The need for organisational policies
The value of a business’ property, plant and equipment is often the largest figure in a business’ accounts. It is therefore important that the business records their values correctly and ensures that the assets are looked after.
To assist with this, businesses should have policies covering such matters as:
- Safeguarding the assets
- Authorising the purchase of assets
- The way they assets are depreciated
Businesses should ensure that they know what assets are held, where they are, and that they cannot (easily) be lost. Appropriate policies will cover such matters as:
- Security to ensure that the assets are not stolen or damaged
- Maintaining records of the assets that are held (a business that does not maintain a record of its assets, increases the risk that they will be lost)
- Maintenance and servicing of assets to ensure that they are kept in good condition
- Insurance of assets to ensure that if they are stolen or destroyed the business’ losses are minimised
Authorising the purchase of assets
As these assets tend to be high-value items, a business should take care over their acquisition and disposal. Businesses therefore have policies over who may authorise these types of transactions.
Purchases of these types of assets require authorisation before they take place and the level of authorisation usually varies according to the amount of money involved. For example, a business might allow its managers to authorise the purchase of equipment up to a particular value (e.g. £5,000) but if the cost is greater than this amount, more senior management would need to authorise the purchase.
Businesses will have policies on the methods to be used to depreciate its assets as well as the rates of depreciation to be charged.
In addition, many businesses will specify how depreciation should be calculated in the year of acquisition and the year of disposal. This is something that students should take note of when calculating depreciation in exams. For example, one business may require depreciation to be calculated for part of a year whilst another might have a policy of not depreciating an asset in the year of its disposal but depreciating an asset for a full year in the year of its acquisition.
Many businesses have a policy of treating minor purchases of property, plant and equipment as expenses rather than capitalising them as assets. This is an application of the materiality concept which tells us that an error in a set of accounts may be overlooked if it will not affect the way that users will view the business.
For example, a business might decide that any asset purchased for less than £500 will be treated as an expense whilst those that cost £500 or more will be recorded as a non-current asset.
The threshold chosen will vary from business to business though larger businesses are likely to use higher materiality thresholds.