Accounting standards are introduced to make sure good transparency and comparability of business financial statements where all the relevant information is made available to the public (European Commission, 2012). Why do we really need a high quality accounting standards at the first place? This is because it is important for people to follow the accounting regulations made. These are done by increasing public confidence on published financial statements and at the same time, meet the aim why the accounting standards formed at the beginning (US Securities and Exchange Commission, 2000). Accounting standards need to be in high quality because it is important for the market economy operation as any decision making made for business operation depends on the information given in the financial statements (US Securities and Exchange Commission, 2000). This essay will cover the characteristics required for high quality standards. And it will also cover which characteristics is presence or absence in FRS15 and IAS 16.
There are several characteristics required for an accounting standard for it to be a high quality standard. The primary attributes are relevant and reliable (US Securities and Exchange Commission, 2000). Standard should be able to pick up and enhance information provided so that it is available for any business decision making. Consistency in standard's policies and principles are also required where similar situations can be handling easily using the same principle. By using consistent principles, it helps to improve comparability between company data and information between companies.
The ability to reflect to real economic situation is one of the attributes of high quality standards (Wulff & Koski-Grafer, 1998). Being able to apply in real situations and not just based on theoretical situations help to reduce any problems that may arise in the accounting transactions and at the same time smooth out the business operations and data gathering (Knutson & Napolitano, 1998). Flexibility come into place as it is impossible to apply all real business situations from a rigid accounting standard (Wulff & Koski-Grafer, 1998). Another attribute is that the accounting standard should be easily understood by the professionals so that they can apply it to the transactions without any difficulties (Kaplan & Fender, 1988). When it is easy to understand a certain standard, it can be used by not only the local companies but also the companies overseas. This is important to companies like multi-national corporations where they have branches all over the world and required standards that can be applied in the countries they involved with. For example Tesco PLC and Wal-Mart Stores, Inc. where both companies have retail stores all over the world. Thus when a completely different standard used for each branch of the companies; it is really hard to give information for comparability and this affect the decision making made to change or improve any operations.
FRS 15: Tangible Fixed Assets, and IAS 16: Property, Plant and Equipment, are accounting standards as suggested from their title; handle the treatments of tangible fixed assets own by companies. Both standards contain the treatment on depreciating fixed assets, disposal of fixed assets, revaluation of fixed assets and so on.
FRS 15 and IAS 16 have specific definitions for tangible fixed assets and the principles basis used in treating fixed assets. These provide consistency that is required in a high quality accounting standard. For example, a specific first measurement of fixed asset is used and this follows throughout the expected life of assets thus providing consistent calculations throughout the accounting years (Adams, 2001). Consistency is also applied in revaluation of asset where when a company want to revaluate a certain fixed assets for such as machinery equipment, all other similar machinery equipment are also required to be revaluate (Adams, 2001 & Accounting Standards Board, 1999). Thus this will keep all similar assets to be up-to-date with its market value (Adams, 2001).
Both standards have certain flexibility to them. For example, there are several methods in calculating depreciation. Companies can make their own judgement on which method to choose for measuring their fixed assets depreciation and the disposal value at the initial measurement of the asset. In a way it helps the professionals to smooth out the measurement suitable to their financial position. But at the same time, conflicts may arise when the company make a wrong judgment in its policies and may try to change them. Thus a compromise is required between flexibility and following specific principles.
The standards are also to a certain degree able to relate to real economic activities. This applied to the revaluation of fixed assets to its present market value instead of its historical cost (Eccles & Holt, 2001). Thus as mention before, it helps to up-to-date the assets involved and at the same time bring the companies to its more realistic financial position.
The standards' contents are easy to understand for the professionals. Detailed contents, definitions and principles are available to be used for any situations related to fixed assets. For example, thorough definitions on what a fixed asset is, what can be considered direct attributable costs to fixed asset or what is an economic life of an asset (Accounting Standards Board, 1999). The standards not only help the professionals and internal management but also the external parties. An easy to understand standards' content improved the information provided. And at the same time, help to disclose relevant information in financial statement in a way that external parties such as investors are able to understand the company's financial position and its performance for the accounting period (Adams, 2001). Thus the information regarding fixed assets is reliable for use in any decision making.
However, comparability is not fully presence as a characteristic in these standards. As mention before there are flexibility in methods calculating fixed assets in term of depreciation and in treatment of interest loan incurred to purchase fixed assets. Due to judgement of the professionals and company's policies, different companies may have different treatment on similar assets thus comparability weakens as each method reflects differently to the companies' financial positions.
In conclusion, there are several attributes required in a high quality accounting standard. FRS 15 and IAS 16 have most of the attributes. However, further improvement on the standards may be required to adapt to the fast moving economy.
