Discussing The Effect Of Value Versus Historical Cost Report

AASB 116 and Fair Value Measurement of Tangible Assets

Question:

Discuss About The Effect Value Versus Historical Cost Report?

AASB 116 outlines the accounting treatment for property, plant and equipment. For the measurement of fair value of these tangible asset this standards lays down provisions for recognition and measurement of fair value (AASB 116.Property Plant and Equipment, 2016).  The initial cost of acquiring the asset and the subsequent cost for repairs and maintenance are included in the cost of the asset for the measurement of fair value. The measurement of any item of plant, property and equipment is done at cost. The cost of an item will be the cash price paid. For the purpose of recognition the entity can use the revaluation model or cost model provided by the standard. As per the cost model the cost of the asset less its accumulated depreciation would be the book value. The revaluation model measures fair value of any asset at a particular date after considering the market participants interest in the property.

The concept of highest and best use reflects an assumption upon which the fair value of the asset is based. For the purpose of determining most probable selling price it may be appropriate to reflect highest and best use. Determination of highest and best use involves recognizing the motivations of marketing participants. These motivations are based up on expectations of benefits that will accrue to property owner.

When not for profit entities acquire an asset as result of charity, then the cost of the item will be its fair value measured at the date of acquiring the asset (Collings, 2015). The initial recognition is done at fair value. For the Not- For- profit entities it is reasonable to valuate an asset at the cost model, after the initial recognition. The fair value is generally measured by the market evidence undertaken by professional.

Thus, two possible uses of any asset will be its current use and the highest and the best use. The psychology assets of old aged home are not put to their best use. If the asset is sold to any market participant, he will use the asset to generate profit. This creates discrepancy in measuring the fair value.

AASB 136 provides provision relating to impairment of assets. Para 58 to 64 of the specified standard provides specification relating to recognition and measurement of impairment loss on assets.

Para 104-108 specifies the provision relating to impairment of loss on cash generated unit. Same provision have been applied in present case in order the ascertain capital loss on cash generating unit.

Impairment Loss on Assets under AASB 136

The remaining amount of impairment loss will be allocated to plant i.e. ($ 200 -$25 -$20) $155. Thus, the amount at which plant will be recorded in books of accounts will be ($850- $155) i.e. $ 695.

Total carried value of Time – Recoverable value of Time =              Impairment loss

=$1002 -$990

=$12

Allocation of impairment loss to specified asset:

Impairment loss will initially be provided to goodwill till its value becomes zero or till the total amount of impairment loss is adjusted; whichever is lower. Thus out of $12 will be allocated to goodwill and the amount at which goodwill will be recorded in books of accounts will be ($20 -$12) $8.

Impairment loss of Time

Total carried value of Time – Recoverable value of Time =              Impairment loss (International Accounting Standards Board, 2014)

$1322-$1502

As recoverable value is higher than carried value; no impairment loss will be recognized in this year .

Impairment loss of Leisure

Total carried value of Time – Recoverable value of Time =              Impairment loss

=$1433 -1520

As recoverable value is higher than carried value; no impairment loss will be recognized in this year.

In accordance with provision specified in Para 9 of AASB 136; it is necessary for an entity to ascertain whether the carrying amount of an asset exceeds its recoverable amount at the end of each reporting date . In present case the recoverable value is higher than carried value in case of division time as well as division leisure; thus no impairment loss is present at the year ended on 31.12.2017

According to the AAS 138, an intangible asset can be referred to as a non-monetary asset that is capable of being identified without physical existence. There are certain cases where the expenditure incurred for generating future economic benefits for creating intangible asset does not results in the same even if the asset meets the criteria provided by the standard. This can be said in case of internally generated goodwill. According to the provisions of the standards of accounting for goodwill, the internally generated goodwill must not be treated as an asset. This is because it is difficult or impossible to identify the proceedings or transactions which only add to the entity’s goodwill. Even if the events are identifiable, their capacity and value of generating future economic benefits cannot be measured reliably. Thus, if the internally generated intangible is goodwill, it will not be recognised as an asset and will either be completely unrecognised or be recognised as an expense.

Accounting for Intangible Assets under AAS 138

However, if the internally generated asset in other than goodwill, like patents, research and development activity, the accounting is done on the basis of initial recognition rather than subsequent accounting. Thus as per the AAS 138, the entity needs to distinguish between accounting for initial and subsequent stage particularly when the asset is created over a period of time.

The difference between the two phases in that the research phase involve systematic work for increasing a knowledge and development means  the application of the work researched. The initial and subsequent recognition is also done separately for the purpose of creating a difference. Cost model and fair value model can be used to recognize the cost associated with each phase.

For the purpose of indentifying the accounting for intangibles that are developed over an extended period of time, it is important to divide the entire development into the research phase and the development phase (AASB 138.Intangible Assets, 2016). The costs related to research are generally treated as an expense being incurred under current AASB and other requirements. This is because of a majority view that by their very nature the research costs are too inaccessible, to be regarded as costs that give rise to an asset from their eventual possible outcome. The AASB and certain other national standard setting Boards require the costs associated with the development of intangible to be capitalised if it meets the specific criteria.

Decision / Conclusion / Reasons and Justification:

In order to eliminate the issues arising from the difference between acquiring and developing assets, it is necessary to account for developed asset as per the provisions provided above.

AASB 119 specifies provision relating to employee benefits. Provision relating to recognition and measurement of defined benefit plan has been specified in Para 56-60 of AASB 119 (AASB 119. Employee Benefit, 2016). Further, Para 66 of the specified standard specifies provision regarding recognition and measurement of present value of defined benefit obligation and current service cost.

In present case present value of defined benefit valuation has been ascertained in accordance with provision specified in Para 66 of AASB 119.

$ 2870000

Working note

Deficit

= Value of defined benefit obligation as on 31-12-16 – Fair value of defined benefit obligation as on 31-12-16 (FIPA & et.al. , 2017)

= 23000000 -$20130000

=$2870000

$2870000

It has the value equal to deficit.

Cost of past service – Interest Income (Hitz,  2013)

= (20000000+2000000 *10%) -(19000000 *10%)

= = $2200000-$1900000

= $300000

(Amount In $000)

(Amount in $000)

 Journal Entry

31^st December 2016       

Superannuation Expense A/c                                    

$3100000

To Income relating to superannuation A/c                                           

$230000

To Bank                                                                                                                               

$1000000

To net superannuation defined benefit plan A/C                                             

$1870000

References

Collings, S., (2013) Impairment of Assets. Interpretation and Application of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015, Pp.241-259.

Dinh, T., Eierle, B., Schultze, W. &Steeger, L., (2015). Research and development, uncertainty, and analysts’ forecasts: The case of IAS 38. Journal of International Financial Management & Accounting, 26(3). Pp.257-293.

FIPA, M.T.G., Stylianou, M.V., Carey, P., Cooper, B., Tanewski, G. &Mroczkowski, N., (2017). Accounting of Defined benefit plan. IPA-Deakin SME Research Centre.

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.

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 civil-engineering. The Accounting Review, 89(3), Pp.1151-1177.

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 8th  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 8th  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 8th  October 2017.]

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