An analysis of the effect of any International Accounting Standard on the accounts of any organisation in term

Question

Using the british Airways as an example can you please explain the analysis of the effect of any International Accounting Standard on the accounts of any organisation in terms of profitability or Financial stability or balance sheet value.

Answer 1

I don't know much about British Airways (BA) but I know they must own airplanes and they make money by selling air tickets.

IAS 16 Property, Plant & Equipment wld apply to BA. It allows PPE to be carried at cost less accumulated depreciation. BA mgt can manipulate profit and balance sheet value in their choice of useful lives of their assets. They can be conservative and depreciate their planes over 10 yrs or they can be aggressive and say that with proper maintenance the planes can fly for 20 yrs. This wld mean that depn in the 1st e.g is twice that in the 2nd e.g. So profit wld be lower in the 1st case than in the 2nd. If depn is higher, the nbv of the assets will be lower and vice versa. So to summarise, depending on how they apply IAS 16, both profit and balance sheet can be affected.

IAS 36 Impairment of Assets wld also apply to BA. This standard requires that if you carry your assets at cost less accd depn, you must perform an impairment test on your assets if there are any indications of impairment. If there are, you must quantify the recoverable value of the asset and recognise the impairment in your income statement. Again, mgt can choose how they want to ascertain recoverable value. The result can affect the impairment value, if any, to be recognised. PPE are stated at cost less accd depn less accd impairment loss, so you can see how the impairment losses can affect both profit and balance sheet.

A stable financial system is one in which major shocks that could disrupt the smooth functioning of the financial system are prevented, one which can withstand such shocks when they occur. However since noone has a crystal ball, the massive increase in price of aviation fuel was unforeseen and contributed to the downfall of many airline companies. The only IAS I can think of which is relevant to this is IAS 1 Presentation of Financial Statements esp. the part on going concern disclosure:

Going Concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.23]

Hope this helped.