Component Depreciation in Swedish Real State Companies –A study of how private and municipal companies handle K3’s new requirement for component depreciation
Abstract: Background and problem discussion: From the 1st of January 2014, the K3framework developed by the Swedish Board for Accounting Standards becamemandatory for large Swedish companies. K3 contains a requirement for tangibleassets to be divided into components if the difference in consumption of thecomponents was likely to be significant. Also, additional costs are activated in thebalance sheet if they fulfill the general asset criteria. Since real estate companies havelarge populations of tangible assets, they are affected by the new requirement. The K3framework is principle-based and do not have specific guidance regarding whichcomponents should be accounted for and how additional costs should be treated.Instead, accounting professionals urged industry organizations to develop guidelinesthe companies could use. The way assessments are made and how the framework isinterpreted can also be connected to the accounting motives within the organization.Private and municipal real estate companies are different in their ownership structuresand can therefore make different assessments and alternatives for actions.Purpose: The thesis has explored how municipal and private companies handled therequirement for component accounting in practice, and how their choices are affectedby institutional forces such as guidance from industry organizations as well asaccounting motives emerging from their ownership structures.Methodology: The thesis has been based on a qualitative method where in-depthinterviews have been made with CFOs in municipal and private real estate companies.By applying existing knowledge in the field on the empirics a deductive approach hasbeen used.Analysis and conclusion: The study has showed that all companies have usedguidance from industry organizations to prepare their component accounting, but thatthe municipal companies would have appreciated more specific guidance. Theauditors have played a minor role in the implementation, but they had a principlebasedapproach in their advising. The thesis has also concluded that municipalcompanies made more detailed component plans than private companies and that theythought the new framework provided a more true and fair view for the users of theirfinancial reports. The private companies strived to simplify the division ofcomponents as much as possible to reduce costs and to put resources on actions thatmaximized the company value in order to satisfy the owners, consistent with PAT. Apotential agency problem has been identified in the relatively small municipalcompanies since the municipal board did not evaluate their earnings targets verythoroughly.Contribution: The study contributes with an overall description of the handling ofcomponent depreciation, and that companies address the new demand differently,depending on ownership structure and size of business. It also provides a feedback tothe standard setter in terms of deficiencies such as insufficient initial guidance,insufficient knowledge from auditors and decreased comparability in the early stage.
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