Every business requires appropriate levels of investment in non-current assets because it is these assets that are at the heart of its operations and lead to future growth. A business must decide whether to invest in real assets (such as property) or financial assets (such as shares) or intangible assets (such as trademarks).
An under-investment in non-current assets can lead to stifling business growth, an inability of the business to operate effectively and failure to provide for customer needs. An over-investment in non-current assets can result in a lack of productivity, inability to repay debt and a poor rate of return to the owners.
Asset management of non-current assets is the process of managing the acquisition, use and disposal of these assets to make the most of their future economic benefits and manage the related costs over their entire useful life. Planning and budgeting should include depreciation, maintenance, income and the disposal of an asset, not just the initial purchase cost.
The costs of acquisition and ongoing operating costs should be compared to the estimated income generated by the use of the asset. The finance for the purchase needs to be planned, including whether cash, debt or a combination is used. Alternatives need to be compared, such as outright purchase or leasing.
Internal controls will ensure that assets are kept secure, prevent loss and record-keeping is complete and accurate.
It is a well-established principle in our society that people should be protected to some degree from exploitation from others who may be better informed or more expert than they are. In the world of business this is achieved broadly in three ways:
1. the development of an accounting conceptual framework, with associated accounting standards, which sets out principles and rules with which all producers of financial reports are encouraged and some are required by law, to comply
2. legislation governing the operations of certain forms of business entity, notably the Corporations Act 2001
3. the requirement that certain entities must have their accounting systems and reports checked by an independent expert
The group most in need of protection provided by these means are those who hold shares and other securities in public companies, so it is these forms of business entity that are required by law to comply with accounting standards.
From the start of 2005, Australia adopted the Framework for the Preparation and Presentation of Financial Reports set out by the International Accounting Standards Board (ISAB) which, together with the former SACs 1 and 2, constitutes the conceptual outline which Australian businesses must operate. That Australian Accounting Standards Board (AASB) has issued a number of Accounting Standards that deal with specific items of preparation or presentation. Generally, Standards comply with the principles contained in the Framework though, if there is a conflict, the Standard prevails.
Although compliance with Accounting Standards is not mandatory for all business financial reports, it does extend well beyond the bounds of legal requirements. For example, the professional accounting bodies in Australia expect their members to comply with standards in all reports for whose preparation they are responsible, regardless of whether their compliance is compulsory.