Measurement of fair values
Under the given circumstance, two assets are there that can be measured under the fair value approach; they are factory and land (Bratten et al. 2013). Alternate option for considering the factory and land will be to treat them as the single asset.
As per the given case, the land was available for sale at $ 1 million for the purpose of residence. Considering the demolition cost of the existing factory that is amounted to $ 100,000, it is identified that the land can be sold for $ 900,000 for the purpose of residence. Computing the fair values in this way determines the specific use and is depended upon the valuation based on in-exchange for the premise as land will be accounted for on the stand-alone basis (Griffin 2014).
Further the factory and the land can be sold as the package to be used by the participants under market in association with the other assets. The factory is depreciated for 50% of the original cost of the factory by the reporting company. With regard to the cost of the new factory that is $ 780,000, the depreciated cost of replacement of existing factory can be estimated at $ 390,000. Moreover, as the factory can be assumed to be built at cheaper land block that is one part is not available for the purpose of residency and it is not likely that the market is available there for factory and land on the basis of in-use (Christensen and Nikolaev 2013). Further, it is anticipated that the participant from the market will be pressurised for paying $ 900,000 for the land and the factory that are given as the alternative use with respect to land for the purpose of residence.
Most beneficial market for the asset will be selling the property for the purpose of residence.
The strategy of the market will be appropriate for the purpose of valuation provided that the input for the observable market is there with regard to the sale price of the similar properties (Bodie 2013). Further, the land is having the fair value that is based on the market price of the same type of properties for $ 900,000. However, the factory is having the fair value as the separate asset.
|
Date |
Particulars |
Debit |
Credit |
|
1st July 2016 |
|||
|
Machine A |
100,000.00 |
||
|
Machine B |
60,000.00 |
||
|
To cash |
160,000.00 |
||
|
30th June 2017 |
|||
|
Depreciation on machine A |
20,000.00 |
||
|
To accumulated depreciation |
20,000.00 |
||
|
[500000*1/5] |
|||
|
Depreciation on machine B |
20,000.00 |
||
|
To accumulated depreciation |
20,000.00 |
||
|
[60000*1/3] |
|||
|
Accumulated depreciation on Machine A |
20,000.00 |
||
|
To machine A |
20,000.00 |
||
|
[writing down to the carrying amount] |
|||
|
Machine A |
4,000.00 |
||
|
To gain on the revaluation – Machine A |
4,000.00 |
||
|
[84000-80000 = 4000] |
|||
|
To gain on the revaluation – Machine A |
4,000.00 |
||
|
To surplus on revolution – Machine A |
4,000.00 |
||
|
[Revolution gain accumulation in equity] |
|||
|
Accumulated depreciation on machine B |
20,000.00 |
||
|
To machine B |
20,000.00 |
||
|
[writing down to the carrying amount] |
|||
|
Revolution loss on machine B |
2,000.00 |
||
|
To machine B |
2,000.00 |
||
|
[Revolution to the fair values on 30.06.2017] |
|
Date |
Particulars |
Debit |
Credit |
|
1st Jan 2018 |
|||
|
Machine C |
80,000.00 |
||
|
To cash |
80,000.00 |
||
|
[Being machine C acquired] |
|||
|
Depreciation on machine B |
9,500.00 |
||
|
To accumulated depreciation |
9,500.00 |
||
|
[38000*1/2*1/2] |
|||
|
Cash |
29,000.00 |
||
|
To Sale proceeds from Machine B |
29,000.00 |
||
|
[Being amount received from sale of machine B] |
|||
|
Carrying amount for sale of Machine B |
28,500.00 |
||
|
Accumulated depreciation on machine B |
9,500.00 |
||
|
To machine B |
38,000.00 |
||
|
[ Carrying amount of the machine sold] |
|||
|
General reserve |
8,000.00 |
||
|
Revaluation surplus on Machine A |
2,000.00 |
10,000.00 |
|
|
To share capital |
|||
|
30th June 2018 |
|||
|
Depreciation on machine A |
21,000.00 |
||
|
To accumulated depreciation on machine A |
21,000.00 |
||
|
[84000*1/4] |
|||
|
Depreciation on machine C |
10,000.00 |
||
|
To accumulated depreciation on machine C |
10,000.00 |
||
|
[80000*1/4*1/2] |
|||
|
Accumulated depreciation on machine A |
21,000.00 |
||
|
To machine A |
21,000.00 |
||
|
[written down to the carrying amount] |
|||
|
Revaluation loss on machine A |
2,000.00 |
||
|
To machine A |
2,000.00 |
||
|
[written down the value 63000 – 61000] |
|||
|
Revaluation surplus on machine A |
2,000.00 |
||
|
To revaluation loss on machine A |
2,000.00 |
||
|
[Revaluation loss accumulated to equity] |
|||
|
Accumulated depreciation on machine C |
10,000.00 |
||
|
To machine C |
10,000.00 |
||
|
Revaluation loss |
1,500.00 |
||
|
To machine C |
1,500.00 |
||
|
[Revolution to the fair values on 30.06.2018] |
The standards on accounting, AASB 138 that is equivalent to the international standards on accounting IAS 38, the intangible asset is stated as the non-monetary identifiable asset that has not any physical substance. To be classified as intangible asset, it is not enough to fulfil the definition criteria; it shall also be complied with the asset definition as per the framework. The intangible assets are recognized at cost initially (Pucci et al. 2014). However, the problem that arises for the intangible asset that is internally generated is that whether the future economic benefit will arise from the identifiable asset and whether the cost will be reliably determined or not. As per the standard the internally generated goodwill is recognized as asset. Further, for other internally generated intangible asset like, brands, customer lists, publishing titles and mastheads, the expenditure are not separable from the development cost and thus not identifiable separately.
Determination of premise valuation that is complied with the best and highest use
Expenses related to acquire intangible asset that is separately purchased which meets the intangible asset’s definition are recognized as intangible asset. On the other hand, other expenses related to intangibles are recognized as internally generated intangible assets and are classified as development or research (Carvalho, Rodrigues and Ferreira 2016). Accounting for the internally generated intangible asset requires more concern and are subject ti special recognition criteria. The internally generated intangible cost can be capitalized provided the reasonable expectation is there that the future revenue will be earned from that. On the other hand, the acquired intangibles with definite life are amortized over the useful life of the asset (Ji and Lu 2014). However, the acquired intangibles with indefinite life are not amortized but are tested for impairment and thereafter written down to the recoverable amount. However, once the intangibles are recognized, both are treated as the same.
Managers generally prefer to show the higher amount of future profits. Whereas the major expenses related to development and researches are written-off, there is an assurance that the future benefit will be derived from the acquired intangibles. Further, if write-off takes place, the impact of the ratios like return rates on equity and assets will be better (Russell 2017). The investors normally consider the write-offs as the one-time items in association with no valuation consequences. Therefore, the investors discount the impact of one-time write-offs and feel happy for the improvement in profitability during the coming years.
Deficit of the fund = $ 28,70,000
PV of defined benefit obligation as on 31st December 2016 = $ 23,000,000
FV of the plan asset as on 31st December 2016 = $ 20,130,000
Deficit of fund as on 31st December 2016 = $ 28,70,000
Net interest = $ 300,000
Calculation –
Component of interest expense on the defined benefit obligation –
Brought forward obligation for defined benefit = $ 20,000,000
Past service cost = $ 20,00,000
Total = 220,00,000 * 10% = $ 22,00,000
Component of interest income = $ 19,000,000 * 10% = $ 19,00,000
|
Particulars |
Net defined benefit liability |
Defined benefit obligation |
Plan assets |
|
Balance as on 01.01.2016 |
$ 1,000,000.00 |
$ 20,000,000.00 |
$ 19,000,000.00 |
|
Past service cost |
$ 2,000,000.00 |
||
|
Revised balance |
$ 22,000,000.00 |
||
|
Interest @ 10% |
$ 2,200,000.00 |
$ 1,900,000.00 |
|
|
Current service cost |
$ 800,000.00 |
||
|
Contributions received by the fund |
$ 1,000,000.00 |
||
|
Benefit payment by fund |
$ (2,100,000.00) |
$ (2,100,000.00) |
|
|
Return on plan asset excluding the recognised interest (WN1) |
$ 330,000.00 |
||
|
Actuarial remuneration on DBO re-measurement |
$ 100,000.00 |
||
|
Balance as on 31.12.2016 |
$ 2,870,000.00 |
$ 23,000,000.00 |
$ 20,130,000.00 |
|
Date |
Particular |
Debit |
Credit |
|
30.06.2013 |
|||
|
Superannuation Expenses (P & L) |
$ 3,100,000.00 |
||
|
To Superannuation income (OCI) |
$ 230,000.00 |
||
|
To Bank |
$ 1,000,000.00 |
||
|
To net superannuation liability |
$ 1,870,000.00 |
||
|
[Being the expenses on superannuation and contribution for year] |
Reference
Bodie, Z., 2013. Investments. McGraw-Hill.
Bratten, B., Gaynor, L.M., McDaniel, L., Montague, N.R. and Sierra, G.E., 2013. The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice & Theory, 32(sp1), pp.7-44.
Carvalho, C., Rodrigues, A.M. and Ferreira, C., 2016. The Recognition of Goodwill and Other Intangible Assets in Business Combinations–The Portuguese Case. Australian Accounting Review, 26(1), pp.4-20.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Griffin, J.B., 2014. The effects of uncertainty and disclosure on auditors’ fair value materiality decisions. Journal of Accounting Research, 52(5), pp.1165-1193.
Ji, X.D. and Lu, W., 2014. The value relevance and reliability of intangible assets: Evidence from Australia before and after adopting IFRS. Asian Review of Accounting, 22(3), pp.182-216.
Pucci, S., Cenci, M., Tutino, M. and Luly, R., 2014. Intangible assets: Current requirements, social statements, integrated reporting, and new models. In Value Creation, Reporting, and Signaling for Human Capital and Human Assets (pp. 179-211). Palgrave Macmillan US.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting & Finance, 57(S1), pp.211-234.
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