ABSTRACT
The purpose of this research
work is to find out to what extent various manufacturing companies have adhered
to the guidelines laid out in S.A.S 9,
using manufacturing companies in the
Lagos metropolis as a case study. It is aimed at ensuring uniformity in
the preparation of financial statements amongst companies. This is important
for evaluation purpose as it ensures a level playing field.
Both primary
and secondary data were used. The primary data involves the use of
questionnaire and oral interview. A total of 30 questions were given to staff
of manufacturing companies. Data were collected so as to get the response of
workers as regards depreciation practices in their working environment. In conclusion the following
modifications are necessary.
(1)
Various regulatory accounting
bodies should come out with more specific rates and methods of providing for
depreciation on individual asset.
(2)
Provision for depreciation should be applied
on consistent basis from year to year.
(3)
Depreciation shall be
calculated on historical cost of the asset.
(4)
Details of fixed asset should
be kept in a fixed asset register.
(5)
Straight line method of
depreciation should be use in computation of depreciation on fixed asset.
(6)
Profit or loss made on disposal
of fixed assets should be treated as exceptional items.
With
all these set out and other things. It is certain that there will be uniformity
in the preparation of financial statement amongst companies which, will in turn
provide a level playing field for performance evaluation.
TABLE OF CONTENT
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of content vi
CHAPTER ONE
Introduction 1
(b) Statement
of the problem 2
(c) Purpose
of the study 5
(d) Relevant
research questions 7
(e) Statement
of the hypothesis 8
(f) Significance
of the study 9
(g) Delimitation
(scope) and limitation of study 11
(h) Definition
of terms 12
(i) Historical
background 14
CHAPTER TWO
Literature review 17
(a)
Conceptual
framework 17
(b)
Theories
relevant to the research problems 20
(c)
Current
literature based on each of the relevant
variables of the theory 23
(d)
Major issues
in the literature reviewed and the
Gap to be filled by the present research. 44
(e)
References. 52
CHAPTER THREE
Methodology
(a)
A brief
outline of the chapter 53
(b)
Restatement of
the research question and hypothesis 54
(c)
Research
design 55
(d)
Characteristics
of the study population 56
(e)
Sampling
design and procedures 56
(f)
Data
collection instrument 57
(g)
Pilot study
test of validity and reliability of the
study instrument 59
(h)
Administration
of the data collection instrument 62
(i)
Procedure for processing /analyzing collected data 64
(j)
Limitation of
the research methodology used 64
(k)
Reference ( if
any) 65
CHAPTER FOUR
The results or findings 66
(a)
A brief
introduction of the chapter 66
(b)
Presentation
of descriptive and inferential
results and brief comments on them. 67
(c)
Summary of
major results or findings 90
(d)
References (if
any) 91
CHAPTER FIVE
Summary, conclusions and recommendations 92
(a)
Summary or
synopsis of the study,
including a
comprehensive summary of the 92
major findings
(b)
Conclusions
drawn from the findings, including
how the study has
answered the research questions
and tested the
hypothesis 116
(c)
Recommendations
based on the conclusion 118
(d)
Suggestions
for further studies 120
(e)
References 122
(f)
Appendices 123
Bibliography. 126
CHAPTER ONE
INTRODUCTION
All business enterprise, both small and big have a form of
assets. Assets encompasses fixed, current and liquid assets. In this context, I
am particularly concerned with fixed assets and how the cost of such fixed
assets has been accounted for and allocated to the relevant period taking into
consideration the rules laid out in S.A.S 9 (Accounting for depreciation).
Depreciation is simply the allocation of the cost
of a tangible asset over its useful economic life. The idea behind depreciation
is to allocate that portion of a fixed asset cost used or expanded or even lost
during a relevant accounting year to that accounting period. Depreciation charged on the fixed assets is
then set against the profits of this relevant period as a revenue expenditure
in order to arrive at a true and fair figure of profits and in conformity with
the accrual concept as stated in the various standards and statements of
accounting.
The statement of accounting standard S.A.S 9
provides a guide for uniform and acceptable material of determining and
reporting depreciation on fixed asset, such as plant and equipment, property
etc.
(a) STATEMENT
OF THE PROBLEM
The statement of the problem of this research
project is, has the Statement of Accounting Standard (S.A.S) 9, (Accounting for
depreciation) been able to ensure uniformity in the preparation of financial
statements in the manufacturing companies? Has the rules and guidelines set out
in the standards been complied with?
In any organised economy there is need for uniform
and acceptable materials of determining and reporting deprecation on fixed
assets. Lack of accounting standard will make financial statement difficult for
external uses to understand. Comparism between companies in the some sector of
the economy will also be difficult or impossible.
Generally there are various standard that have
been put in place by various regulatory bodies to guide the preparation of
financial statement. They include,
-
International
Accounting Standards ( I.A.S)
-
Statement of
Accounting Standard (S.A.S)
-
Statement of
Standard Accounting Practice (S.S.A.P)
These standards are usually not been followed by
companies and organisations. In most cases accountants and auditors assist in
helping them apply these standards in the recording of financial transactions.
This study shall specifically address the
following problems.
i)
Can
depreciation serve as a method of cost allocation as regards both the matching
of revenue and expense in the process of profit measurement and product costing
in management accounting?
ii)
Is
depreciation central to decision making as regards the life and replacement of
fixed assets?
iii)
Could
depreciation be related to the concept of capital maintenance in income theory?
iv)
Could
depreciation be discontinued if asset appreciate in value.
v)
To what extent
has S.A.S.9 being able to ensure uniformity in the methods of recording and
disclosing depreciation in manufacturing companies.
vi)
Could the use
of various depreciation methods by different manufacturing companies still
ensure fairness in performance evaluation between companies in the same sector
of the economy?
This practice of treating depreciation as an
allocation of cost also presents a number of theoretical problems. The known
objective fact about an asset are few and adequate records are not usually kept
of various incidents in the life of an asset apart from its purchases price.
Repair and maintenance cost, for example are charged separately as running
cost. Other unresolved problem concern the selection of depreciable assets for
example, should depreciation be calculated by reference to units of actual use
rather than time used and also what method should be adopted.
Finally, should the residual value of an asset be
regarded as a windfall gain or should it be set off against the replacement
cost of the asset rather than used as a point of reference for calculating the
proportion of the cost of fixed assets, which should be allocated as
depreciation.
(B) PURPOSE
OF THE STUDY
The purpose of the study is to find out to what
extent various manufacturing companies have adhered to the guidelines laid out
in SAS 9. Various standards and laws are made to help and guide the accountant
in the preparation of the financial
reports of an organisation. Despite these pronouncements, standards and
laws, there are many occasions where an accountant may arrive at different
profit/loss figures even when they have the same data at their disposal. This
variation may sort of baffle many users of financial reports who might not know
the reasons behind the preparation of
the report.
Depreciation methods used by the accountant is one
of the major reasons for the variation in financial report figures and it is therefore this consideration that has
prompted me to analyze the consideration in terms of calculation of
depreciation.
The permanent diminition or reduction in value of
an asset due to use has to be reflected in the computation of the operating
income of an establishment in the way that is best suited to the establishment
or organisation concerned. As situations differ from one set up to another
different rates are expected to be applied by the management of each business
concern or organisation.
In spite of the various ways companies manage
their fixed assets S.A.S 9 provides a guide for uniform and acceptable methods
of determining and reporting depreciation of fixed assets.
It is the evaluation of the extent to which
manufacturing companies have adhered to the rules laid out in S.A.S 9 that is
the purpose of the study.
In summary, the purpose of the study are:
-
To show the
categories assets are grouped into.
-
To show the
points of consideration when determining the methods of depreciation.
-
To analyze the
various methods of depreciation and their application to different assets in
the industry.
-
To prove the
extent in which disclosure requirements of S.A.S 9 has been adhered to.
-
To show the
effects of alternative methods of depreciation, on financial reports
© RELEVANT RESEARCH QUESTIONS
In order to achieve the purpose of this research
study the researcher will attempt to provide answers to the following research
questions.
1.
What are the
various categories assets are grouped into?
2.
What are the
points of consideration when determining the methods of depreciation?
3.
What are the
various methods of depreciation and their application to different assets in
the industry?
4.
To what extent
has various manufacturing companies adhered to the requirements of S.A.S 9?
5.
What are the
effects of alternative methods of depreciation, on financial reports.
(D) STATEMENT
OF THE HYPOTHESIS
The researcher has formulated the following
hypothesis, which shall be tested
1.
Depreciation
can be best defined as cost allocation over the useful life of an asset than
any other definition.
2.
If a true and
fair picture of an organisations financial situations is to be presented
depreciation impact or effect must be considered.
3.
Depreciation
is an accounting system based an assumption.
4.
Depreciation
should not be discontinued if assets appreciate in value.
5.
Assets are
usually disposed off after they have been fully depreciated.
6.
Depreciation
is computed on historical cost of assets.
7.
Different
rates of depreciation adopted by companies for similar items makes the
comparability of financial report difficult.
8.
Year of
potential service is the most commonly considered, of all the factors that
determine the depreciation rate and method adopted.
9.
The most
widely used of the depreciation method is the straight-line method.
(E) SIGNIFICANCE
OF THE STUDY
This research will make theoretical and practical
contribution to the academics, stakeholders in a company, professional
associations, government and managers.
To the academics this research will be relevant in
the that it will assist, as a form of teaching aid for students. It will also
act as a base to research by students.
Stakeholders in a company will be able to
understand the theory of depreciation and also the financial statement in
general.
Professional associations will also be able to
find out how well its members are applying its rules and guidelines in the preparation
of financial statements and also make amendments, were necessary.
The government will be able to establish if
companies in the manufacturing sector are complying with the dictates of
accounting standards. This is necessary for making policies and assessment (
e.g. Tax purposes).
This research will assist managers in the
recording of financial transactions in ways that will ensure uniformity in the
financial statements and make Comparism between companies possible.
The benefits derivable from this research topic on
depreciation is not limited to the group stated above but to other sectors in
the economy dealing with fixed assets.
(F) DELIMITATION
(SCOPE) AND LIMITATION OF STUDY
This study seeks to examine the difference between
theory and practice of depreciation in the manufacturing industry in the Lagos
metropolis and how they have complied with the rules laid out in S.A.S 9. It
will also consider how the accounts in relation to depreciation are kept, as
well as the procurement and management of the fixed assets.
By the time this research is concluded the ABC of
depreciation including the technicalities involved in depreciation would have
been fully understood by anybody who goes through a copy. The accounting
procedures, of depreciation will be considered giving particular reference to
organisations. (manufacturing companies).
This research is limited to Lagos metropolis, the centre
of commercial activities in Nigeria. Limited manufacturing companies are
selected to represent the population. This is due to time and financial
constraints or else I would have endeavoured to compare a whole set of listed
companies, apart from financial constraints some respondents might not be able
to answer the questionnaire distributed to them and return at the appropriate
time.
(G) DEFINITION
OF TERMS
1.
Revaluation of
depreciable Assets:- This is the
process by which a new value is determined for a depreciable asset having
regard to its state, the prevailing economic and market conditions at the time of revaluation.
2.
Residual value
of a Depreciation Asset:- This is the estimated net amount recoverable from
its disposal after its expected economic life.
3.
Depreciation:- This
represents an estimate of the portion of the historical cost of the revalued amount of a fixed asset chargeable to operations during
an accounting period. In determining depreciation. Cognisance is usually taken
of the wear and tear on an asset resulting from use, effluxion of time or
obsolescence dictated by changes in technology and market forces.
4.
An Investment
Property:- This is an
investment in land or building held primarily for generating income or capital
appreciation and not occupied substantially for use in the operations of the
enterprise.
5.
Depreciable
assets: These are items of property, plant and equipment with the
following characteristics:
i.
Have lives
over one year
ii.
Are acquired
primarily for use in production of goods or services for an enterprise.
iii.
Have limited
useful economic lives.
iv.
Are not
intended for sale in the ordinary course of business.
6.
Depreciable
Value:- This refers to that
part of the net book value of a
depreciable asset that an enterprise can allocate to future operations through
depreciation.
7.
Estimated
Useful Life of an Asset:- This is the shorter of
i.
The pre-determined
physical life.
ii.
The useful
economic life during which it could be profitably employed in the operations of
the enterprise.
(H) HISTORICAL
BACKGROUND
There are various guidelines and laws that guide
the preparation of a company’s financial statement. There is need to verify the
extent in which companies have adhered to these guidelines and laws. In this
research the guidelines as specified in S.A.S 9 will be used.
The Statement of Accounting Standard (S.A.S)
requires that for each accounting year the financial report or statement must
state:-
1.
The enterprise
accounting policy with respect to depreciation.
2.
The amount
charged as depreciation during the period.
3.
The effect of
any charge in depreciation rate on the operating results of the period.
4.
The method or
methods used in computing depreciation in the period.
5.
The book value
and the amount that would otherwise have been charged by way of depreciation on
any item of property. Plant or equipment reclassified during the accounting
period as an investment.
6.
The
accumulated depreciation for each category or group of assets held by an
enterprise.
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