Recognitions, Measurements & Disclosures of IAS 41 Assignment Sample
Write an accounting essay focusing on IAS 41 accounting standard, incorporating the following:
i. Examine the accounting standards' requirements for disclosures, measures, and recognitions;
ii. Talk about how the accounting standard affects the relevance and faithful depiction of information reporting, which are essential qualitative qualities;
iii. List any three practical difficulties in following the chosen accounting standard and critically examine them.
In this accounting essay, the main goal of the IAS 41 accounting standard is to control how biological assets are transformed into agricultural products. With some exclusions, such as agricultural produce at the harvest point and bearer plants, the accounting principles apply to biological assets. Intangible assets and government funding connected to agricultural pursuits or bearer plants are typically inapplicable. The requirements of the accounting standards are examined in this particular article based on their recognition, measures, and disclosures, as well as the impact of the standard on the core qualitative attributes of information reporting. In the accounting assignment, a few real-world obstacles to this standard's compliance are also mentioned and critically evaluated.
Recognition, Measurements, and Disclosures
Recognition: An accounting standard set called IAS 41 was created to help turn biological assets into agricultural production. The primary purpose of accounting standards is to account for agricultural activities based on produced goods from a company's biological assets. In the year 2000, the accounting standards were released. Biological assets or agricultural goods are recognized when an entity has control over the vents connected to previous transactions (Abdelkhalik, 2019). Future consistency in measuring the entity or fair worth is also a possibility. These requirements are seen to be essential to the acceptance of this specific accounting standard or method.
Measurement: Unless there is an estimation of the fair value at a lower selling cost, the measurement of a fair value can be done consistently. Agribusiness production is valued at fair value less the projected cost of selling at the harvest point since harvested produce is a commodity. With the exception of produce, there is no measuring dependability. All expenses incurred, including the relevant cost to the fair value of the biological assets, are those incurred other than the acquisition price of the biological assets. The only issue with measuring is that there isn't a price for biological assets on the active market that has already been quoted. Since fair value calculations are unreliable, it is necessary to evaluate assets at lower costs through reduced accumulated depreciation and impairment losses. However, if the situation changes in a major pattern, charges free from fair value are required.
Disclosure: IAS41's disclosure requirements are based on the typical loss or gain from recognizing assets and agricultural products, as well as changes in the value of sales within the given period. The requirements also somewhat depend on the entity's biological resources, as defined by the big group (Baigrie and Coetsee, 2016). The disclosure rules also apply to restricted and pledged security titles relating to information about biological assets. The disclosure obligations also cover commitments for the development and acquisition of biological assets as well as risk management plans for funding. Additional disclosures about asset depreciation, the fair value range, and the reasons for not being able to accurately determine fair value are necessary if it is not possible to do so. Along with the overall depreciation that has accrued and the amount that is carried, the depreciation methods, rates, and amounts must all be declared.
Impact of IAS41 on Fundamental Qualitative Characteristics of Information Reporting
Relevance and faithful depiction are regarded as the basic qualitative traits of information reporting. It is regarded as a notion that envisions the truthful reflection and depiction of financial statements that establish the genuine economic status of the firm. Every section of the financial statement, including the operational results, financial positions, and various cash flows, should be given a faithful portrayal (Enyi, 2019). The statements that show a fair and pertinent approach to information reporting should largely exhibit these three qualities: they should be exhaustive, objective, and error-free. To properly assess IAS41's influence on corporate financial reporting, it is necessary to identify any potential implications for the reporting entities. The fair value of the assets that must be reported is calculated using the income from unrealized gains or losses.
The recognition of unrealized gains and losses arising from assets from fair value adjustments to agricultural harvest will have a substantial impact on the businesses' income and other financial statements, ultimately increasing the volatility in reported income. Compared to private entities, the influence on governmental organizations is comparatively bigger. The two fundamental qualities that are essential to financial reporting are faithful and relevant representation. Relevance is a characteristic of information that gives users of financial information the ability to decide while making decisions. When information is utilized to predict a future outcome or to confirm previous assessments of economic events that have a confirmative value, it is said to be relevant (Filip et al., 2017). Even though IAS 41 refers to agricultural production and biological assets, these occurrences are recorded in the financial accounts of businesses.
The revenue for the following year can be predicted using information about the current year's revenue that is related to agricultural output and biological assets. This information also confirms the degree of accuracy of the predictions made in the previous year. The valuation of the user's net assets can be updated using impairment charges relating to biological or agricultural assets. Estimates may not be very accurate because the liabilities of a company dealing with biological assets are unpredictable and legal claims can be extraordinarily expensive. A firm must maintain a particular level of honesty while preparing a financial report based on agricultural output and biological assets. The most crucial deciding factor when deciding the variables of financial accounting is the fact that the amounts of produce each year are changing and not fixed in nature (Zerhan and Sultanolu, 2017). The development of appropriate financial reports for businesses that are accounted for in accordance with IAS 41 depends on the relevance and faithful portrayal of factual events and transactions.
Three Practical Challenges of IAS 41 Compliance
The implementation of IAS 41 in accordance with the accounting standards is complicated by three practical issues.
One of the main issues with biological asset compliance approaches is the lack of an active market. The corporate management must solely rely on the biological assets' assessments and judgements. To study the present economic trends and conditions that were reported on earlier dates, it is necessary to evaluate the markets and market information that are currently available. The fair worth of the biological assets might be determined using the existing prices if the economy remains stable over the long term. According to Scott, Wingard, and van Biljon (2016), a market may not have been developed if the company administration evaluates appropriate data while assets are limited or scarce.
The second issue relating to IAS 41 compliance is thought to be a lack of appropriate valuation techniques. Lack of direction from the national treasury may result in the use of different accounting rules that are based on organizations that are identical. The strategies and needs connected to the economic sector are provided by the treasuries of different countries. The absence of valuation methodologies can be ascribed to a lack of oversight. The organization is nonetheless subject to the requirements' applicability despite the event. The quality of audit departments may express their thoughts if the criteria are disregarded.
A real problem with calculating fair value is the high costs associated with biological assets' accounting for fair value. According to Baigrie and Coetsee (2016), the issue that is regarded as being most important in the case of biological assets is the exorbitant expenditures connected with the evaluation process. When hiring specialists to perform the valuation process, several criteria must be met. Before making contact with an individual, the administration must evaluate their credentials and value knowledge. Despite the fact that the professionals are handling them, the management of the organization is still responsible for how the information is presented. They should analyses the work that was completed as well as the work of the expert on the audit and other financial reporting. The department of the auditor general will audit the underlying valuations, and the administration will give auditors the necessary information on the supporting documentation.
As the management of the companies is ultimately responsible for the proper assessment and evaluation of the financial statements, the three challenges of adhering to or complying with IAS 41 are integral to the final preparation of financial reports for the company. There is a significant amount of impact created on the relevance and the faithful representation of the biological assets that are evaluated by the fair value of assets and agricultural produce. The three factors of initial recognition, measurements, and disclosure are crucial to comprehending the accounting standards intended for both appreciation and the depreciation of biological assets related to agricultural products. Therefore, it can be concluded that the cost and valuation of biological assets in relation to the market are the major determinants of the accuracy of the companies' financial reporting. This accounting standard has a considerable impact on the fundamental elements of information reporting, as evidenced in the financial reports of businesses that trade in agricultural and biological goods.
A.R. Abdel Khalik (2019). Issues in Reporting Financial Instruments: Failing Faithful Representations of Financial Statements. 676-708 in Abacus, [online] 55(4). Available at: doi/full/10.1111/abac.12176 at onlinelibrary.wiley.com [Retrieved on June 4, 2021] .
I. Baigrie and D. Coetsee (2016). An examination of South African public agriculture enterprises' financial reporting compliance. 9(3), pp. 833–853, Journal of Economic and Financial Sciences, [online]. The document is accessible at: https://core.ac.uk/download/pdf/160732061.pdf. [Retrieved on June 4, 2021] .
Enyi, P. (2019). International Journal of Business and Management Review, [online] 7(3), pp. 1–10, "ETHICAL PRINCIPLES AND FAITHFUL REPRESENTATION OF FINANCIAL REPORTS OF QUOTED COMPANIES IN NIGERIA." The document is accessible at: https://www.eajournals.org/wp-content/uploads/Odesanya-O.-S.pdf. [Retrieved on June 4, 2021] .
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Y. zerhan and B. Sultanolu (2017). Fair Value Accounting for M2M. www.intechopen.com [online]. IntechOpen. Easily accessed at: https://www.intechopen.com/books/accounting-and-corporate-reporting-today-and-tomorrow/m2m-fair-value-accounting [Retrieved on June 4, 2021].
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