Valuation Premise For Measurement Of Fair Value, Revaluation Model, Internally Generated Intangible Assets, Accounting For Defined Benefit Superannuation Plans

Valuation of Maple Ltd’s assets

Solution-1

Fair valuation of assets means recording them at the market values. As per AASB 116, there are two methods for valuing and recording non-current assets. These are cost model and revaluation model. Following are the steps for measuring non-current assets at fair value (“AASB 116 – Property, Plant and Equipment – July 2004”, 2017):

Identification of assets for fair valuation– First of all, the assets or group of assets liable for fair valuation should be identified. In the given case, we have 2 assets for fair valuation, one is land and another is building. Alternatively, we can consider both the assets as single asset, i.e. Land & Building.

Determination of best use of assets and its valuation- Next step is to identify the best use and valuation of assets. In the given case, the assets i.e. land and building can be sold individually. In that case, the land can be sold for residential purpose for $1,000,000 and the building is of no cost or value. So, the net inflow in this case would be $1,000,000. Another option is to sale the land and building as a single asset. So, the Maple Ltd. will have to incur a cost of $100,000 in demolition of building and $780,000 to build new factory on the piece of land and the residential apartments can be sold for $500,000. So the best value of the land is $1,000,000 and the most advantageous purpose is to sale the land for residential apartments.

Recording of assets in financial books– The next step after identifying the assets for valuation and computing their values is to record the fair value in the books of accounts. This recording should be as per AASB 116. As per the procedure given under standard, the asset should be recorded at fair value initially and after that these values should be reviewed at each period end and the assets should be carried at fair values each time. The valuation gain or loss should be recorded in the statement of equity through revaluation surplus or loss account. In the given case, the entry to record fair valuation in the books is as follows:

In the above entry, to record asset under fair value, first of all the carrying amount of assets is compared with the fair value and then if the difference is positive then the amount reflects the gain and is credited to Revaluation Surplus account and if the difference is negative means carrying value is more than the fair value then the amount reflects the loss and is debited to the Revaluation Loss account. In the current case, there is a gain as the carrying value is $460,000 (i.e. $200,000 for land and $260,000 for building) and fair value is $1,000,000 and the difference of $540,000 is credited to the revaluation surplus account.

Solution-2

Part-1

Journal Entries in the books of Peewee Ltd. for the year ended on 30 June, 2017

Date	Description	Debit	Credit
1 July, 2016	Machine A	100,000
	Machine B	60,000
	To Bank		160,000
	(To record purchase of machines)
30 June, 2017	Depreciation Expense	40,000
	To Accumulated Dep – Machine A		20,000
	To Accumulated Dep – Machine B		20,000
	(To record depreciation expense for the year)
30 June, 2017	Accumulated Dep – Machine A	20,000
	Accumulated Dep – Machine B	20,000
	To Machine A		16,000
	To Machine B		22,000
	To Revaluation Surplus (refer WN-1)		2,000
	(To record machines at fair value)

Particulars	Machine A	Machine B
Cost	100,000	60,000
Useful life (in years)	5	3
Less: Dep for the year	20,000	20,000
Carrying value	80,000	40,000
Fair value	84,000	38,000
Revaluation surplus / (loss)	4,000	(2,000)

Part-2

Measuring and recording assets at fair value

Date	Description	Debit	Credit
1 January, 2018	Depreciation Expense	9,500
	To Accumulated Dep – Machine B		9,500
	(To record depreciation expense on machine B)
1 January, 2018	Bank	29,000
	Accumulated Dep – Machine B	9,500
	To Machine B		38,000
	To Gain on sale of machine (refer WN-2)		500
	(To record gain on sale of machine)
1 January, 2018	Machine C	80,000
	To Bank		80,000
	(To record purchase of Machine C)
1 January, 2018	General Reserve	8,000
	Revaluation Surplus	2,000
	To Share Capital		10,000
	(To record issue of bonus shares)
30 June, 2018	Depreciation Expense	31,000
	To Accumulated Dep – Machine A		21,000
	To Accumulated Dep – Machine C		10,000
	(To record depreciation expense for the year)
30 June, 2018	Accumulated Dep – Machine A	21,000
	Accumulated Dep – Machine C	10,000
	Revaluation Loss (refer WN-3)	3,500
	To Machine A		23,000
	To Machine C		11,500
	(To record revaluation loss on fair valuation)
30 June, 2018	Income Statement	3,500
	To Revaluation Loss		3,500
	(To record transfer of revaluation loss to P&L)

Particulars	Machine B
Carrying value as on 30 June, 2017	38,000
Useful life	2
Dep till 1 January, 2018	9,500
Carrying value as on 1 January, 2018	28,500
Sale Proceeds	29,000
Gain on sale	500

Particulars	Machine A	Machine C
Carrying value / cost	84,000	80,000
Useful life (in years)	4	4
Less: Dep for the year/ half year	21,000	10,000
Carrying value	63,000	70,000
Fair value	61,000	68,500
Revaluation surplus / (loss)	(2,000)	(1,500)

Solution-3

Part-1

As per AASB 138 “Intangible Assets”, for recording any asset as intangible, 2 conditions should be satisfied, firstly it should meet the definition of intangible assets as per standard and second it should meet the recognition criteria of intangible assets.

As per standard, an asset is intangible if (Dell’Atti, 2017)

it is identifiable means it can be separated from another assets and can be sold, exchanged, rented, transferred in the market.
It is in the control of the entity. Means the entity can restrict the use of the asset by another person or can restrict the economic benefits of such asset to others.
the asset should provide some or other future economic benefit to the company.

Further, the asset should meet the recognition criteria, as per para 21 of AASB 138,

“An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably”

So, if an asset meets the recognition criteria then it should be recorded as internally generated intangible assets at cost in the books. The cost of the intangible asset would be the cost incurred in research and development of the intangible asset or any other cost attributable to intangible assets. However, the past expenses that are already recognized as an expense should not be recognized as intangible assets later on. The accounting entry for recording the asset would be:

Part-2

The accounting treatment of acquired intangible assets and internally generated intangible assets is same except the measurement of cost with which the asset is to be recorded. In acquired intangible assets, the cost of intangible is the purchase price at which the asset is acquired plus all the costs directly attributable to such acquisition, these costs include import duties paid, non-refundable purchase taxes, rebates and discounts, etc. whereas in the case of internally generated intangible asset, the cost of asset is the cost incurred in generating the assets, it includes, cost incurred in research and development of the asset or any other cost directly attributable to such assets like employees salary directly attributable or similar expense. (“AASB 138 – Intangible Assets”, 2017)

Part-3

The companies are generally reluctant to press for changes in AASB 138 to require more recognition of internally generated intangible assets. This is because they want to write off the entire expense incurred in one go so that future profits can be inflated. This is so because if the intangibles are recorded then they will require annual amortization over the life, which will increase the expenses in future years and will deflate the profits. By improving profit they can improve the ratios such as return on equity and all and can impress the shareholders. Further, writing off of expenses in one go will create not much questions from investors perspective as they will consider it as a sunk cost. Whereas creating intangible and amortizing it over the life will require explanations and justifications by the investors / shareholders. Management wants to escape these justifications. (“IAS 38 — Intangible Assets”, 2017)

Solution-4

Part-1

Present value of the defined benefit obligation as on 31 Dec-16	=	$23,000,000
Fair value of plan assets as on 31 Dec-16	=	$20,130,000
Deficit of the fund at 31 Dec-16	=	$2,870,000

Part-2

The net defined benefit liability at 31 Dec-2016 is $2,870,000, being the deficit of the fund.

Part-3

Defined benefit obligation brought forward	=	$20,000,000
Past Service Cost	=	$2,000,000
		$22,000,000
Interest Expense	=	$22,000,000 x 10%
	=	$2,200,000
Interest Income	=	$19,000,000 x 10%
	=	$1,900,000
Net Interest	=	$2,200,000 – $1,900,000
	=	$300,000

Particulars	$	Amount ($)
Fair value of plan assets as on 31st Dec-16		$20,130,000
Less:
Opening balance	-$19,000,000
Interest income	-$1,900,000
Contribution received	-$1,000,000	-$21,900,000
Add:
Benefits paid		$2,100,000
Return on plan assets excluding interest		$330,000

Part-4

Particulars	Net defined liability	Defined benefit obligation	Plan assets
Balance as on 1st Jan-16	$1,000,000	$20,000,000	$19,000,000
Past service cost	$2,000,000	$2,000,000	$0
Revised balance	$3,000,000	$22,000,000	$19,000,000
Interest @ 10%	$300,000	$2,200,000	$1,900,000
Current service cost	$800,000	$800,000	$0
Contribution received by fund	-$1,000,000	$0	$1,000,000
Benefits paid by fund	$0	-$2,100,000	-$2,100,000
Return on plan assets excluding interest	-$330,000	$0	$330,000
Actuarial loss on re-measurement of DBO	$100,000	$100,000	$0
Balance as on 31st Dec-16	$2,870,000	$23,000,000	$20,130,000

Part-5

Journal entry as on 31st Dec-16
Particulars	Debit	Credit
Superannuation Expenses (Profit and Loss Account)	$3,100,000
To Superannuation Income (Other Comprehensive Income)		$230,000
To Bank Account		$1,000,000
Net Superannuation Liability		$1,870,000
(Superannuation expenses, income and contribution for the year)

Working Note

Particulars	Profit or Loss	Other Comprehensive Income	Bank	Net Defined Benefit Liability or Assets
Past service cost	$2,000,000			-$2,000,000
Net Interest	$300,000			-$300,000
Service Cost	$800,000			-$800,000
Contribution received by fund			-$1,000,000	$1,000,000
Gain on plan assets		-$330,000		$330,000
Actuarial loss on re-measurement of DBO		$100,000		-$100,000
Balance as on 31st Dec-16	$3,100,000	-$230,000	-$1,000,000	-$1,870,000

References

AASB 116 – Property, Plant and Equipment – July 2004. (2017). Legislation.gov.au. Retrieved 18 September 2017, from https://www.legislation.gov.au/Details/F2005B00678

Dell’Atti, A. (2017). ACCOUNTING FOR INTERNALLY GENERATED INTANGIBLE ASSETS ACCORDING TO AASB 138. Academia.edu. Retrieved 18 September 2017, from https://www.academia.edu/11781988/ACCOUNTING_FOR_INTERNALLY_GENERATED_INTANGIBLE_ASSETS_ACCORDING_TO_AASB_138

AASB 138 – Intangible Assets. (2017). Legislation.gov.au. Retrieved 18 September 2017, from https://www.legislation.gov.au/Details/F2005C00146

IAS 38 — Intangible Assets. (2017). Iasplus.com. Retrieved 18 September 2017, from https://www.iasplus.com/en/standards/ias/ias38

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