmers & Godfrey 2006). This standard helps Companies to evaluate their performances as well as making future decisions regarding investment. AASB 140 simply assesses the investment property whether it is occupied by the owner or the Company. Australian Accounting Standards Board also aims at improving the economic standards of Australia because it reduces the cost of capital which leads to effective competition among the Companies. It also aims at building the confidence of the investors in Australia because it sets out clear Accounting policies which are clear to follow and understand. It distinguishes the property owned by an individual and an entity and it helps the accountants of a Company to easily recognize and measure the investment property and in this regard they make work easier for the accounts department of a Company in making the financial statements. AASB 140 starts with classification of investment property, recognition and measurement of investment property for easier accounting. References Australian Accounting Standards Board 2006, AASB 140, property investment, compiled AASB. Australia Accounting Standard Board 2004, AASB 140 investment property, Compiled AASB. Standard Australian Bureau of Statistics 2006, Measuring Australia's Economy, AusStats database. Chalmers, K & Godfrey, J 2006, property investment: Diversity of Practices and Potential Impacts from AIFRS Adoption, Australian Accounting Review, Vol 14, pp 78-129. Clikeman, P 2002, The Quality of Earnings in the Information Age, Issues in Accounting Education, 17, p. 411-417. Matolcsy, Z & Wyatt, A 2006, property investment and Financial Analysts, Accounting and Finance, Vol. 46, pp 467-732. Ritter, A & Wells, P 2006, property investment recognition, Asset Disclosures, Stock Prices and Future Earning, Accounting and Finance, Vol. 44, pp 563-953. Rowland, P 2009, Australian Property Investment and financing. Thomson limited publishers. Thorton, G 2010, Australian Accounting Standards Board, Thompson publisher. The Treasury 2012, Office of the Australian Accounting Standards Board, viewed 17 th April 2013 from http://www.treasury.gov.au/PublicationsAndMedia/Publications/2011/Portfolio-Budget- Statements-2011-12/Report/Office-of-the-Australian-Accounting-Standards-Board Read More