AN EVALUATION OF THE CONFORMITY OF THE DEPRECIATION PRACTICES WITH S.A.S 9 (A SURVEY OF SELECTED MANUFACTURING COMPANIES IN THE LAGOS METROPOLIS)

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Product Code: 00005803

No of Pages: 138

No of Chapters: 5

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ABSTRACT

The purpose of this research work is to find out to what extent various manufacturing companies have adhered to the  guidelines land 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  

vii

 
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

vii

 
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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