REVALUATION OF PLANT, PROPERTY, AND EQUIPMENT: SIMILARITIES AND DIFFERENCES BETWEEN IASC AND ASC (PHILIPPINES) STANDARDS Consolacion L. Fajardo, Department of Accounting~Finance, National University, 9320 Tech Center Drive, Sacramento, CA 95826-2858, (916) 855-4137, clfajardo@aol.com ABSTRACT This study focuses on a comparative analysis of the revaluation of property, plant, and equipment (PP&E) accounting standards by the International Accounting Standards Committee (IASC) and the Accounting Standards Council (ASC) of the Philippines. It will delineate areas of similarities and differences in terms of the rationale for revaluation, point of recognition, basis of valuation, financial statements presentation, implementation, and required notes for full disclosures. It incorporates the author's comments for or against the similarities and the differences. The main objective is to assist users of financial reports in arriving at more informed decisions in a global market environment. PURPOSE AND RESEARCH METHODOLOGY The complexity of conducting business worldwide across national borders, each with different sets of accounting standards, presents a formidable task for accountants and professional organizations that formulate accounting rules. Clearly, without a common accounting language, there is some doubt that given the diverse national standards, a truly efficient international market will develop. Thus, the need to have a set of international accounting standards that will provide comparability of financial data, reduce the cost of analyzing and interpreting financial reports, and ultimately result in enabling capital seeking and investing entities to effectively compete in the global markets. The International Accounting Standards Council (IASC) is at the forefront in the move toward internationalizing accounting standards. But until the accounting community agreed to follow a set of accounting standards acceptable world-wide, comparative analysis of the different countries accounting standards will be of help in analyzing and interpreting financial reports that will be useful in business decision-making The purpose of this paper is to contribute to a better understanding of the accounting standard of a country (the Philippines) compared to that of the international accounting standard relative to the revaluation of property, plant, and equipment. The research method is comparative analysis delineating similarities and differences in terms of the rationale for revaluation, point of recognition, basis of valuation, financial statement presentation, implementation, and required notes for full disclosures. It also incorporates the author's comments for or against the similarities and the differences. This study hopes to assists investors and creditors in making better business decisions. 134
International Accounting Standards Committee (IASC) Formed in 1973, IASC's main function is to formulate accounting standards, to promote their worldwide acceptance and observations, and to work generally for the improvement and harmonization of accounting regulations, standards, and procedures worldwide. Board members are either country members (representing professional accountancy bodies) or other organizations, not individuals. The sixteen (16) countries and organizations currently representing IASC board members are: Australia, Canada, France, Germany, India & Sri Lanka (share 1 seat), Japan, Malaysia, Mexico, Netherlands, Nordic Federation of Public Accountants, South Africa & Zimbabwe (share 1 seat), United Kingdom, United States, Federation of Swiss Industrial Holding Companies, International Coordinating Committee of Financial Analysts" Association and International Association of Financial Executives Institutes. Accounting Standards Council (ASC) The Accounting Standards Council (ASC) was founded in November 18, 1981 by the Philippine Institute of Certified Public Accountants (PICPA). Its main objective and function is to establish and improve accounting standards that will be generally accepted in the Philippines. The ASC board consists of eight individual members (four from PICPA, one from the Security and Exchange Commission (SEC), one from the Central Bank of the Philippines, one from the Board of Accountancy, and one from the Financial Executives Institute of the Philippines (FINEX). The members serve without compensation for a term of two years, which can be renewed. The ASC pronouncements shall apply to the financial statements of any commercial, industrial, or business enterprises and some contents may also be applicable to non-profit organizations. COMPARATIVE ANALYSIS OF IASC NO. 16 AND ASC NOS. 6 AND 12 Comparison of the Rationale for the Revaluation Similarities: Both IASC and ASC provide the effect of inflation as main the reason for the revaluation principles. Differences: None in particular. Rationale given by IASC and ASC are identical. Comments: Mlowing for the revaluation of PP&E, is appropriate for those economies affected by high inflation. The financial data on PP&E in the balance sheet represent aggregation of costs of varied purchasing power that may not be relevant to the needs of users of financial reports. Recording at historical cost may result in lower depreciation expense and consequently and higher income that may not be reflective of the results of business operations and proper valuation of the assets in the balance sheet. However, the alternative accounting treatment of revaluing PP&E may result in non-comparability of financial statements prepared by different entities using historical cost basis. 135
Bases of Valuation Similarities: IASC and ASC allow alternative treatment in valuing PP&E after recording initial cost. Differences: (1) IASC recommends the use of fair value in the revaluation of PP&E., but adds that market value may also be used based on its existing use. (2) ASC permits revaluation either based on index numbers or an appraisal made by independent experts or specialists. No suitable index has been prescribed thus appraisal by independent appraiser is commonly used. ASC specifies appraised value (also termed as replacement cost or reproduction cost to be determined by independent specialists) as the revalued amount of property, plant and equipment. Comments: While fair value means the current market value as the investment an entity make in acquiring PP&E with the intention of using the assets in business operations to generate revenue, market value referred to by IASC as the fair value of the property based on its existing use means replacement cost or reproduction cost. Thus, IASC appears to provide alternatives of either current value of investment on the asset or the replacement or reproduction cost of the asset based on existing use. The specification of fair value as current market value and market value based on existing use (reproduction cost) are conflicting in their application. ASC is more specific as to what value is construed as appraisal value, that is, reproduction cost. Recognition Similarities: (1) IASC and ASC both present the revaluation increment (surplus) under the stockholders' equity section of the balance sheet. (2) Both requires that subsequent appraisal value increases or decrease must first be adjusted to the revaluation surplus up to the amount of the balance in the account; any excess to be adjusted through operations either as an income or expense as appropriate. Differences: (1) IASC allows the transfer of net revaluation surplus to retained earnings when the surplus is absorbed through charges to depreciation expense. (2) ASC allows three additional alternatives of treating revaluation surplus: (1) revaluation surplus as a permanent account not reduced by depreciation charges (with notes for the accumulated depreciation), (2) transfer the portion of revaluation surplus absorbed through depreciation in the appropriated retained earnings account, and (3) transfer the portion absorbed through depreciation to unappropriated retained earnings account. Comments: ASC's allowing more alternatives may result in non-comparability of financial data among companies even if they are in the same country. Pronouncements requiring specific unifonn application improves comparability. Financial Statements Presentation Similarities: (1) IASC and ASC compute sound value as the gross amount of PP&E reduced by accumulated depreciation based on cost and on appraised values. Differences: (1) IASC allows the alternative treatment of presenting only the net amount of PP&E. (2) ASC specifies presenting both the gross appraisal value and accumulated depreciation based on appraised values with additional disclosures on the historical costs data incorporated in the accompanying notes to the financial statements. 136
Comments : IASC's alternative of presenting only the net amount of PP&E impairs the information regarding the value of the asset and the corresponding accumulated depreciation. The data of the revalued PP&E may not be obvious or easy to trace depending on how often assets are revalued and how they are grouped for revaluation. For financial statement users, there may be uncertainty related to how revalued amounts are determined, the validity of certain asset ratios, and the ability to evaluate performance. ASC's specification of showing both the gross amount of PP&E and the corresponding accumulated depreciation provide users of financial reports with information necessary to determine the magnitude of the appraisal value and its impact on the financial statements. Required Disclosures Similarities: (1) Both require disclosures on the basis of valuation used in the appraisal, the effective date, the indices used, and whether an independent party prepared the valuation, the additional disclosures for the carrying value of each class of PP&E at historical costs with accumulated depreciation, the manner of accounting for the revaluation increment absorbed through depreciation, and the presentation of revaluation increment in the stockholders' equity section of the balance sheet. Differences: (1) ASC permits revaluation not to be recorded in the accounting records, but instead be included as disclosures in the notes to the financial statements or in a supplementary schedule: the appraised values of the PP&E and related accumulated depreciation, that the appraisal is made by an independent appraiser with the effective date of the appraisal, the effects on the PP&E, the stockholders' equity, the net income, and the retained earnings had the revaluation been recorded in the accounts. Comments: Not reflecting the revaluation in journal entries retains the financial data of PP&E at cost. This may have an advantage in the sense that data are more comparable with those companies reporting on the historical cost basis. The information on the notes regarding the appraisal and its impact on the income statement and balance sheet provide useful information to existing and potential investors and creditors relative to PP& E even if appraisal values are not journalized. Implementation Similarities: (1)Both IASC and ASC allow subsequent revaluation of PP&E. Differences: (1) IASC requires revaluation with consistent regularity once the company chooses revaluation. (2) ASC allows revaluation only when there is a raise in prices of at least 25% over the previous revaluation value (based on Consumer Price Index). Comments: IASC does not provide specific guideline as to how often and under what situation revaluation has to be applied. ASC is more specific in its rules providing a materiality guideline to warrant a reappraisal of PP&E. Specification of a materiality guideline results in uniformity of application, thus, comparability of financial data is better achieved. CONCLUSIONS AND IMPLICATIONS FOR FUTURE RESEARCH This study highlights the differences and the similarities between IASC and ASC standards regarding the revaluation of property, plant, and equipment and includes the author's comments on the similarities and the differences. The results of this comparative analysis indicate that both IASC 137
and ASC allow revaluation for the same rationale--to reflect the effects of inflation. Some differences are apparent in the areas of valuation, recognition, presentation and implementation of the standards. However, the impact of the differences cited must be evaluated by a particular entity to determine if it may cause substantial differences on financial information shown in the financial statements and accompanying notes thereto. Similar comparative studies between IASC and ASC GAAP, as well as, with other countries GAAP, need be conducted in the ~ture for a better understanding of other countries accounting standards compared to those of the IASC. The expectation is that being aware and having knowledge of the main areas of differences and similarities will be use~l to financial statement users in analyzing and interpreting accounting and other financial information. The ultimate goal is to assist users in making better and more informed decisions relative to financing and investing alternatives and opportunities in the context of a global capital market environment. BIBLIOGRAPHY Accounting Standards Council. (1999). Compilation of Statements of Financial A ccounting Standards Nos. 1-29. Philippines: ASC. Epstein, B. J. & Mirza, A. A. (1997). l iley IAS 97 Interpretation and Application of International Accounting Standards 1997. New York, Canada: John Wiley & Sons, Inc. Financial Accounting Standards Board. (1996). The 1ASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP. Norwalk, Connecticut: Financial Accounting Foundation. Hoyle, J., Schaefer, T. F., & Doupnik, T. S. (1998)AdvancedAccounting, 5th Edition. Boston: h-win/mcgraw-hill. International Accounting Standards Committee (1999). International Accounting Standards Nos. 1-39, London: IASC. Mueller, G. G., Gernon, H., & Meek, G. K. (1997). Accounting An International Perspective 4th Edition. Chicago: Irwin/McGraw-Hill. APPENDIX IASC - IAS No. 16 ASC - SFAS No.6 Property, Plant, and Equipment Summary of Generally Accepted Accounting Principles on Property, Plant, and Equipment (Carried at Historical Cost) ASC - SFAS No. 12 Revaluation of Property, Plant, and Equipment through Appraisal 138