1 MATERIALITY

What is “material”?
Conclusion:
Materiality is a key factor in the application of accounting standards. As a general
rule, if the inclusion or omission of an item would affect the decisions of those who use
financial statement, the item is material.
It is not simply a question of magnitude - £5 to a millionaire is not material, but is to
a four year old child. Rather, it is a question of significance to decision making. When
attempting to determine whether an item is or is not material, it should always be
considered from the perspective of the financial statement. It should not be assumed that
merely because an item is of small value, it will be immaterial in the context of the financial
statements. For example, the sale of £10.000 of goods to Iraq would not seem important in
the context of a company’s total turnover of £20m. However, many user of the
undertaking’s financial statements would make different decisions were information
included rather than excluded from those statement.

2 FRS 3 : REPORTING FINANCIAL PERFORMANCE

Summary of the accounting treatment requirements

The profit and loss account should show extraordinary items separately after the
after-tax profit on ordinary activities attributable to the members of the company. The
following ordinary items which are of exceptional size or incidence should be shown
separately on the face of the profit and loss account after operating profit and before
interest, and included under the appropriate heading of continuing or discontinued
operations:
a) Profits or losses on the sale or termination of an operations,
b) Costs of a fundamental reorganization or restructuring having a material effect on
the nature and focus of the reporting entity’s operations, and
c) Profits or losses on the disposal of fixed assets.

Problems of interpretation and grey areas

The following items are discussed:
1. Extraordinary items and earnings per share,
2. Prior period adjustments,
3. Revaluation and the profit or loss on disposal of an asset,
4. Primary statements.
 4 SSAP 12 : ACCOUNTING FOR DEPRECIATION

Summary of the accounting treatment requirements

Depreciation should be provided in respect of all fixed assets which have a finite
useful economic life. It should be provided by allocating the cost less net realisable value
over the periods expected to benefit from the use of the assets being depreciated. No
depreciated method is prescribed, but the method selected should be that which produces
the most appropriate allocation of depreciation to each period in relation to the benefit
being received in that period through use of the asset.
Useful economic lives should be reviewed on a regular basis, normally at least every
five years. Where the amended asset life would materially distort future results if treated
normally, it should be treated as an exceptional item as defined by FRS 3 (Reporting
financial performance) and included under the sane statutory format heading as the
ongoing depreciation charge.
The depreciation method may only be changed when to do so will result in an
improvement in the true and fair view. A change in method does not constitute a change in
accounting policy. When the method is changed, the net book value should be depreciated
over the remaining useful economic life of the asset, commencing with the period when the
change occurred.
UITF 5, issued in July 1992, introduced rules relating to situations where current
assets are included in the balance sheet at the lower of cost and net realisable value.
Specifically, it addressed the question of an appropriate transfer value when a current
assets becomes a fixed assets through its being retained for use on a continuing basis. To
avoid entities being able to transfer from current asset to fixed asset at above net realisable
value and subsequently write-down the value through a debit to a revaluation reserve, UITF
5 requires that all such transfers are done at the lower of cost and net realisable value, with
any diminution in value at that point being charged in the profit and loss account.

Problems of interpretation and grey areas

The following items are discussed:
1. Selection of the depreciation method,
2. Non-depreciation of certain assets,
3. Revaluation: profit and loss account -v- balance sheet,
4. Review of useful economic life,
5. Permanent diminution in value of revalued assets,
6. Freehold land,
7. Disclosure of changes,
8. Approaches to adopt.
 5 SSAP 13 : ACCOUNTING FOR RESEARCH AND DEVELOPMENT

Summary of the accounting treatment requirements

Expenditure on research and development (R&D) should be distinguished from non-
R&D expenditure. Research expenditure should be distinguished from development
expenditure and must be charged to profit and loss.

Problems of interpretation and grey areas

The following items are discussed:

1. The determination of what constitutes research and development expenditure,
2. The period in which amortization should begin,
3. The basis of amortisation which should be adopted,
4. The writing back of development expenditure previously written-off.

Conclusion:

The broad terminology used in SSAP 13 gives rise to problems and in many instances
could lead to the adoption of widely differing treatments by different companies faced with
the same conditions and expenditure. However, in a survey of 300 UK companies, only 1%
of the 171 companies identified as having some R&D activity elected to capitalize it. If this is
representative of the overall treatment of R&D expenditure as research or as development.
Nevertheless, there remains the problem that the distinction between development and
non-R&D expenditure is imprecise and open to manipulation, if there is any benefit to be
gained by doing so.
Finally, the partial exemption from disclosure is difficult to justify. If the information
is regarded as unimportant for the majority of companies, what is so special about the
others that it suddenly takes on an important role? It is hard to see why the shareholders of
non-public limited companies would be any less interested the the shareholders of public
limited companies in knowing the total R&D expenditure charged to profit and loss, and the
proportion of it which related to the amortization of deferred development expenditure.
 8 SSAP 19 : ACCOUNTING FOR INVESTMENT PROPERTIES

Investment properties should be included in the financial statements at their open

market value and, with the exception of leasehold property, should not be depreciated.

Problem of interpretation and grey areas

The following items are discussed:

1. The conflict with the companies act,
2. The partial application of SSAP 12,
3. Optional depreciation,
4. The confusion between properties held on leases and investment properties,
5. The redesignation of property.

Conclusion:

This standard was issued in response to pressure from the property industry both
before and after the issue of the original version of SSAP 12 in 1977. It deals with a very
specific topic and, unlike most of the other accounting standards, it will not be applicable to
the vast majority of companies. Even when it is applicable, it will not usually apply to all the
property assets pf the company concerned.
While there is an obvious justification for its depreciation exemption being
applicable only to a specific class of property, it is unfortunate that the requirement to
revalue investment properties annually is not applicable to non-investment properties
under SSAP 12. There is no doubt that the use of current market property values provides a
more true and fair view than the use of historical cost property values. The fact that the
balance sheets of companies with investment properties will contain a mixture of property
at market value, at historic revaluation, and at historical cos, does nothing for the clarity of
that true and fair view.
 11 SSAP 24 : ACCOUNTING FOR PENSION COSTS

Summary of the accounting treatment requirements

The accounting objective of the standard is given in paragraph 16: the employer is
required to recognize the cost of providing pensions on a systematic and rational basis over
the period during which he benefits from the employee’s service.
The charge against profits for defined contribution schemes should be the amount of
contributions payable to the pension scheme in respect of the period. The pension cost for
defined benefit schemes should be calculated using actuarial valuation methods and the
regular pension cost should be a substantially level percentage of the current and expected
future pensionable payroll.

Problems of interpretation and grey areas

The following items are discussed:
1. The scope of SSAP 24,
2. The classification of pension schemes,
3. Actuarial choice and judgement,
4. The treatment of variations,
5. Multiple schemes,
6. The impossibility of inter-firm comparability,
7. Differences between amounts funded and charged, and deferred tax.

Conclusion:
SSAP 24 has been described as a disclosure standard. It certainly emphasizes the
need for detailed disclosure. However, it cloud be argued that is does not go far enough: for
example, there is no requirement to disclose on what basis an variation is being eliminated.
It cloud also be argued that some of the disclosure requirements are more likely to confuse
than to clarify: for example, the requirement in paragraph 88(h) to disclose the actuarial
method used.
The standard provides a framework within which pension costs are to be
determined, but is not a measurement standard. For example, average service periods may
or may not be used; discretionary increases may or may not be recognized in the actuarial
assumptions; interest may or may not be provided on balance sheet balances; and there are
many possible bases which can be adopted for spreading variations, etc. Even greater is the
degree of flexibility given to the actuarial calculations: for example, actuarial valuation of
assets may be done using whatever approach the actuary believes to be appropriate, so
long as it complies with the general requirements of the standard; the actuarial method
used may be one of several; and the assumptions made involve a high degree of personal
judgement.
WORKBOOK OF ACCOUNTING
STANDARD

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NAMA : SEFTIO SUARNA PUTRA (222016127)

UNIVERSITAS MUHAMMADIYAH PALEMBANG

FAKULTAS EKONOMI DAN BISNIS
TAHUN AJARAN 2017