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The Economic Substance of Accounting Treatment of Property, Plant and Equipment

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The Economic Substance of Accounting Treatment of Property, Plant and Equipment

Related IASs and Faithful Representation
April 03, 2010

Theoretical principles of conceptual framework help determine which events should take place and when. They aid professionals with development of new standards and principles. The users of financial statements of public companies depend on the faithful representation of the entity’s financial statements. The financial statements must be adjusted on a regular basis to reflect economic substance of their information, as the users need these amounts to faithfully represent the account balances as an indicator of a company’s future earning power. As IFRS is introduced into Canadian practice in 2001, companies will be required to focus on which methods will emphasize economic substance with the changes in accounting policies. In the following discussion, we will focus one aspect of the conceptual framework around IFRS, in particular, economic substance, as it relates to the application of IFRS in reporting Property Plant and Equipment (PPE.)
Recognition of PPE to Reflect Economic Substance
Changes to the recognition of property, plant, and equipment Among the most significant changes are the options of accounting policy regarding the ongoing valuation of an asset on a class by class basis. Under GAAP, the cost model was the only choice; IFRS provides two options, the cost model or the revaluation model. These options are mutually exclusive; one policy must be chosen and followed on an ongoing basis.
By using the cost model the assets are recorded at cost, and then depreciated over the course of its useful life. The amount affects the balance sheet, and the income statement. In the revaluation model, the assets are revalued by a third party annually, changes in fair market value, increasing or decreasing but…...

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