Accounting Irregularities in Financial Statements by Kwok Benny K. B.;

Author:Kwok, Benny K. B.;
Language: eng
Format: epub
Publisher: Routledge

TANGIBLE FIXED ASSETS

As discussed in Chapter 4, tangible fixed assets (tangible assets or fixed assets) primarily include property, plant and equipment and are defined as those which:3

• are held by an organization for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

• are expected to be used during more than one financial year.

In the UK, FRS 15 of the ASB does not have a definition of tangible fixed assets. However, the Companies Act 1985 in the UK defines a fixed asset as one intended for use on a continuing basis in the organization’s activities, that is, it is not intended for resale.

An item of property, plant and equipment which qualifies for recognition as an asset or a tangible fixed asset should initially be measured at its cost.4 The cost of an asset generally comprises:

• acquisition costs (including import duties and irrecoverable purchase taxes but excluding trade discounts and rebates); and

• directly attributable costs, such as site preparation, delivery and handling costs, installation costs and professional fees, and the estimated cost of dismantling and removing the asset and restoring the site (to the extent that it is recognized as a provision under SSAP 28 Provisions, Contingent Liabilities and Contingent Assets of the HKICPA or FRS 12 Provisions, Contingent Liabilities and Contingent Assets of the ASB – see Chapter 6).

Start-up costs, administrative expenses and general overheads do not necessarily form part of an asset’s costs unless they are incurred in bringing the asset to its working condition. Capitalization of directly attributable costs should cease when the tangible fixed asset is ready for use (physically constructed), even if the asset has not actually been brought into use or met its target capacity.

Tangible fixed assets in the B/S are reported by two components – quantities and unit value, thus:

Total value = Quantities × Unit value

Therefore, in overstating tangible fixed assets, perpetrators may manipulate either of the two components. There are at least three ways to do so:

• overstating physical count

• inflating unit value

• delaying depreciation or amortization.

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