Accounting and Finance
Financial Reporting Assignment
This assignment I will be choosing to do international accounting standard 16 – property, plant and equipment. The IAS sets how businesses should measure their property plant and equipment that are held in the use of the production and/or supply of goods and services. The valuation of an asset can only be recognised if the asset can be measured reliably and is probable that future economic benefits will continue to flow to the entity. Measurement of assets is set on 2 models and depreciated in the similarly way on both. I have chosen the company royal Dutch shell to study my IAS and I will be determining the effect of measuring at costs other specific parts of the balance sheets/consolidated balance sheets.
On (Royal Dutch Shell, 2011) you can see the consolidated balance sheet, here they have listed their assets including PPE, they have gone into more detail in this on accounting policies where they have explained the Property, Plant and Equipment (PPE) will be recognised in the consolidated balance sheet at cost. PPE is being measure using the cost model and not the revaluation model. The business have calculated their yearend figures carried at cost less accumulated depreciation which is calculated on the basis of life time expectancy.
The value of PPE is broken down on (Royal Dutch Shell, 2011) where we have opening cost; it has been split in headings like exploration and production. Exploration costs relate to the capital expenditure needed for exploration like drilling costs. We can see they have also included additions in the table; this is where there have been major changes in the year in terms of new equipment. IAS 16 lists the importance of subsequent costs and clarifies clearly that it does not recognise the carrying amount of an item of property, plant and equipment the costs of the day to day servicing of the item. After the changes we can see they have subtracted the accumulated depreciation giving us the net carrying amount.
The definitive rules of IAS 16 allow a stern and rigid perception on capital expenditure, from various measurements it has many implications on other areas of accounts for example the ratio analysis. In this instance we can see a change, if hypothetically all other factors remained the same. Ratio such as the debt asset ratio conveys the proportion in how the company finances its assets. Companies with a high ratio tell us its finances a high number of its assets through debt and vice versa. If we analyze the previous year we can see that there was an increase of £9,376 million from years 2010 to 2011. If liabilities and all other figures remained the same then debt asset ratio would decline therefore mean the company is financing more of its assets through equity. By using other important ratios like the return on capital employed we use the operating profit to determine the effectiveness of capital expenditure. Provided all other figure to remain the same here we would see decrease in percent as more capital is employed for the equal amounts of profits.
Recognition costs also transcend from initial outlay of the asset. Included in this is the cost attributable to bringing the asset to its location, as well as the costs in the asset being operational intended by the management. Attributable costs include employee benefits we can see much room here for subjectivity. As we relate this to the report we can widely expand their use of exploration costs and how they accounted for these costs. Under the PPE notes on (Royal Dutch Shell, 2011) they have included “sales, retirements and other movements.”
Here we can see they have applied this in their PPE costs and included it in their Accounts. The IAS has set specific guidelines on when the carrying amount ceases when the item is in condition and location necessary originally intended by management. If it wasn’t