Fair Valuation in Accounting
Question:
Discuss About The Journal Of Corporate Accounting And Finance?
In the given case study, the most relevant and critical issue is the determination of fair value and how it fluctuates according to its use by the different entities. The value of PPE may differ entirely if based on the fair values as it has separate uses for a non-profit organisation and one which deals in profits. (Alexander, 2016) Thus, it has to be seen that what is the best and the highest use of the asset relevant to the circumstance to determine the correct fair value.
Highest and best use may be defined as how the non-financial asset can be put to the best possible use to extract the maximum economic benefit out of it. Or, if can be sold to the other party who has the ability to extract the best out of it or sell it at the best possible price. While using this concept, 3 things need to be considered. i.e., physical presence of asset, economic feasibility and legal status of the transaction. (Das, 2017)
When the above principle is applied to the aged home care, the value of the assets may come out to be substantially less when the same is compared against the commercial or business entities. But, in true sense, the value of the asset or property should bot change according to who is using it but should be uniform based on the exit price in the market as on the final measurement date.
Fair valuation is the essence of modern day accounting and is used in wide areas like the determination of impairment amount of the tangible and intangible assets, inventory valuation in the books and several other reporting requirements as per IFRS framework.
AASB 136 deals with the impairment of the tangible and intangible assets. Agenda 10F(a) of the conceptual framework of general purpose accounting also deals extensively on the issues related to impairment. (Dichev, 2017) Impairment is the permanent write down in the value of assets when the indicators so exists and hint the write down in value. These indicators may be internal or external in nature and based on these factors, the impairment testing is done towards the end of the period. The asset should not be carried in the books of accounts at more than the recoverable value which is higher of the value in use or the fair value of the asset less the cost of disposal. All this is calculated in accordance with the standards prescribed.
Impairment Loss Determination
The relevant issue here is the determination of the impairment loss for the 2 CGU of the company which has been named as Time and Leisure. The company has also changed the value of depreciation in the 2nd accounting year based on the assessment, the impact of the same also needs to be analysed on the impairment loss for the year. (Visinescu, Jones, & Sidorova, 2017)
As per the below calculations made, it is evident that there is an impairment loss in the 2 CGU’s as $ 200 for Time and $ 12 for Leisure. While calculating so, it was taken care that impairment loss is first assigned to the goodwill and then to the other remaining assets. The value of the plant is limited to the recoverable value and so the reallocation had to be done to other assets. Loss will not be allocated to Inventory and receivables as both of them are current assets held for sale. (Murray & Markey?Towler, 2017)
|
Date |
Account |
DR |
CR |
|
31/12/2016 |
Impairment loss on CGU – Time |
200 |
|
|
To Accumulated depn & impairment loss – Plant |
155 |
||
|
To Accumulated depn & impairment loss – Patent |
20 |
||
|
To Accumulated depn & impairment loss – Goodwill |
25 |
||
|
31/12/2016 |
Impairment loss on CGU – Leisure |
12 |
|
|
To Accumulated depn & impairment loss – Goodwill |
12 |
While calculating the impairment loss for 2017, the new carrying values given by the company for the assets were considered basis which reversal of impairment loss is coming. However, goodwill once impaired, cannot be reversed back in any circumstance. The impairment calculation further on is given below:
|
Date |
Account |
DR |
CR |
|
31/12/2017 |
Accumulated depn & impairment loss – Plant |
155 |
|
|
Accumulated depn & impairment loss – Patent |
20 |
||
|
To Impairment Loss on CGU – Time |
175 |
The question of research and development expenditure arises when the company is dealing with the internally generated intangible assets. The topic is being extensively dealt in by AASB 138, paragraph 8 and SSAP 13 of the conceptual framework of accounting. Research cost is the pre facto cost which is being incurred in the initial phase before the development of the asset takes place. It is done to check on the technical and scientific feasibility of the project in hand. It is checked that whether the project would be economically viable and financially feasible to carry on with. (Trieu, 2017) Further, development of the asset is the phase which comes after the research phase and the company is sure that the asset once generated would bring future economic benefits to the entity. It is during this phase that the company comes up with the advanced technology or invests in developing a new and enhanced product or to bring a new version of process of the existing one. In case there is an issue of non-classification of the research and development expenses in the absence of information, full value should be considered as the research cost. (Heminway, 2017)
Research Costs and Development Costs in Accounting
The relevant issue of discussion here is the bifurcation of the research and the development cost and how the same should be treated in the financial books of accounts
The difference between the 2 phase is that the research comes before the development phase starts. Research may or may no result into an asset whereas development phase will surely result in to an asset. Research is not associated with future economic benefits whereas development is. These are the basic differences in between the two. (Raiborn, Butler, & Martin, 2016)
The research phase is not expected to give the future economic benefits to the entity neither the entity can demonstrate so. It is not done with the intention of creating the asset rather it is done just to get the understanding of the thing. Hence, it should be charged off to expense in the P&L. Whereas the development is the post facto phase of the research where the development of the enhanced product or technology or process is being carried out such that the company can derive the future economic benefits out of it and therefore the same should be capitalized in the books. (Félix, 2017) Further, if any incidental costs are incurred during the developmental phase, the same should be capitalised in the books.
Decision / Conclusion / Reasons and Justification:
On the basis of the above discussion and study, it can be concluded that the research costs needs to be charged off as an expense to the P&L whereas the development costs should be capitalised in the books. However, before the decision is taken on the accounting, It should be seen that whether the motive was there to create the asset, whether the asset is saleable in the open market, whether it is economically feasible in the future and before capitalization, whether it can be reliably measured.
AASB 1056 deals on the employee benefits being offered by the company to their employees in lieu of the services rendered. It includes defined benefit plan, contribution plan and superannuation plan. It is in the nature of the pension which is being paid to the employee after retirement but the funds are to be accumulated upfront. Defined benefit plan includes contribution only by the employer to the common fund whereas defined contribution plan includes contribution to be made both by the employer as well as employee. (Jones, 2017) In the given case study, the company has stopped giving this benefit to the new employees however, it continues to do so and contribute towards the old employees who opted for it in the past. The return earned on these funds depends on a lot of internal as well as external factors and particularly the interest rate which is prevailing in the market for the investment made by the company. (Werner, 2017)
The issue of discussion here is the computation of the benefit or deficit in the funds, asset or liability as on the balance sheet date. Accordingly, the computation has been shown below:
The deficit amount in the fund computed is $ 1,100,000 (2,100,000 – 1,000,000)
The net defined benefit liability for the company at the end of the period is $ 23,000,000
In the table given above (Present value of defined benefit obligation account), net interest is computed as on 31st December 2016 to be $ 2,200,000.
The reconciliation accounts of the company have been shown below.
|
Date |
Account |
DR |
CR |
|
31/12/2016 |
Current service cost A/C …………………Dr. |
800,000 |
|
|
Interest cost A/C …………………………….Dr. |
2,200,000 |
||
|
To Present value of defined benefit obligation |
3,000,000 |
||
|
31/12/2016 |
Actuarial Loss A/C……………………………..Dr. |
100,000 |
|
|
To Present value of defined benefit obligation |
100,000 |
||
|
31/12/2016 |
Statement of P&L……………………………….Dr. |
3,100,000 |
|
|
To Current service cost |
800,000 |
||
|
To Interest cost |
2,200,000 |
||
|
To Actuarial Loss |
100,000 |
References
Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), 10-17.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632.
Félix, M. (2017). A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, 1-69.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Murray, C., & Markey?Towler, B. (2017). A Theory of Return-Seeking Firms. SSRN, 1-14.
Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124.
Visinescu, L., Jones, M., & Sidorova, A. (2017). Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), 58-66.
Werner, M. (2017). Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25, 57-80.
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