The preparation of the financial statement needs to be complied with the accounting standard. Described in the Auditing Standard ASA200, “the objective of an audit of a financial report is to enable auditor to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework”(AUASB, 2009). Accounting framework and standards published by IFRS is adopted worldwide. Almost all of the standards and frameworks produced by IFRS are also adopted by AASB. Therefore, understanding the classification regulation in the accounting standards is a medium to understand classification of general investment from the accounting angle. Figure 2.1 is a demonstration of the classification of asset and expense that was organised base on the interpretation of the accounting standards from both IAS and AASB (IFRS, 2011a, CPA, 2010, CPA, 2008, CPA, 2009).
In figure 2.1, differentiating whether expenditure shall be recorded either as asset or expense shall be considered at the initial stage of the classification procedure. In IAS 1 and AASB 1 There are five categories of information that need to be reported in financial. They are “(a) asset, (b) liability, (c) equity, (d) income or expense, (e) contribution by and distribution to owner in their capacity as owners and (f) cash flow”. The standard also specifies that the information described earlier is required to be reported in the element of the financial statements. The elements of the financial statements include Balance Sheet, Income Statement, and Statement of Change in Equity, Cash Flow Statement and The Note to Financial Statement.
Base on the accounting frameworks, asset should be report on balance sheet, while expense shall be reported on the income statements. If the expenditure meets the
capitalisation criteria to be recognized it shall be capitalised and included as the balance sheet reporting items; otherwise, it needs to be recorded as an expense and be reported in the Income Statement. (CPA, 2008, CPA, 2009, CPA, 2010)
Both IAS and AASB specify different categories of asset that shall be reported as the main class/line items on the balance sheet. Two line items, Property Plant and Equipment (PP&E) and Intangible Asset are possibly related to IT and required to be reported as line items or the main class of asset on a balance sheet. PP&E is required to be reported on the balance sheet by AASB 101, IAS 16, and AASB 116. Based on IAS 16 and AASB116, PP&E is the asset that has the physical substance. Intangible Asset is another main class of asset required by AASB 101, IAS 38, and AASB 138.
According to IAS 38 and AASB 138, Intangible Asset is the asset that is non-cash and without physical substance. Apart from the specified two line items above, firms can create additional classes with any descriptions that are relevant for decision- making and according to the nature of the operating activities of firm.
Based on IAS1 and AASB101, the subclass of asset shall be reported on the note to financial statements if not reported on balance sheet. For the subclass of PP&E, PP&E under the construction is spotted to be a subclass of PP&E that specified by the accounting standard IAS16 and AASB116 to be reported by firms. For the subclass of Intangible Asset, IAS38 and AASB138 require firms to report separately the intangible asset acquired separately, intangible asset acquired through business combination, and internal generated intangible asset. Other than the subclass of asset mentioned earlier, both IAS and AASB allow firms to create and report any additional subclass of asset following the aggregation rules in the accounting standards.
Figure 2.1 diagrams illustrating the accounting standards classification of asset and
Accounting standards also require firms to report specific classes and subclasses of expense on Income Statements and Note to Financial Statements. In figure 2.1, the interpretation from the accounting standards IAS1, AASB101, IAS 16, and AASB116 required firm to report the expense from the disposal of PP&E and the written down PP&E. IAS1 and AASB101 also require firms to report the organisation expense on employee benefit, for example salary and wages. IAS16, AASB116, IAS38, AASB138 also require firm to report depreciation and amortisation of asset.These items are required to be reported on the note to financial statement if they are not reported on the income statement. The organisation can follow the aggregation rules in the accounting standards to create and report additional class and subclass of expense.