Accounting Standards For Fair Value, Impairment Loss, And Intangible Assets

AASB 13: Fair Value Measurement

AASB 13 defines fair value and it also provides standard guidelines for determination of fair value. Further it also outlines the disclosures to be made for fair value measurement. As per AASB 13 fair value measurement is market based and not entity specific based.

Financial Institutions use fair value method for valuation of financial instruments in normal course of business. However it involves a lot of judgment and prudence while valuing tangible assets (International Accounting Standards Board, 2014). Unrealized Loss and Gains which are accruing to the concern on account of using fair value method doesn’t reflect the importance of that relevant asset to the organization. Moreover there are also inconsistencies regarding individual businesses practices in using fair value for plant and equipment.

For determination of fair value it is important to whether the non-financial asset which is being valued is used in manner from which it can yield highest returns as on the date of measurement. It takes into account the ability of market participant to generate economic benefits from the use of non-financial asset or by transferring it to another market competitor who would use the asset in best and highest manner (Hu, Percy and Yao, 2015). The highest and best use of non-financial asset also considers use of the asset that whether it is physically possible, legally permissible and financially feasible or not.

For some asset and liability it may be possible that market information may not be available. However market information is available or not objective remains the same in both the cases i.e. to determine a price at which transaction will take place between two independent parties under the prevailing market conditions (Palea, 2014). As per views of Liang and Riedl (2013) in other words it is an exit price from the purview of independent party that holds the asset or owes the liability. 

AASB 13 directs the chief accountant to reflect assets market price considering its best and highest use for determination of fair value. But this creates problem for the non-profit organization. If the asset of the non-profit organization i.e. old age homes if provided to market participant for building flats (which will be its best and highest use) then the fair value would be much higher as depicted in the books. This also doesn’t depict the importance of asset to the organization. It only states that value should be market based and situation based. It only focuses or considers the value which would have been deprived by the market participant by using it or by selling it. Thus in this case fair value may not reflect actual value and it also creates lot of problem and confusion (Hoyle, Schaefer and Doupnik, 2015). 

AASB 136 provides accounting treatment relating to impairment of assets. Provision relating to accounting of impairment loss has been provided in Para 58 to 64 in specified accounting standard.

In accordance with provided facts, Peewee Ltd, has acquired assets A& B and further sold asset B and purchased C. As the asset has been revalued at the end of each year; thus calculation relating to impairment of same has been provided below.

AASB 136: Impairment of Assets

(Amount in $000)

Working Note 1 (Depreciation)

Working Note 2 (Revaluation Surplus)

(Amount in $000)

(Amount in $000)

Working Note 1 (Depreciation)

Working Note 2 (Impairment Loss)

AASB 138 (Intangible Assets) deals with the accounting and disclosure of Intangible Assets. It also throws light on goodwill generated within the organization and expenditure done during research and development phase. AASB 138 states that expenditure done during the development phase should be recognized as intangible asset only when the following conditions are satisfied:

1. Intangible Asset should can be use further or sold during at the end of development phase.
2. There must be intention of organization of using the Intangible or selling it.
3. It must be capable to generate future economic benefits.
4. Adequate resources must be available to complete the development phase of the Intangibles.
5. Expenditure done during the development phase and attributed to the Intangible should be measurable.

If conditions mentioned above aren’t fulfilled then expenditure incurred to create intangibles will be charged to Revenue Account of that particular period and won’t be capitalized i.e. it won’t be added to the cost of asset. Hence the expenditure incurred on internally generated goodwill doesn’t include the total cost incurred (Yao and  Percy , 2015). It also prohibits capitalization of some intangible assets that are internally generated.

AASB 138 requires that expenditures incurred during development phase of internally generated goodwill should be charged to Revenue account if the conditions mentioned in it are not met (AASB 138.Intangible Assets, 2016). But if the conditions mentioned are met then these cost should be capitalized or should be added to the cost of asset. Moreover AASB 138 also requires assessing the useful life of internally generated goodwill. If the life of the goodwill is assessed then the cost of asset will be amortized over the useful life of it but if the useful life of the asset cannot be worked out then AASB 138 gives an option to amortize the cost of asset in maximum amortization period i.e. 20 years. If the asset has indefinite life then the same would not be amortized but will be assessed annually for adjustments of impairment.

In case the intangible asset is purchase or acquired; then as per provision of AASB 3 the same is accounted on its fair value on date of acquisition. In case of internally generated the expenditure relating to research and development phase is done in following manner:

Research phase planning is done with the intent to gain scientific or technical knowledge and understanding. It is important phase in creating internally generated goodwill. In the research phase an organization conceptualize the discoveries which will go take place if all things go well. This is an act of creating new processes that will be used to create new products. Development phase comes after the research phase where discovered science in converted into a useful product that organization can use to its benefits and asset is recognized only after it criteria of development stage. (Zakaria and et.al. 2014). 

AASB 138 mandates only those organizations which are involved in medium and long term contracts of research and development and to those who work in technology sector. Such companies are required to reflect and disclose the asset internally generated. 

AASB 119 ‘Employee benefits’; provides specification relating to employee benefits which comprises defined benefit plan (AASB 119, Employee Benefit. (2016).). Recognizing procedure for the same has been specified in Para 66 of AASB 119. Further, Para 26-30 specifies provision regarding defined plans.

Carried value of benefit obligation as on 31^st December 2016 – Fair value of plan assets

$23000000- $20130000

= $28700000

It is same as balance of deficit i.e. $28700000

$300000

(Amount in $000)

Return on plan asset excluding interest 

Value as on 31.12.06 – Opening balance – contribution- paid benefits – Interest income

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

= $330000 

(Amount in $000) 

Reconciliation

(Amount in $000)

References

Books and Journal

Hitz, J.M., 2013. Capitalize or expense? Recent evidence on the accounting for intangible assets under IAS 38 by STOXX 200 firms. Zeitschrift für internationale Rechnungslegung IRZ, 5, Pp.319-324.

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

Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), Pp.930-939.

International Accounting Standards Board, 2014. International accounting standards IAS 36, Impairment of assets, and IAS 38, Intangible assets. IASCF Publications Dept..

Liang, L. and Riedl, E.J., 2013. The effect of fair value versus historical cost reporting model on analyst forecast accuracy. The Accounting Review, 89(3). Pp.1151-1177.

Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2). Pp.102-116.

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 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.]

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.]

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