An insight into some international accounting standards

Category: Accounting

International Accounting Standard (IAS) is a standard use to ensure appropriate account record in book. International financial reporting (IFR) is a conceptual framework on how corporation include necessary information in the report. Therefore, IFR provides relevant, understandability, reliability and comparability financial report base on IAS standard.



Lease is an agreement where lessees obtain the right to use the assets in return for payment to lessor in specified time (IASB 2003b, pg4). Management need to aware the regulation of IAS17 while view of lease due to IAS17 associate with creative accounting and there will be off balance sheet finance.


IAS17 is relevant in enacted and attempted to force corporation in creative accounting which will affect true and fair view of financial report and influence management decision making. IAS17 distinguish lease using few criteria to explicit rule. Those rules allow off balance sheet financing to continue and provide justification of the treatment.

IAS17 recognise lease as finance lease if risk and rewards are transfer to lessee; specialise assets only use by lessee without major modification. Leases with bargain purchase power; lease period is most of assets economic life and present value of lease amount is greatly than fair market value. Operating lease is all leases besides finance lease (IASB 2003b, pg4). Therefore it relevant on how to classified lease.

Lessee in finance lease allowed offsetting taxable profit by using assets allowances. Lease payment in operating lease is tax deductable most of the time. Thus IAS17 is relevant in taxation for both lessor and lessee to gain a tax advantages.


Operating lease, lessees recognise lease payment as expenses but lessors recognise lease as income. Both recognise over its lease term on straight line basis. Finance lease, lessees recognise as assets and liabilities in the balance sheet. Lessors recognise as receivable base on net investment in lease. Thus it's understandability on how operating and finance lease recognising for both parties.

IAS17 had created a clear understandability on the treatment of depreciation and who entitle to depreciate. In finance lease, the assets had depreciated over its lease term and useful life by lessee. Lessors of operating lease depreciate assets base on consistent method for similar assets in their book over its useful life.

Lease may not request any down payment but with fixed lease repayment. Therefore it will be more cash for companies to generate more profit. Fixed lease payment and interest provide more accuracy budget item. Lease is flexible because lease agreement can be tailored to meet requirement of the lessee.


IAS17 not apply in both investment property and biological assets that held by lessees under finance lease and provided by lessors under operating lease (IAS Plus, Deloitte). IAS17 also not apply to exploration of mineral, licensing such as copyright of music and similar items so it's reliable in defined the industries and scope of lease.

Disclosures of lease cause IAS17 more reliability because in lease rental treatment, lessees recognise contingent rent as an expense but lessors recognise contingent rent as an income. In finance lease, lease payment (income) should separate to interest and principle. Interests recognise as expenses and principle recognise in liabilities (assets).

Lessees in finance lease recognise assets and liabilities at fair value or initial direct costs in balance sheet. In case fair value lower than lease assets, present value of minimum lease payment is recognising at the beginning of the lease.


IAS17 had standard and consistent rule of lease for corporate to follow therefore its comparable. It allow comparable between two different corporate in similar industries. It also can compare intercompany with different financial year to ensure their performance. Besides comparable result can be guidance for corporation when have new lease.

Comparable can be making in sales and leaseback transaction by helping corporations determine the selling price and leaseback amount of assets. Thus assets of companies will not either under or over sales and leaseback. Excess of proceeds is amortised over lease period. In operating lease, sales price equal or below fair value should recognise in income statement. Example, Malaysia CIMB bank had entered into sales and leaseback agreement in early of 2009 and they hope to complete this transaction for other branch in 2010.

On disclosure of lease, interest and principle is separated therefore it comparable on lease interest which only for finance lease. By compare lease interest with similar assets lease by the corporation or compare with different corporations hold similar assets help management to monitor both current and future cash flow.


IAS17 is relevant due to rapid growth of creative accounting such as off balance sheet finance. IAS17 help to understand accounting rule of finance and operating lease. IAS17 is reliable in disclosure of lease that ensures uniform in financial reporting. IAS17 is comparable due to consistent of standards.



Borrowing cost is the interest or other costs incurred from borrowing fund for corporation to operate their business and generate profit. Borrowing costs can be bank overdraft; loan and amortization of discount costs (IASB23.4). Furthermore finance charges for finance lease and exchange rate gain or loss from foreign currency borrowing also part of borrowing costs.


Assets that necessarily or take substantial period of time to get ready of its intended use or sales is known as qualifying assets so it's relevant in define qualifying assets. Qualifying assets include manufacturing plant; investment properties; intangible assets and power generating facilities during construction and development period or ordering period for inventories (IAS23, IASC Foundation Education).

Borrowing costs which directly related should capitalise or recognise as a part of assets costs with consistently to all construction and production of qualifying assets. Otherwise borrowing costs are recognising as expense in the period incurred.

It's relevant in case where corporation does not need borrowing for acquisition or productions of qualifying assets but for internal resources such as investment in subsidiary. Consequently this borrowing is not a direct costs but opportunity cost related to corporation benefit by obtain internal resources which not directly related to acquisition or productions.


Funds borrow specifically to obtain qualifying assets, actual borrowing costs capitalise during the period less any investment income arise from it. Funds borrow for general purpose but obtain qualifying assets, capitalise costs is based on capitalisation rate which is weighted average of borrowing costs. Total borrowing costs capitalise cannot exceed total borrowing costs incurred during the period. Thus IAS23 make cost of assets capitalise more understandable.

IAS23 create clear and understand picture on commerce, suspense and cease for capitalisation of borrowing costs. Capitalisation should be commerce when expenditures to acquire the assets and borrowing costs are incurred. Furthermore, it must be capitalise when activities to prepare the assets for intended to use or sales are in progress.

In other hand, capitalisation should be cease when development had fully completed and assets are ready to use or sales. Capitalisation should suspend on the period when activity development of assets is interrupted due to market force such as poor sales. Temporary interrupted of development such as bad weather should continue unless there is reasonable assurance that active will resume shortly.


IAS23 is reliability in the scope of applied borrowing costs. The standard does not apply in actual or imputed cost of equity such as share capital which is not classified as a liability but as equity. It's also not applied to qualifying assets measured at fair value, for example biological assets and certain inventories like inventories in used.

Borrowing costs is discloses based on its accounting policy. Amount of borrowing costs capitalised should recognise in period where borrowing costs incurred. In case of general borrowing costs, capitalisation rate is used to determine the amount to capitalise with exception total amount capitalise cannot exceed total borrowing costs. Therefore its make IAS23 more reliable when disclose in financial report.

Investment costs of assets will be more accurate and reliable because IAS23 request capitalise of borrowing costs which probable affect future economic benefit(IASB revised 2003, pg12). Moreover, it helps to achieve better matching of costs and revenues for the extension period of construction or development.


Consistency of accounting treatment allow corporation to compare their financial statement to ensure their future and pass performance and monitor their gearing level. Besides, it useful for corporation to choose appropriate way to arise fund and lowest interest rate base on the fund borrows.

IAS23 tapping with others IAS such as IAS17: Lease accounting, IAS36: Impairment of assets to enhance comparability. It useful for corporation to pick the most appropriate method payment (i.e.: assets should be capitalise base on borrowing costs or lease according to finance lease standard). By tapping with IAS36, comparable between carrying amount and recoverable amount of qualifying assets is possible and this will discuss further in IAS36.

IAS23 also comparable between actual costs incurred and budget costs. Example when part of the development complete, management able to compare the actual costs incurred during this period with budget. Therefore this will help management to monitor costs incurred for the project will not over the budget.


IAS23 is relevant in defined qualifying assets. IAS23 create clear and understand picture on commerce, suspense and cease for capitalisation of borrowing costs. IAS23 is reliability in the scope of applied and how to disclosure. IAS23 is comparable base on the consistency of accounting standards and tapping with others IAS.



Impairment of assets is to ensure assets in corporation are carried base on amount not more than its recoverable amount. This is important standard which will influence management making decision. IAS36 will reflect financial report by eliminating creative accounting issue.


IAS36 is relevant in defined recoverable amount as the higher of the net selling price or value in use (ACCA, 2009, pg103). Net selling price is fair value less costs to sell or amount willing to sale in binding sale agreement (IAS36, IASC Foundation Education). Value in use is the present value of assets by calculating future value of assets either continuing use or disposal of the assets using discounted rate (IAS plus, Deloitte).

IAS36 not only cover assets under IAS16 but also cover assets under IAS38. It's relevant in scope to covers such as investment property carried at costs (IAS plus, Deloitte). IAS36 are exception on covering inventories, deferred tax, financial assets, assets arising from employee benefit and insurance contract assets which cover by other IAS (IAS plus, Deloitte).

Fair value is appropriate value to determined assets costs as compare to historical costs. Fair value is always base on current condition and useful of the assets. However historical costs are the past costs which are not based on current condition but past condition of assets. Consequently IAS36 is relevant by proving fair value is better costs for impair assets.


This standard creates clear understandable on how new carrying amount taken place and amount to depreciate. Where carrying amount is greater than recoverable amount, recoverable amount will replace existing carrying amount become new carrying amount. Depreciation of assets will adjust and calculate base on new carrying amount (i.e. recoverable amount).

Cash-generating unit is smallest identifiable group of assets that general cash inflows depend on cash inflow from other assets (IAS plus, Deloitte). Cash-generating units are understandable on how to determine recoverable amount for its individual assets which must impair but unable to estimate recoverable amount (IAS36, IASC foundation Education).

IAS36 disclose impairment loss whereby carrying amount greater than recoverable amount. This exceed amount recognise as expense in income statement. In situation cash-generating units, impairment loss is allocated by reduce carrying amount of any goodwill allocated in cash-generating unit, then follow by pro rata basis for other assets in unit.


IAS36 is reliable in measuring when assets should be impaired. Assets should recognise as impairment loss if carrying amount of assets are more than recoverable amount. Otherwise there is no impairment recognise. Example, unused or damage assets of corporation should impair, assets still use by corporate in either generate profit or run daily activity, no impairment should recognise.

Impairment indications are base on external and internal issue by performs impairment review. External issue such as rapid changing in technological, decline in market value and changing in interest rate base on borrowing costs of assets such as base lending rate (BLR). Internal issue can be change in natural use of assets and physically damage of assets.

Impairment test is an estimate recoverable amount and allow impairing goodwill annually (IAS plus, Deloitte). Goodwill must be allocated to each of the acquirer's cash generating units before proceed impairment test. When implied values are less than carrying amount, then goodwill must reduce its carrying amount to implied value.


IAS36 allow comparing between its initial carrying amount and recoverable amount. In cases recoverable amount is not equal to carrying amount, initial carrying amount that had capitalise should either written down or written off to show actual assets value. The process written down or written off the value of assets also applied to qualifying assets in IAS23.

Recoverable amount is base on value in use and net selling price which will influence cash flow. Therefore, management able to compare cash flow and forecast cash flow at least five years which request by standards. This help management to monitoring their cash flow in future and ensure corporation going concern.

Tangible assets and intangible assets had different disclosure in financial statement. Therefore it's comparable for the ways to disclose. Tangible and intangible assets recognise impairment loss as expenses which are tax deductable all the way. Useful life of the intangible assets should specify disclose when impairment loss is recognised due to infinite useful life of intangible assets cannot be impaired.


IAS36 is relevant in defined recoverable assets, net selling price, value in use and scope to use. IAS36 have a clear understandability on how new carrying amount taken place and depreciation charged. IAS36 are reliability on how to measure and indicates impairment of assets. IAS36 is comparability in its carrying amount and recoverable amount.



Provision, contingent liabilities and contingent assets associate with off-balance sheet topic and will cause important information missing from balance sheet. Therefore objective of IAS37 is to ensure present obligation had proper recognise in financial statement base on past event.


Provision is a liability with uncertain time and amount example provision for doubtful debts. Contingent liability is obligation arise base on past event but uncertain future event occur out of corporation control such as loss in hedging for foreign currency. Whereby contingent assets is an obligation assets arise on past event but will confirm by uncertain future event which also out of corporation control like insurance compensation in event of fire.

Standard sets a relevant way to determine whether event should create provision; disclose as a contingent liability or no action. Provision is recognising if there is present obligation from past event, probable and estimate amount in payment. If there is possible obligation and payment not remote, disclose as contingent liability. Otherwise no action should be taking.

Provision is providing if probable transfer of economic benefit more than 50%. If less than 50%, contingent liability is disclose (IAS plus, Deloitte). Contingent liability is disclosed if corporation unable to estimate possible amount. Constructive obligation arises by established pattern of past practice and created valid expectation on third parties is recognise as provision. Therefore it's relevant in term use by standard.


Disclosures of IAS37 in the note of financial statement are base on sufficient information. This enable viewer and management to understand the nature, timing and amounts of the items incur in financial statement. It's also enable viewer to understand reason of such provision incur.

Review provision should be conduct at each balance sheet date. Base on review result, any necessary adjustment should be making and this will reflect current best estimation. Provision should be reversed if there is no probable of outflow resources required. This yearly review is request by standards and help to understand how provision affect balance sheet base on its adjustment.

IAS37 is understandarable on which value should provision recognise. Provision is recognising on balance sheet date so amount of provision to settle the obligation should be present value. Time value of money, provision influent cash outflow base on settlement date therefore settlement amount should be discounted back present value because the effect is material.


Lease specially addressed under IAS17: lease accounting, therefore IAS37 only applied to lease obligation like provide provisions for lease payment. IAS37 applied obligation on IAS17: benefit of employee such as provision for bonus and other employee benefit. From this point of views, IAS37 is reliable in the obligation to apply the standards.

Book value at beginning and end of period; allowance make; amount used and unused and increase of balances subject to discount for the period should disclose by corporation when provision is recognise (IAS37, IASC Foundation Education). In case provision not required to provide comparative information, brief description of nature and expects time of incur this obligation; indication of uncertainties in timing and amount and amount expected to reimbursement need to disclose clearly.

If there is possible of any outflow in settlement (inflow in economic benefit) is not remote (is probable), contingent liability (assets) should disclose at the balance sheet date with brief description of the nature where an estimate of its financial effect; indication of uncertainties in timing and amount and expected amount to reimbursement.


Risk for corporation to collect back payment is higher base on uncertainty of debtors and long payback period. In this case, provision for doubtful debts is recognised to prevent bankrupts of debtors. Consistency of provision is comparable between different financial period to ensure percentage of collect back the payment and certainty of debtors

Provision for lease payment in operating lease is based on past amount therefore there should no different unless there is an increasing in lease payment which had agreed by both parties or possible wrongly bill by lessor. By compare this; management may aware there is creative accounting created by over or under provision such as Enron and Worldcom case

There is comparable between present value and future value to settle its obligation. Present value is more appropriate value for provision to settle it obligation had discuss in above. Future value is not so suitable because there is uncertainty in future event and time value of money which may affect current cash flow.


IAS37 is relevant in define provision, contingent liability and assets; when should recognise and term used by standard. IAS37 created clear understandability on the useful of disclose in IAS37. Moreover, IAS37 is reliable in scope and information should be disclosed. IAS37 is compare by tapping with other standards and different value.

In conclusion, IAS is interlinking and provides relevant information which will influence management decision. Viewers will understandard financial report base on information can perceive by viewer abilities. Furthermore IAS is reliable in provide complete and faithful representation of financial report. Consistencies and discloser of IAS are comparable and evalueated.