Understanding AASB 13 Fair Value Measurement In Valuing Assets And Liabilities

Objectives of AASB 13

The Australian Accounting Standard Board (AASB) aims at formulating such Australian Accounting Standards that includes interpretations and are required to be applied by :

• Organizations required to present and prepare financial reports according to Corporations Act 2001 ;
• Governments who are required to prepare financial reports for the entire General Government Sector (GGS) ;
• Reporting entities whether they are profit making or nonprofit making companies or whether they are preparing general purpose financial statements.

Our scope of study is about AASB 13 ‘Fair Value Measurement‘ and is issued by IASB (International Accounting Standards Board). Organizations complying with AASB 13 are automatically complying with IFRS 13 (Atkinson, 2012).

AASB 13 Standard defines fair value and sets out the framework to be used for measurement of fair value and also requires accurate disclosures about such measurements of fair value. Fair value is a measurement based on the market situations and is not estimated based on entity’s considerations or perspective.

For certain assets and liabilities, market prices or market conditions are available while in certain instruments, they might not be available. However, the concept of fair value measurement remains the same in both the cases, that is, estimation is made about the price at which the sell or transfer of an asset or liability respectively will take place under market conditions between market participants on the date of measurement.

However in case of non availability of proper market conditions, an organization uses other valuation techniques that make use of available inputs to estimate a fair value for the instrument (Berry, 2009). Fair valuation uses assumptions about risk, perception of market participants, trend analysis etc. Thus, as a result, the intention of an entity that whether it wants to hold an asset or it wants to settle a liability is irrelevant for measurement of fair value (Datar, 2015).

Let us discuss the objectives of AASB 13 in brief:

• Defining fair value: The standard defines the fair value as the price in the market that would be received in case of sale of an asset or paying off a liability between the participants of market on the date of measurement. The fair value measurements take into concern the characteristics of an asset or a liability such as location, conditions, uses of assets and restrictions on such assets or liabilities (Edwards, 2014).
• Framework for measurement of fair value: This framework states about the market conditions relevant for an instrument, the perception of market participants, risks associated etc (Girard, 2014). For example, It considers non performance risk when measuring a liability which is a broader concept than the credit risk owned by an entity. Market participants are those persons who are independent, knowledgeable and capable enough to transact without any force whereas orderly transactions refer to those transactions that take place normally in the market, that is, it excludes the sales value made under liquidation, sales due to fire, non-arms length sales, etc. It considers the restrictions that might prevent the transfer of a liability or sale of an asset or transfer of its financial instruments. The framework states valuation techniques that would be appropriate enough to measure an instrument’s fair value and also that increases the relevance of the inputs that are observable and reduces the use of inputs that are non observable (Seal, 2012).
• Appropriate Disclosures: The objective of the standard is to disclose about the valuation technique adopted, the basis whether recurring or non recurring after initial recognition, using of important inputs whether observable or unobservable, the effects of such valuation on profit or loss or other comprehensive income for the financial year. The company shall make detailed disclosures if it is of material nature. It shall state the emphasis to be placed on various requirements of the standard, additional information that might deliver transparency at a greater level to the intended users (Siciliano, 2015).

Usually the instruments referred above can be assets whether tangible or non tangible, liabilities and equity instruments. For measuring fair value, the instrument is to be recognized, that is, its characteristics and behaviour, the premise is determined for appropriate valuation, the relevant market for such an instrument is determined and then, accordingly the valuation technique is adopted.

For centuries, the books were made on historical cost basis that were based on conditions existing while transacting to buy or sell such an instrument and not the current conditions where such an instrument is existing (Taillard, 2013). The adoption of fair value measurement is important to vanish the traditional concepts as valuation of an instrument is a part of valuation of an enterprise and an enterprise value in the market is important for the users who are responsible for making decisions of investments, supplies, management decisions, etc.

Framework for Fair Value Measurement

The financial crisis globally had put a pressure on having common fair value measurements across the world and accurate disclosure requirements. This is because fair value measurement instils a better relevance in the books. For example, an equity instrument is purchased today for $15 and just after some time, a government regulation regarding increase in taxation is circulated. In such a case, the price of the entity might fall due to unfavourable economic condition. Therefore, the valuation of such an instrument is to be made on the basis of such condition and not on $15 so as to let intended users know about the current price of the instrument in the market. The correct valuation would help in correct valuation of market capitalization rate of an enterprise which is important for comparison purposes in terms of performance between different enterprises in the industry.

It is important for enterprises to make an extensive use of AASB 13 when valuing their assets and liabilities. AASB 13 delivers consistency and uniformity across the global corporate world. This standard is more based on delivering real value of an instrument and not the cost at which it was previously transacted. The high demand of transparency means the most appropriate and accurate valuations in the financial statements. Thus, we see the increasing relevance of AASB 13 in the books and how well the enterprises are complying with it to satisfy the objectives of this standard.

Part B:

The amount by which total carrying cost exceeds recoverable amount is known as impairment loss. In the given case, the total carrying amount of the assets amount to $1221700 and the total recoverable amount amounts to $1095700. Therefore, the total impairment loss amounts to $126000 (1221700-1095700).

Impairment loss against goodwill is $42000 and against equipment is $30539 (820700-790161). The remaining impairment loss of $ 53461 (126000-42000-30539) is written off against the rest of the assets in the ratio of their carrying amount. The distribution of the impairment loss for the rest of the assets is shown in the below table:

Particulars	Carrying Amount	Ratio	Impairment Loss
Copyright	189000	0.53	28,145 (53461*0.53)
Machinery	119000	0.33	17,721  (53461*0.33)
Inventory	51000	0.14	7,595  (53461*0.14)
	3,59,000		53,461

The journal entries are as follows:

Particulars	Dr Amt	Cr Amt
Accumulated Impairment Loss ……..Dr	1,26,000.00
To Equipment		30,539.00
To Copyright		28,145.21
To Machinery		17,721.06
To Inventory		7,594.74
To Goodwill		42,000.00
(Being impairment on assets realised)
Impairment loss……Dr	1,26,000.00
To accumulated impairment loss		1,26,000.00

Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.

Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.

Datar, M. S. (2015). Cost accounting. Boston: Pearson.

Edwards, M. (2014). Valuation for Financial Reporting: Fair Value Measurement in Business Combinations, Early Stage Entities, Financial Instruments and Advanced Topics . Hoboken: John Wiley & Sons Inc.

Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.

Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.