Fair value refers to the amount received on selling of an asset or paid for transferring the liability as per order between the market applications exactly on measurement date. The price will fluctuate on entry to exit for any property. The four criteria applicable are subject of measurement, valuation premise, and determination of advantageous market and Valuation technique (Ernst & Young, 2012).
International Accounting Standards Board (IASB) issues IFRS 13, incorporated by AASB 13 measurement of fair Value. AASB 13 helps in defining the fair value, sets a single standard framework and requires disclosures for measurement (AASB Standard, 2015). Criteria taken into concern while measurement the fair value is the location along with the condition of the assets and restrictions on use or sale of these assets are applicable or not (AASB Standard, 2015).
In the case study, factory and land are the two assets, which can be measured at a fair value. Alternatively, factory and land can be considered at a single unit of asset for assessment.
Estimated value of Land is $1,000,000. Cost provided for demolishing the factory existing on the land is $100,000. Hence, the property can be sold at $900,000 for residential purposes. Here the land will be sold considering stand-alone basis and its fair value (Sangiuolo & Seidman, 2008).
Factory and land can also be sold as a single unit. As per the mentioned data in the case study, factory price can be depreciated from the construction value $520,000 to combined value of land and factory at$260,000, which depicts depreciation of 50% till 30th June 2017. Provided Cost of new factory is $780,000, therefore current replacement value of the factory after depreciation will be approximately $ 390,000. Here, the factory can be built on cheaper blocks but residential apartments will require better land blocks. Hence the market for combined factory and land is not favourable based upon in-use valuation premise (Crowe Horwath, 2012). Hence, the buyer or market participant will be forced to buy the land along with factory at $ 900,000 considering its better use for residential purpose.
The market will offer maximum advantage, if the property is sold for residential purposes.
The property including the land has a value of $900,000, which is same for residential use, but if the factory is separately sold, it will have no fair value.
There are two ways of determining the use of the property considering the case study.
Out of these two ways, one with the higher value will have the best and highest use. If the first option is taken, then depreciation will not be calculated due to its nil fair value. Considering the second option, land and factory need to be separately valued for determining the depreciation.
The conceptual framework in this section describes physical as well as financial capital maintenance. The criteria start with either downwards or upward valuation.. Additionally, the non-current assets must be re-valued and the carried amount is considered as book value. It is defined as a model, which helps in carrying out a re-valued fixed asset, where amount carried and recorded in books are considered as a fair value(Deloitte Global Services Limited, 2017; Deloitte Global Services Limited, 2017a)
Considering paragraph number 75 of AASB 138 and 31 of AASB 116, intangible asset is carried upon as re-valued amount after recognition, where any accumulated losses due to impairment and amortisation is deducted. Revaluation of previously recognized assets is prohibited and initial recognition is completed at the re-valued amount excluding cost (AASB, 2009; AASB, 2015).
|
Date |
Account |
DR |
CR |
|
1 July 2016 |
Machine A |
100000 |
|
|
Machine B |
60000 |
||
|
Cash |
160000 |
||
|
30 June 2017 |
Depreciation exp. (Machine A) (1/5 of 100000) |
20000 |
|
|
Accumulated Depreciation (Machine A) |
20000 |
||
|
Depreciation exp. (Machine B) (1/3 of 60000) |
20000 |
||
|
Accumulated Depreciation (Machine B) |
20000 |
||
|
Accumulated depreciation (Machine A) |
20000 |
||
|
Machine A (carried amount written off) |
20000 |
||
|
Machine A |
4000 |
||
|
Gain on Revaluation of Machine A (Increment from 80000 to 84000) |
4000 |
||
|
Profit on revaluation of Machine A |
4000 |
||
|
Surplus of Asset revaluation (net gain after revaluation in equity) |
4000 |
||
|
Accumulated Depreciation (Machine B) |
20000 |
||
|
Machine B (carried amount written off) |
20000 |
||
|
P&L A/C (loss on revaluation in Machine B) |
2000 |
||
|
Machine B (revaluation as per fair value on 30 June 2017) |
2000 |
|
Date |
Account |
DR |
CR |
|
01 Jan 2018 |
Machine C |
80000 |
|
|
Cash (Acquisition of new machine C) |
80000 |
||
|
Depreciation exp. (Machine B) |
9500 |
||
|
Accumulated Depreciation (Machine B) (38000*1/2 *1/2) |
9500 |
||
|
Cash |
29000 |
||
|
Sale of Machine B |
29000 |
||
|
Cost price of machine B after depreciation |
28500 |
||
|
Accumulated Depreciation (Machine B) |
9500 |
||
|
Machine B |
38000 |
||
|
General Reserve |
8000 |
||
|
Surplus of Asset revaluation (Machine A) |
2000 |
||
|
Share Capital |
10000 |
|
Date |
Account |
DR |
CR |
|
01 Jan 2018 |
Machine C |
80000 |
|
|
Cash (Acquisition of new machine C) |
80000 |
||
|
Depreciation exp. (Machine B) |
9500 |
||
|
Accumulated Depreciation (Machine B) (38000*1/2 *1/2) |
9500 |
||
|
Cash |
29000 |
||
|
Sale of Machine B |
29000 |
||
|
Cost price of machine B after depreciation |
28500 |
||
|
Accumulated Depreciation (Machine B) |
9500 |
||
|
Machine B |
38000 |
||
|
General Reserve |
8000 |
||
|
Surplus of Asset revaluation (Machine A) |
2000 |
||
|
Share Capital |
10000 |
||
|
Date |
Account |
DR |
CR |
|
30 June 2018 |
Depreciation exp. (Machine A) |
21000 |
|
|
Accumulated Depreciation (Machine A) (84000 * ¼) |
21000 |
||
|
Depreciation exp. (Machine C) |
10000 |
||
|
Accumulated Depreciation (Machine C) (80000 * ¼ * 1/2) |
10000 |
||
|
Accumulated Depreciation (Machine A) |
21000 |
||
|
Machine A (carried amount written off) |
21000 |
||
|
Loss on Machine A after revaluation |
2000 |
||
|
Machine A (Value decreasing from $ 63000 to $ 61000) |
2000 |
||
|
Surplus on Asset revaluation (Machine A) |
2000 |
||
|
Loss on Machine A after revaluation (net loss after revaluation accumulated to equity) |
2000 |
||
|
Accumulated depreciation (Machine C) |
10000 |
||
|
Machine C (carried amount written off) |
10000 |
||
|
P&L A/C (Total Revaluation Loss) |
1500 |
||
|
Machine C (fair value after revaluation on 30th June 2018) |
1500 |
Intangible assets fall under IAS 38, is defined as an identifiable and non-monetary assets, having no physical essence to it. Criteria differentiate in intangible assets, where one is identifiable and the others are internally generated (Krstia & Dor-Devia, 2010).
According to AASB, intangible assets are part of AASB 138: 9, where some of the major criteria are identifiable and controlled further having economic benefits (AASB, 2015).
As per AASB, if there is no expenditure for internally generated assets, it will not come under AASB 138:24. Measurement of intangible assets is done based on the cost price. Any expenses incurred for the development of intangible assets is internally generated and depends on its classification. In AASB 138:56, investigation should be planned along with original research taking fresh knowledge under prospect. Research findings provide development as per AASB 138:59. Research expenditure is taken into account as incurred expenses under AASB 138: 54. Capitalization of development expenditure depends on various criteria under 138: 57, which needs to be fulfilled. Brands, mastheads and customer lists among others will not be given the recognition of intangibles assets excluding patents. Additionally, customer relationship is neither identifiable nor can be exchanged or sold.. However, it is necessary to amortise the internally generated intangibles having indefinite life, if customer relationship is recognized (AASB, 2015; CPA Australia, 2015).
Recognition of acquired intangibles is easier, as the transactions takes place in the market, where it is measured as per fair value based on business combinations, whereas internally generated ones are not identified. Fair value can be used for acquired intangible assets for determining the overall cost. Moreover, the assets are internally generated and excluded under 138: 63 and can be recognized as acquired ones. However, all the intangible assets are treated similarly, once it gets identified (AASB, 2015; CPA Australia, 2015).
Managers look forward to maximize the company profits. Hence, writing off R&D investments guarantees future earnings from acquisitions, free of any liability prior to amortization. Furthermore, return on equity and assets will provide better results in future, if it is written off in the present rather than amortising it later. One-time items written-off have no value according to the investors and therefore its effect is discounted, which improves in profitability in the upcoming years. Moreover, immediate expenditures by the managers will be forced during failures, which attract additional attention to the business activities. Accounting processes incur costs for measuring the fair values, efficient running of analytical models along with reviewing the measures through auditors (Wyatt & Frick, 2010; Artsberg & Mehtiyeva, 2010).
Defined Benefit Obligation or DBO is expected payments in the future, which is required for settling employee service obligations in the current situations. Falling under paragraph 64 of AASB 119, net DBL (asset) is required to be recognized for obtaining benefits from post-employment in the financial statement (Henderson, Peirson, Herbohn & Howieson, 2008; AASB, 2011).
Present Value of the defined benefit obligation as on 31st Dec 2016 = $ 23000000
Fair value of the plan assets as on 30th June 2016 = $ 20130000
Deficit of Fund as on 31st December 2016 = 23000000 – 20130000
= $ 2870000
Net defined benefit liability will be same as deficit of fund, which is equivalent to $ 2870000
Present Value of the defined benefit obligation as on 1st Jan 2016 = 20000000
Past service cost = 2000000
Total = 22000000
Interest expense component of the defined benefit obligation = 22000000 * 10%
= 2200000
Interest income component of the defined benefit obligation = 19000000 * 10%
= 1900000
Net Interest = 2200000 – 1900000
= 300000
|
Particulars |
Net Defined Benefit Liability ($) |
Defined Benefit Obligation ($) |
Plan Assets($) |
|
Balance as on 1st Jan 2016 |
1000000 |
20000000 |
19000000 |
|
Past service cost |
2000000 |
||
|
Revised new balance |
22000000 |
||
|
Interest @ 10% |
2200000 |
1900000 |
|
|
Current Service Cost |
800000 |
||
|
Received contributions by fund |
1000000 |
||
|
Paid Benefits by fund |
(2100000) |
(2100000) |
|
|
Return on plan assets excepting evaluated interest ( working done below) |
330000 |
||
|
Actual loss calculated on defined benefit obligation |
100000 |
||
|
Balance as on |
28700000 |
23000000 |
20130000 |
Working Note:
Return on Plan assets
Fair Value as on 31st Dec 2016 = $ 20130000
Less:
Opening Balance $ 19000000
Interest Income 1900000
Received Contributions 1000000
Paid Benefits (2100000) = $ 19800000
Return on plan assets excepting evaluated interest = $ 330000
References
AASB Standard. (2015). Fair Value Measurement. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf
AASB. (2009). Property, Plant and Equipment. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_01-09.pdf
AASB. (2011). Employee benefits. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf
AASB. (2015). Intangible assets. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
Artsberg, K., & Mehtiyeva, N. (2010). A literature review on intangible assets. School of Economics and Management
CPA Australia. (2015). IAS 38 intangible assets. Retrieved from https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/reporting-ifrsfactsheet-intangible-assets.pdf?la=en
Crowe Horwath. (2012). Premise and standard of value. Retrieved from https://crowehorwath.net/uploadedfiles/au/insights/insightsassets/premise%20and%20standard%20of%20value.pdf
Deloitte Global Services Limited. (2017). Conceptual framework — Presentation and disclosure; elements of financial statements; capital maintenance (IASB only). Retrieved from https://www.iasplus.com/en/meeting-notes/iasb/2013/march/cf-2
Deloitte Global Services Limited. (2017a). IAS 16 — Property, plant and equipment. Retrieved from https://www.iasplus.com/en/standards/ias/ias16
Ernst & Young. (2012). Fair value measurement. Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-applying-ifrs-fair-value-measurement/$FILE/ey-applying-ifrs-fair-value-measurement.pdf
Henderson, S., Peirson, G., Herbohn, K. & Howieson, B. (2008). Issues in financial accounting. England: Pearson Higher Education AU.
Krstia, J., & Dor-Devia, M. (2010). Financial reporting on intangible assets: Scope and limitations. Facta universitatis. Series Economics and Organization, 7(3), 335-348.
Sangiuolo, R. & Seidman, L. F. (2008). Financial instruments: A comprehensive guide to accounting and reporting. United States: CCH
Wyatt, A., & Frick, H. (2010). Accounting for investments in human capital: A review. Australian Accounting Review, 20(3), 199-220.
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