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Fixed Assets management through IFRS

Mariam Koyava.jpgMariam Koyava
Aug 06, 2017

After the introduction of the Law on Financial Accounting and Auditing into the Georgian legal framework, IFRS became a crucial element. As the general awareness of these standards is very low, 2017 will be a great challenge for accountants and financial reporters.

Of the International Financial Reporting Standards (IFRS), we would like to pay particular attention to IAS 16, which focuses on property, and plant & equipment (PPE). This standard provides detailed guidance on recognition, accounting, overall management and disclosure requirements for fixed assets. Based on IAS 16, each and every unit of fixed assets which satisfies the asset recognition criteria will be initially measured at cost. However, the optional exemption for deemed cost (the amount used as a surrogate for cost or depreciated cost at a given date) optional exemption permits the carrying amount of an item of property, plant & equipment to be measured at the date of transition at deemed cost. When the deemed cost is used to establish the cost of fixed assets it becomes the new IFRS cost basis at that date.

In contrast to the current accounting and reporting of fixed assets, IFRS requires further valuation of property, plant & equipment between either cost or revaluation model. If the company's fixed assets do not operate in technology-intensive areas where market conditions change very frequently, we recommend retaining the cost model due to its simplicity and lower implementation and monitoring costs compared to the revaluation model.

As a next step, it is important to analyze property, plant & equipment individually and group these assets into different aggregate classes, such as land, buildings, machinery, office equipment, construction in progress, etc.

In addition, classes should be divided into smaller subcategories. For example, the office equipment class could be divided into computers, scanners, printers, desks, shelves, etc.

In the meantime, consider the appropriate depreciation method for your business and, with the help of qualified professionals, estimate the useful life for each subcategory. Last but not least, for IFRS transformation purposes, you should recalculate the accumulated depreciation and the current depreciation expense for each class.

Please also note that with respect to property, plant & equipment, you have the following disclosure requirements in the notes to the financial statements:

  1. The basis for calculating the cost of fixed assets
  2. The method used to calculate the depreciation expense
  3. Estimated useful lives of the classes
  4. A reconciliation of the carrying amount at the beginning and end of the accounting period
  5. The existence and amount of title restrictions on title, and property, plant & equipment pledged as security for liabilities
  6. The amount of contractual commitments for the acquisition of fixed assets

In order to start the necessary works concerning property, plant & equipment transformation it is important to first create an inventory of each fixed asset item. Also, review the financial statements of companies operating in a similar industry (however, these financial statements must be prepared in accordance with IFRS) and analyze what other valuation methods are used by your peer companies or the industry in general.PPE-Register-ENG-1024x82.png

As with all management estimates, it should be noted that the useful life of each asset class should be reviewed at least annually. If there are significant deviations, the useful lives must be adjusted accordingly.

Comparing the IFRS fixed asset values with the existing figures results in the IFRS adjustment, which affects both the balance sheet and the income statement.