Valuation premise for measurement of fair value
The Australian accounting standard number thirteen – Measurement of Fair value, prescribes the framework for determining the fair value of the asset as mentioned in the statement of affairs. In accordance with the clause number 9 of the thirteen number standards, the fair value of the asset will be equivalent to the amount which the seller will receive from selling the asset in the market or the amount which will be paid in order to set off the obligation in relation to that asset (AASB, 2011).
The issue involved in this heading is to how the measurement of the fair value shall be done as per the given circumstances and which method shall be adopted in order to confirm with the correct valuation of the asset and along with this, the type of market has also been detailed.
The subject of the fair value determination and the measurement comprises of the two forms of assets as given in the study. One is factory and other one is land. On measurement of the fair value of the asset, both the assets are required to be treated as either jointly or severally. It means either the fair value shall be measured by considering it as the single group or by treating it as to different and separate.
In accordance with the paragraph number thirty one of the accounting standard number thirteen, the valuation premise is defined and determined with the highest and best possible use of the concerned asset. In the given case the assets are land and factory as separate and joint. When it is probable that the highest and best use has been achieved then the fair value will be equal to the price at which the asset will be sold to the other market participant and the other market participant will use the same asset in different way. Thus, valuation premise depends upon the use and the sale price from the point of view of the other market participant (Draft and Standard, 2005). In the given case, the valuation premise will determine the fair value of the asset as equivalent to the sale price minus the amount paid for the bringing the asset for the use by the other market participant which is cost of demolishing. Fair value is thus equals to 900000 dollar (1000000 dollar – 100000 dollar)
In the given case, the market determines is the active one. It is because of the fact that the price of land has been considerably increased over the years with the increase in the demand of the residential houses. Secondly both the parties to the contracts are dealing in an active and efficient manner(Marton, 2009).
Valuation techniques will be cost approach and accordingly fair value will be the amount incurred for replacing the current asset which is 900000 dollar.
The definitions, procedures and the accounting treatment relating to the property plant and equipment are dealt with the Australian accounting standard number sixteen (Aboody, Barth and Kasznik, 2009). It defines two valuation methods – one is cost model and second is revaluation model. In the initial year cost model is used, the choice is made available from the subsequent year. ( Easton and Eddey and Harris, 2013).
Revaluation model
The major issue concerned with this heading is the accounting treatment of the property plant and equipment and its related depreciation.
|
Date |
Account |
DR |
CR |
|
1/7/2016 |
Machine A |
100000 |
|
|
Machine B |
60000 |
||
|
Cash |
1600000 |
||
|
30/06/2017 |
Depreciation – Machine A (100000/5) |
20000 |
|
|
Depreciation – Machine B (60000/3) |
20000 |
||
|
Accumulated Depreciation – Machine A |
20000 |
||
|
Accumulated Depreciation – Machine B |
20000 |
||
|
30/06/2017 |
Machine A (84000-80000) |
4000 |
|
|
Revaluation Surplus |
4000 |
||
|
30/06/2017 |
Revaluation Surplus (40000-38000) |
2000 |
|
|
Machine B |
2000 |
|
Date |
Account |
DR |
CR |
|
01/01/2018 |
Depreciation – Machine B |
9500 |
|
|
Accumulated Depreciation – Machine B |
9500 |
||
|
(Depreciation for Sic Months38000 / 2 *0.5) |
|||
|
01/01/2018 |
Cash |
29000 |
|
|
Profit on Sale of Machine B |
500 |
||
|
Machine B (38000-9500) |
28500 |
||
|
01/01/2018 |
Machine C |
80000 |
|
|
Cash |
80000 |
||
|
01/01/2018 |
General Reserve |
8000 |
|
|
Revaluation Surplus |
2000 |
||
|
Bonus Share Capital |
10000 |
|
Date |
Account |
DR |
CR |
|
30/06/2018 |
Depreciation – Machine A (84000/4) |
21000 |
|
|
Depreciation – Machine C (80000/4*0.5) |
10000 |
||
|
Accumulated Depreciation – Machine A |
21000 |
||
|
Accumulated Depreciation – Machine C |
10000 |
||
|
30/06/2018 |
Impairment Loss |
3500 |
|
|
Machine A (63000-61000) |
2000 |
||
|
Machine C (70000-68500) |
1500 |
The accounting standard number one hundred and thirty eight deals with the intangible assets. In accordance with the provisions of the accounting standard, it is defined as the assets – which can be easily identifiable, which can be expressed in monetary terms and which does not possess any form of the physical substance
Under this heading, the accounting treatment of intangible assets has been discussed with regard to the provisions of the accounting standard.
Internally generated intangible assets are defined in the common parlance as the assets which created within the organization. To start with the accounting treatment of the internally generated intangible assets, the company at first will be required to identify the various stages through which the development of the intangible assets will pass through. These stages are required to be broadly classified under two heads and these are research and development.
First to begin with the research phase, any expenditure which is incurred in the research phase will not be capitalized in any situation rather it will be charged to the profit and loss account for the period ending in which the said expenditure have been incurred. The aforesaid accounting treatment is followed because of the two basic reasons. One of the reasons is that during the research phase, the company can never have the high probability that the intangibles are there for use by the company. Second reason is that there is no confirmation that the intangible assets being developed will generate the economic benefits in the coming years.
Further moving to the second phase of the development, the expenditure shall be capitalised on the fulfilment of the following conditions:
- The project shall be technically feasible as well as viable with regard to is completion within the due time.
- The company shall have the clear strategic intent that the project shall be completed within the due time and shall be completed.
- The company shall provide the assets either for use or for sale.
- The company shall have the high predictions with the confirmation that the intangible assets shall be capable enough to generate benefits for the company in monetary terms in the upcoming years.
- The amount incurred during the development stage shall be easily measurable in the monetary terms (AASB, 2015).
In this way, the standard has prescribed the accounting treatment of intangible assets.
Following are the differences in the internally generated goodwill and the acquired goodwill:
- For developing the internally generated goodwill, the expenditure is required to be differentiated into two stages – research and development. In case of the acquired goodwill, the expenditure will directly capitalize.
- In the internally generated goodwill, the amount paid during research phase is directly expenses in the profit and loss account. In the acquired goodwill, whole of the amount is capitalised (Padrtová, 2013).
Following are the reasons for reluctance among the companies in relation to changes in the accounting standard:
- During the charging of the expenditure incurred during research phase in the statement of profit and loss, the capitalised value of the internally generated goodwill will always be less as compared to acquired goodwill.
- The establishment of the future economic benefits to the company will always be there with the acquired goodwill.
The Australian accounting standard number 119 is dealing with the employee benefits. The standard has provided the meaning and definition of employee benefits and its contents and the accounting treatment of each and every item of the employee benefits. (AASB, 2011).
The issue involved in the study is the calculation and accounting treatment of the employee benefit obligation in accordance with the terms of the accounting standard.
Deficit occurs when the present value of the defined benefit obligation exceeds the fair value of the asset planned. Surplus occurs in the reverse situation where the fair value of asset exceeds the present value of the defined obligation as on date.
Therefore, Deficit equals to the Present value of the Defined benefit obligation less the fair value of concerned plan asset
Deficit = 23000000 dollar – 20130000 dollar= 2870000 dollar.
It is calculated when the deficit from the plan asset is adjusted for any limit which has been placed on the net defined asset. In the given case no such asset ceiling has been mentioned and therefore the Net defined benefit liability is equivalent to the deficit amount of dollar 2870000.
Net Interest = Expense –Income
Net Interest = 2200000 dollar – 1900000 dollar = 300000 dollar
Workings:
Expense = ($20000000 + $2000000)*10% = $2200000
Income = $19000000*10% = $1900000
|
S. No. |
Particulars |
NDBL – Net Defined Benefit Liability |
DBO – Defined Benefit Obligation |
PA – Plan Assets |
|
1 |
Opening Balance – 01/01/2016 |
1000000 |
20000000 |
19000000 |
|
2 |
Add Past Service Cost |
0 |
2000000 |
0 |
|
3 |
Added Balance |
22000000 |
||
|
4 |
Interest @10% |
2200000 |
1900000 |
|
|
5 |
Current Service Cost |
800000 |
||
|
6 |
Contribution received |
1000000 |
||
|
7 |
Benefits paid |
(2100000) |
(2100000) |
|
|
8 |
Return on Plan Assets |
330000 |
||
|
9 |
Actuarial Loss |
100000 |
||
|
Closing Balance – 31/12/2016 |
2870000 |
23000000 |
201300000 |
Return on Plan Assets = $20130000 – ($19000000 + $1900000 + $1000000 – $2100000) = $330000.
|
Date |
Account |
DR |
CR |
|
31/12/2016 |
Expense – Superannuation |
3100000 |
|
|
Income – Superannuation |
230000 |
||
|
Bank |
1000000 |
||
|
Net Defined Liability – Superannuation |
1870000 |
|
S. No. |
Particulars |
Income Statement |
Other Comprehensive Income |
Bank |
Net defined Benefit Liability |
|
1 |
Opening Balance |
1000000 Cr |
|||
|
2 |
Past Service Cost |
2000000 Dr |
|||
|
3 |
Net Interest |
300000 Dr |
|||
|
4 |
Service Cost |
800000 Dr |
|||
|
5 |
Contribution |
1000000Cr |
|||
|
6 |
Plan Assets – Profit |
330000 Cr |
|||
|
7 |
Actuarial Loss |
100000Dr |
|||
|
Closing Balance |
3100000 Dr |
230000 Cr |
1000000Cr |
1870000 Cr |
References
Aboody, D., Barth, M.E. and Kasznik, R., (2009), “Revaluations of fixed assets and future firm performance”, Evidence from the UK. Journal of Accounting and Economics, 26(1), pp.149-178
AASB, (2011), “Fair Value Measurement” available at www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf accessed on 05/10/2017
AASB, (2011), “Employee Benefits” available at www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdfaccessed on 05/10/2017
AASB, (2015), “Intangible Assets” available at www.aasb.gov.au/admin/file/content105/…/AASB138_08-15_COMPoct15_01-18.pdf accessed on 05/10/2017
Draft, E. and Standard, I.A.,( 2005). “Fair Value Measurement”. MEASUREMENT, 9, p.90
Easton, P.D., Eddey, P.H. and Harris, T.S., (2013), “An investigation of revaluations of tangible long-lived assets” Journal of Accounting Research, pp.1-38.
Marton, J,(2009). “Fair Value Measurement” COMMENT LETTER ON THE EXPOSURE DRAFT (ED/2009/5) University of Gothenburg.
Padrtová, M., (2013), “Accounting of Internally Generated Intangible Assets at Public Universities in the Czech Republic”. Littera Scripta, p.104.
