Details

Technical Note

Measurement of Tangible Long-Term Assets Under International Accounting Standard 16 in The Airlines Industry

Asad Alam

INDUSTRY : Transportation, Airlines Industry

AREA : Accounting & Control

ORGANIZATION : Aviation

LENGTH : 46

LUMS No : 01-001-2014-2

PUBLICATION YEAR : 2014

KEYWORDS:

Long-Term Assets,International Accounting Standards,Airlines Industry,Aviation,Trasportation,Logistics,Policies,Airline Business,Profit & Loss

DESCRIPTION:

This note concentrates on operating assets expected to yield their economic benefits (or service potential) over a period longer than one year. Such assets are called long-lived assets. Long-lived assets represent a significant percentage of total assets in industries like oil exploration, automobile manufacturing and airlines. Under IFRS, firms have latitude in how to record long-lived assets on their balance sheets and how much detail they provide about separate long-lived asset components. Companies can choose to provide footnote breakdown of the total assets by class so that the statement readers can see the breakdown of gross and net property as well as plants and equipment across classes or segments. This note provides an overview of the basic accounting standards for Property Plant and Equipment (PP&E) under International Accounting Standard 16 (IAS 16). The note focuses on long-lived assets used in the operation of the airlines industry. These assets are a major investment for all airlines. They make up a large part of assets on most balance sheets, and they yield depreciation, often one of the largest expenses on income statements. They also affect the statement of cash flows when cash is paid to acquire assets or is received from their sale. The acquisition or building of an asset is often referred to as a capital expenditure. Capital expenditures are important events because they impact both the short and long-term success of an airline. This note explains how to determine long-lived asset¿s cost under IFRS, how to allocate these costs to periods benefiting from their use and how to dispose them off. This note focuses on PIA¿s long-lived assets as they represent over 80% of the airline¿s total assets. Moreover, there is also emphasis on the ways these assets are recorded on PIA¿s financial statements. The objective of this note is to highlight the prevailing model used in the airline industry and compare it with the model used by PIA, which causes significant differences in the area of measurement of long-lived assets. The note also discusses the accounting rules and policies under International Accounting Standard (IAS 16) that PIA uses to record PP&E and compares it with accounting policies followed by Malaysia Airlines and Emirates Airline. Depreciation policies at PIA, Malaysia Airlines and Emirates Airline are also compared and contrasted against a summary of operating data from each airline.

LEARNING OBJECTIVES:

1) The initial measurement of long-lived assets and the critical accounting estimate and judgement used in these assets. 2) Subsequest measurement of long-lived assets under cost and revaluation methods allowed under IAS 16 and their implication for readers of financial statements. 3) Purpose of depreciation and the depreciation policy used in the airline industry. The critical accounting estimate and judgement used in recording depreciation should also be highlited. 4) Alternative procedures for reporting asset book values and income that might better serve users of financial reports.

SUBJECTS COVERED:

Accounting & Control