International Accounting Standards and Companies Act 1985
International Accounting Standards and Companies Act 1985
The financial records and statements of Fast Track PLC were evaluated and audited and it was found that the directors of the company had made several changes and adjustments in accounting records which are not allowed and inconsistent with the Companies Act 1985 and International Accounting Standards. The organisation was facing a threat of a hostile takeover by a giant US corporation if the share prices of Fast Track PLC decreased considerably. The company had not paid any interim dividends and the accountants of the company indicated a loss in the final accounts making it impossible for the company to pay final dividends. This could lead to further decrease in share prices and that is the primary motive of the directors to make adjustments in the company accounts. The following sections present the inappropriate measures taken by the directors and the appropriate steps which should have been taken in light of the International Accounting Standards and Companies Act 1985. The following sections explain the responsibilities of the directors with respect to Companies Act 1985 and IAS.
The historical cost of the land was £5 million but it was revaluated in the past year before sale and the revaluated value of the land was £10 million. The Companies Act (1985) clearly identifies that the income or expense occurring from the revaluation of assets has to be transferred to a revaluation reserve account which is to be kept under a separate heading. On the contrary, the company did not transfer the income of £5 million to a revaluation reserve account which was in conflict with the Act. The company cannot record revenue of £20 million and £5 million cost to show a £15 million profit as the company was using the revaluation model in place of the historical cost model of valuation. The directors should have instructed the accountants to transfer the income generated from the revaluation to a revaluation reserve account and show it in a separate heading on the company financial statements. The directors agreed to revert back to the historical cost valuation method which was inappropriate as the tranche of land had already been sold and this reversal to the historical cost method should have taken place before the sale.
IAS 16: Property, Plant and Equipment (1982) prescribes that any gain or loss from revaluation of an asset should be kept in a revaluation surplus account and this amount can be transferred to retained earnings or can be left in the revaluation surplus account on sale or disposal of the asset. Although IAS 16 (1982) provides that the revaluation surplus may be transferred to the retained earnings account but the Companies Act (1985) allows the transfer of any gain or loss from the revaluation reserve to the income statement and the directors of the company can credit this gain of £5 million to the profit and loss account. The actual £10 million profit from the sale of land will be presented separately on the income statement which would have a similar effect of a £15 million profit in the income statement. The directors must instruct the company accountants to provide proper disclosures with the financial statements regarding the sale and revaluation transaction. The transactions should be included in the company accounts according to the following table.
Transactions Million (£)
Revenue from sale of land 20
Value of land after revaluation (10)
Gain from sale 10
Other Comprehensive Income 5 1
Income arising from sale 15
1 This amount was transferred from the revaluation reserve account after profit was realised
Recognition of Revenue
The second issue in the case of Fast Track PLC is revenue recognition. IAS 18: Revenue (1982) prescribes that an entity can recognise revenue only when each of the following criteria is met (IAS 18 1982).
• The rewards and risks have been transferred from the seller to the purchaser.
• The probability is that the future benefits of the sale will flow to the entity.
• The seller has no power or involvement in the sold item.
• The amount of revenue can be measured reliably.
• Any costs incurred in the transaction can be measured reliably.
There is a high probability that the future benefits linked with the toilets delivered to the client till January 31st will flow to Fast Track and the amount can be reliable measured. The rewards and risks associated with ownership along with the involvement and power of these toilets have also been transferred to the client. Although these criteria have been met for the toilets delivered till 31st January, these criteria have not been met for the remaining toilets. This implies that the revenues of the first half of the toilets can be recognised but the revenue of the remaining toilets cannot be recognised and included in the financial statements of the company.
Provision and Revenue Recording
IAS 37: Provisions, Contingent liabilities and Contingent Assets (1998) prescribes that an entity should recognise and create provisions for contingencies in case of obligations and there is a high likelihood of payment and the amount of this payment can be estimated reliably (IAS 37 1998). The directors should have instructed the company accountants to recognise and create a provision under the portable offices transaction with Bloggs Builders PLC, due to a probable obligation in case the client returned these offices.
Fast Track PLC appropriately recognised revenue of £1 million but the company accountants failed to consider the savings on the returned portable offices. The offices were valued at £0.5 million at the time of sale but they had depreciated at a rate of 25% during the nine months and their value at the time of return was £406,250 resulting in a saving of £93,750 to the company. The company accountants should have recognised this saving and recorded revenue of £1,093,750.
Although the directors agreed to record £150,000 servicing income they completely ignored the cost linked with providing services which was 40 percent of the servicing fee charged by the company. IAS 18: Revenue (1982) prescribes that the cost incurred in providing services should also be recorded with the respective revenues in the accounting records (IAS 18 1982). Thus the company accountants should also recognise a cost of £60,000 incurred for providing services. The structure of income for Fast Track PLC after appropriate adjustments is presented in the following table.
Sale of Portable offices 1,093,750 2
Income from Services 150,000
Cost of Services (60,000)
Total Income from Services 90,000
Total Income 1,183,750
2 Revenue Sale of offices = £1 million
Savings on returned offices = 500,000 X 0.25 X 9/12 = 93,750
Total amount from sale of offices = 1,093,750
List of References
IAS. (1982). IAS 16 Property, Plant and Equipment. London: International Accounting Standards Board.
IAS. (1982). IAS 18 Revenue. London: International Accounting Standards Board.
IAS. (1998). IAS 37 Provisions, Contingent Liabilities and Contingent Assets. London: International Accounting Standards Board.
Office of Public Sector Information. (2010, November 7). Companies Act 1985 (c. 6). [Online] Available from: Statutelaw.gov.uk:
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