Part 2 – The “rules of the game”
The Standards of GRAP describe the “rules of the game” that apply when preparing the financial statements, and outline the broad recognition, measurement, presentation and disclosure requirements.
The “rules” are broad so that they cover a variety of situations. It is generally understood that the users of the financial statements would have a basic understanding of the “rules” applied in preparing the financial statements. What is most helpful to users, is understanding how the “rules” have been applied by the entity to the transactions, events or other circumstances that are reflected in the financial statements.
When we review financial statements, we find generic accounting policies that simply repeat the “rules” outlined in the Standards. As an example, this is a typical accounting policy for property, plant and equipment….
Property, plant and equipment are tangible non-current assets that are used in the production or supply of goods or services, rental to others, or for administrative purposes and are expected to be used during more than one reporting period. The cost of an item of property, plant and equipment is recognised as an asset when it is probable that the future economic benefits or service potential will flow to the entity and the cost or fair value can be measured reliably. Classes of property, plant and equipment are measured subsequently using the cost or the revaluation model.
This is not a good accounting policy!
The accounting policy should…
- Explain what items are considered property, plant and equipment.
- Indicate whether cost or fair value is applied on initial recognition, and in what circumstances each is applied.
- Identify the classes of property, plant and equipment, and indicate what measurement model is applied, e.g. cost or revaluation, and whether it is different for classes of assets.
- Explain whether fair value or replacement cost is used to revalue assets.
- Explain how frequently, or under what circumstances, assets are revalued.
This list is not complete as there are various issues that should be considered, particularly if entities have complex items of property, plant and equipment. It is also important to note that entities only disclose accounting policies that are significant to the preparation of the financial statements and represent material items, transactions, circumstances and events in the financial statements.
Useful links:
GRAP 1 on Presentation of Financial Statements (paragraphs .127 to .134): access.
GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors (paragraphs .06 to .23): access.
FAQ 3.2 on How does an entity decide which accounting policies should be included in its financial statements?: access.
Disclaimer
This content has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved or otherwise acted on by the Board.