Valuation And Impairment Assessment Of Property, Plant And Equipment: AASB Standards Perspective

Relevant Issues

Conceptual framework: Para 6.22-6.33

AASB: 116 Para 15

For the measurement of fair value of property, plant and equipment, it is important to consider the applicable standard provided by the AASB. The applicable standard under this case will be AASB 116. This standard outlines the accounting treatment for property, plant and equipment (AASB 116.Property Plant and Equipment, 2016).

In this case, Maple Ltd acquired a land in 2007 for $200 000 and the cost of building the factory was $520 000. Thus, as per the above provision, the total cost of factory will be the sum of $ 20 000 00 + $520 000 = 25 20 000. The carrying value the factory at 30 June 2017 was 10 00 000. The accumulated impairment of the factory as per the standard would be 15 00 000.

The subject matter of the valuation in this case will be the land which was previously acquired for factory. However, due to its residential location the factory needed to be demolished at a certain cost for making it fit for residences.

AASB 16 does not lay down any specific unit of measure for recognition as to what constitutes property, plant, and equipment. However, if we use the cost model for valuation each part of the physical asset must be depreciated separately that is in significant relation to the total cost of the asset.  The standard also recognises that some parts physical asset may require to be replaced at regular intervals by inspections for any faults.  The carrying amount will also comprise of cost of replacing and inspecting the part of such an asset.  

Revaluations of the asset must be regularly carried out based on market projection.  The carrying amount of an asset must not materially differ from its fair value at the balance sheet. The market for such asset will be any market participant which can make use of the asset better than its present use. ( AASB 13. Fair Value Measurement, 2016).  

These non-current assets are initially measured at the cost of acquiring the asset and all the cost associated with bringing the asset into workable condition. Subsequently, these types of assets are measured by either the cost method or the revaluation model, and are amortized depreciated in a way so that the depreciable amount is allocated over asset’s estimated useful life systematically on regular basis. The impairment losses arising due to the reduction in its fair value, is recognized separately in the profit and loss statement.

Determine Subject of Measurement

Conceptual framework: CF 6.6

AASB: 136

The specified account deals with Impairment of assets. Para 5 of the standard specifies that as per provision of other accounting standard as revaluation model of AASB 116 Property, Plant and equipment; impairment is assessed in accordance with the fair value. In sub point b of Para it has been provided that after applying revaluation requirement; an organization will apply this standard for ascertaining whether asset is impaired or not (AASB 136. Impairment of Assets, 2016). Further Para 58 to 64 deals with measurement and accounting of impairment loss.

In present case Peewee Ltd has acquired two assets A & B and further sold asset C. The company has revalued the asset at the end of year 2017 and 2018.  Thus, it has been assessed that whether the assets are impaired or not and journal entry relating to same have been provided below. 

Calculations:

Depreciation of Machine A

= Cost of Machine / Expected useful life

= $100000/5

=$20000

Depreciation of Machine B

= $60000/3

= $20000

Revaluation Surplus on Machine A

Fair value – Book Value (after depreciation) (Zakaria and et.al.2014)

= $84000 -$80000

$4000

Impairment loss on Machine B

Fair value of Machine – Fair value – Book Value (after depreciation)

= $38000 -$40000

=-$2000

(Amount in $00)

Date	Account	DR	CR
1st June 2016	Machine  A A/c Dr.	1000
	Bank A/C		1000
1st June 2016	Machine  B A/c Dr.	600
	Bank A/c Cr.		600
30th June 2017	Depreciation A/c Dr (working note A)	200
	Machine A A/c Cr.		200
30th June 2017	Depreciation A/c Dr (working note B)	200
	Machine B A/c Cr.		200
30th June2017	Machine A A/c Dr (working note C)	40
	Revaluation Surplus Cr		40
30th June 2017	Revaluation Surplus A/c Dr (working note D)	20
	Machine B A/c Cr.		20

Calculations & General Journal Entries 1/8/18:

Date	Account	DR	CR
1st Aug. 2018	Cash A/c Dr.	29000
	Revaluation A/c Dr	2000
	Profit & Loss A/c Dr.	7000
	Machine B A/c Cr.		38000
	(Loss incurred on sale of machine)
1st Aug. 2018	Bank A/c Dr	80000
	Machine C A/c Cr.		80000
	(Being machine purchased for cash)
1st Aug. 2018	General reserve A/c Dr.	8000
	Revaluation Surplus A/c Dr.	2000
	Share Capital  A/c Cr.		10000
	(Being bonus share issued)

Date	Account	DR	CR
30th June 2018	Depreciation A/c Dr. (working note A)	21000
	Machine A A/c Cr		21000
30th June 2018	Depreciation A/c Dr. (working note B)	20000
	Machine C A/c Cr.		20000
30th June 2018	Impairment loss A/c Dr (Working note C & D )	3500
	Machine A Cr.		2000
	Machine C A/c Cr.		1500

Conceptual framework: BC5.12

AASB: 138 Para 48 to 50 

The AASB 138 states that the internally generated goodwill must not be treated as an asset. There are certain cases where, the expenditure incurred for generating future economic benefits, does not result in any creation of intangible asset which fully meet the criteria of recognition provided in this Standard. It has been specified in Para 48 to 50 that such expenditure is often described as contributing to internally generated goodwill. The reason behind this provision is that the internally generated goodwill is not a separately identifiable resource.

The main issue in this case is that when intangible assets are treated as internally generated rather than being accounted as acquired, a lot of differences arise in its cost and impairment value.

Para 65 to 67 specifies the provisions relating to cost of internally generated intangible asset. Though, sometimes it is difficult to ascertain that whether an intangible asset that is internally generated qualifies for recognition due to

• Difficulty in identifying the future economic benefits provided by the asset and
• Complexity in determination of cost of the asset as the cost of internally generating an intangible asset is not separable from the cost of maintaining the internally generated goodwill of the entity or from the cost of day-to-day operations.

 Therefore, apart from conforming to the general requirements for the assets’ recognition and initial measurement, the entity also applies other requirements and guidance provided by the standards to all intangible assets generated internally. For assessing whether the asset meets the criteria to be recognized as an internally generated intangible asset, an entity has to classify the generation of the asset into two phases-

Determine Valuation Premise/Method

A research phase- There is no recognition to any intangible asset that arises from the research phase of an internal project. Expenditure on any research activity is recognised as an expense in the year when it is incurred (Yao and et.al.2015). This is because during this phase an entity cannot exhibit that the intangible asset will make economic benefits in the future.

A development phase- The asset arising from the developmental phase can be recognized only when there is a surety of it being completed for further use and will deliver some king of economic benefit to the entity.

In accordance with AASB 3, Business Combinations, if intangible assets like any goodwill or patents are acquired through a business combination, its fair values serves as the cost at the date of acquisition. This fair value reflects expectations of market participants about the possibility of future economic benefits that the asset will offer to the entity at the acquisition date. On the other hand, the fair value of internally generated intangible asset are considered only after the asset meets some criteria at the development stage and is cost is capable of being separated from other expenses. The fair value in the latter case would be the expectations of market participants if the liability of the asset is transferred (AASB 138.Intangible Assets, 2016).

The main reason for reluctance in both the accounting treatment is that when an intangible asset is acquired to due to business combination or any other specified method, its useful life and future economic benefit are capable of being certain. Thus, the fair value can be calculated easily. As per views of Hoyle, Schaefer and Doupnik, (2015) on the other hand, if the asset is generated internally it may not be possible to separate the cost at the research phase; moreover, the useful life of asset may be difficult to calculate.

Conceptual framework: BC4.54

AASB: 119 Para 26 -31 and 66

AASB 119 deals with provision relating to employee benefits. Further, provisions relating to defined benefit plans have been specified in Para 26 -31and recognition relating to same has been explained in Para 66 (AASB 119. Employee Benefit, 2016). 

Particular	Amount in $
Balance of benefit obligation as on 31.12.16	23000000
Fair Value of plan assets	20130000
Deficit	28700000

Deficit of fund = $28700000

The amount is equal to deficit of fund i.e. $28700000.

Calculation                                                                             (Amount in $)

Carried forward balance of defined benefit obligation + Past service cost *10%

=20000000+2000000 *10% =2200000

Interest Income

$19000000 *10% =$1900000

Net Interest

$2200000- $1900000

=$300000

Calculation of return on plan asset

Fair value of Plan asset as on 31.12.2016 – Opening balance – Income from interest – contributions – payment of benefit

= $20130000 -$19000000 -$1900000 -$1000000- (2100000)

= $330000

	Liability of Net Defined Benefit	Obligation of Defined Benefit	Plan Assets
Balance as on 1st Jan 2016	1,000	20000	19000
Cost of Past service		2000
Adjusted Balance		22000
10% interest		2200	1900
Cost of Present service		800
Fund Contributions received			1000
Funds’ paid Benefits		(2100)	(2100)
Return on Plan Assets excluding Interest			330
Remeasured Actual loss of Defined Benefit Obligation		100
Balance as 31st December 2016	2870	23000	20130

Date	Particular	Dr.	Cr.
31st December 2016	Expense related to Superannuation  (P/L)   Dr	3 100
	Superannuation Income Account Cr		230
	Bank A/c Cr		1 000
	Superannuation liability A/c Cr		1 870
	(being Superannuation expense and contributions accounted)

References

Books and Journal

Basu, A. and Andrews, S., 2014. Asset allocation policy, returns and expenses of superannuation funds: recent evidence based on default options. Australian Economic Review, 47(1), pp.63-77.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.

Zakaria, A., Edwards, D.J., Holt, G.D. and Ramachandran, V., 2014. A Review of Property, Plant and Equipment Asset Revaluation Decision Making in Indonesia: Development of a Conceptual Model. Mindanao Journal of Science and Technology, 12(1), pp.1-1.

Online

AASB 116.Property Plant and Equipment. (2016). (PDF). Available through < https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_07-09.pdf>. [Accessed on 6th October 2017.]

AASB 13. Fair Value Measurement. (2016). (PDF). Available through < https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf>. [Accessed on 6th October 2017.]

AASB 138.Intangible Assets. (2016). (PDF). Available through < https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun14_07-14.pdf>. [Accessed on 6th October 2017.]

AASB 136. Impairment of Assets. (2016). (PDF). Available through < https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun14_07-14.pdf>. [Accessed on 6th October 2017.]

AASB 119. Employee Benefit. (2016). (PDF). Available through < https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf>. [Accessed on 6th October 2017.]