Recognition Principle Based on AASB 116
Question:
Discuss About The Equipment Revaluation Decision In Indonesia?
The subject matter of measurement is the land and property which is demolished and renewed by the entity engaged in manufacturing of women shoes. The cost of land and factory will be recognised only if the entity is certain about its future economic benefits and the asset’s cost can be measured reliably[1]. The entity does the evaluation of all the costs associated with property, plant and equipment under this recognition principle (Plant, Property and Equipment AASB 116), at the time when they are incurred. These costs include the costs which are incurred initially at the time of acquiring or constructing the asset and subsequent costs incurred to replace or reconstruct the asset[2]. The costs associated with the day to day service are not to be included in the carrying amount of asset. These costs are recognized separately in the profit or loss account.
After the land and factory is recognized as an asset whose fair value is measureable reliably shall be represented at revalue amount minus any accumulated depreciation and impairment losses; this will give its fair value at the date of the revaluation[3]. Revaluations shall be made regularly for ensuring that there is no material discrepancy in carrying amount and the fair value of the asset at the end of the reporting period.
The fair value of asset is usually determined by evidence provided by appraisal of market undertaken by professionals. The fair value asset is usually their current market value. The entity must allocates the initial amount of the non-current tangible assets to its significant parts and apply depreciation to each part separately. On the other hand if the entity acquires the psychology asset on lease basis, it is appropriate to depreciate the asset separately. The disclosure required by standard requires reflecting the following-
- The existence of any title on the property, plant and equipment pledged as security and their respective amounts[4];
- The amount of expenditures which are being recognised in the carrying amount of property, plant and equipment in its construction phase;
- the amount of contractual obligations which are to be paid for the acquisition of the assets[5];
- If the impairment is not disclosed separately in the comprehensive income statement, that is included in profit or loss account in total.
As per the valuation technique provided by IAS 116, the valuation of land will be done in the following manner-
Market value of land+ demolishing cost+ cost of construction
10, 000, 00+ 10, 000, 00+780000= 27, 80,000
(Amount in $)
|
Date |
Account |
DR |
CR |
|
1-07-2016 |
Machine A/c DR. |
100000 |
|
|
Bank A/C Cr. |
100000 |
||
|
(Being machine A purchased) |
|||
|
1-07-2016 |
Machine A/c Dr. |
60000 |
|
|
Bank A/c Cr. |
60000 |
||
|
(Being Machine B purchased) |
|||
|
30-06-2017 |
Depreciation A/c Dr |
20000 |
|
|
Machine A A/c Cr. |
20000 |
||
|
(Being depreciation charged for the year) (Note: 1) |
|||
|
30-6-2017 |
Depreciation A/c Dr |
20000 |
|
|
Machine B A/c Cr. |
20000 |
||
|
(Being depreciation charged for the year) (Note: 2) |
|||
|
30-06-2017 |
Machine A A/c Dr |
4000 |
|
|
Revaluation Surplus Cr |
4000 |
||
|
Profit on revaluation is transferred to revaluation surplus account. (Note:3) |
|||
|
30-6-2017 |
Revaluation Surplus A/c Dr |
2000 |
|
|
Machine B A/c Cr. |
2000 |
||
|
(Loss on revaluation in charged to revaluation surplus account). (Note: 4) |
Note1
Depreciation of Machine A
Cost of Machine $100000
Expected useful life 5 years
Depreciation $100000/5
Depreciation of Machine B
Cost of Machine $60000
Expected useful life 3 years
Depreciation $60000/3
$20000 p.a.
Revaluation Surplus on Machine A
Fair value of Machine A on 30th June 2017
Revaluation and Fair Value Assessment of Plant, Property, and Equipment
= $84000
Book Value of Machine A on 30th June 2017
=$100000-$20000
=$80000
Revaluation Surplus of Machine A
Fair Value – Book Value
$84000- $80000
$4000
Impairment loss on Machine B
Fair value of Machine B on 30th June 2017
= $38000
Book Value of Machine B on 30th June 2017
=$40000
Impairment Loss
=$38000-$40000
=-$2000
In accordance with provisions specified in AASB 116 Property, Plant and Equipment revaluation surplus is transferred to surplus on revaluation account[6]. Further, if any loss relating to revaluation occurs than the same is adjusted with existing balance of revaluation account and in case of higher loss the remaining balance is charged to profit and loss accounting as impairment loss[7].
|
Date |
Account |
DR |
CR |
|
1-1-2018 |
Bank Account Dr. |
29000 |
|
|
Revaluation A/c Dr |
2000 |
||
|
Profit & Loss A/c Dr. |
7000 |
||
|
Machine B A/c Cr. |
38000 |
||
|
(Being machine B sold at loss of $9000) |
|||
|
1-1-2018 |
Cash A/c Dr |
80000 |
|
|
Machine C A/c Cr. |
80000 |
||
|
(Being machine purchased for cash) |
|||
|
1-1-2018 |
General reserve A/c Dr. |
8000 |
|
|
Revaluation Surplus A/c Dr. |
2000 |
||
|
Share Capital A/c Cr. |
10000 |
||
|
(Being bonus share issued) |
|
Date |
Account |
DR |
CR |
|
30-6-2018 |
Depreciation A/c Dr. |
21000 |
|
|
Machine A A/c Cr |
21000 |
||
|
(Being depreciation charged) (Note 1) |
|||
|
30-6-2018 |
Depreciation A/c Dr. |
20000 |
|
|
Machine C A/c Cr. |
20000 |
||
|
(Being depreciation charged) (Note 2) |
|||
|
30-6-2018 |
Impairment loss A/c Dr |
3500 |
|
|
Machine A Cr. |
2000 |
||
|
Machine C A/c Cr. |
1500 |
||
|
(Being impairment loss charged) (note 3 & 4) |
Working Notes
Depreciation as per revaluated amount
Revalue amount / No of remaining years
$84000/ 4
= $21000
= $80000/4
= $ 20000 p.a.
= $10000 for six months
Impairment loss
$61000 – $63000 ($84000-$21000)
$2000
Impairment loss
$68500-$70000 ($80000-$10000)
$ 1500
Internally generated cost of intangible assets generally meant for paragraph 24 is the total of expenditure held from the specific date, when recognition criteria is faced by intangible assets in (para 21, 22 and 57). As per the paragraph 71, it avoids the expenditure’s re-instalments prior to be recognised as expense[8]. Internally generated cost of intangible assets is combined with all the direct attribute costs required to make the assets capable to operate in an effective manner for the purpose of management.
According to AASB 123, the recognition criteria of interest are a component of internally generated cost of intangible assets. These are the non-components of internally generated cost of intangible assets; Expenditure incurred on training staff members in order to operate asset, recognized inefficiencies and primary loss on operation held before achieving the goal. Once the initial requirement is satisfied, an intangible asset shall be recognized at cost from which accumulated amortization and any impairment losses will be subtracted.
After the initial recognition is done an intangible asset’s amount shall be revalued, as fair value at the specific date of revaluation from any accumulated amortization and any impairment losses will be subtracted. For revaluation purpose as per the Standard, fair value must be measured by considering active market. Revaluation must comprise with such kind of regularity which ultimately does not vary from its fair value. On the contrary under IAS 38, there are several requirements for accounting of intangibles and will vary on the basis of source of asset. Internally generated cost of intangible assets shall be valued initially on the basis of direct attributable costs which will meet the terms with recognition criteria (para 81). Individually obtained intangibles shall be valued at the cost of actual transaction, inclusive of directly attributable costs having the asset readily available (para 82)[9]. It must be considered that the transactional price for individually obtained intangibles may be assisted by valuing of assets before the transaction; however it is not considered as an actual requirement. After analysing methods available in both the standard it can be assessed that it is comparatively easier for calculation.
Determining Fair Value of Asset
Companies may be unwilling to accept changes required by AASB 138/IAS 38 in order to access recognition of internally generated intangible assets in appropriate manner. As the use of intangible is essentially more complex to measure comparatively to other assets; the same is due to changes in goodwill value are unstable and changeable[10]. Systematic provision of intangible asset is subjective; it is complex to impartially state the life and depreciation method used.
$28700000
As on 31st December 2016,
the value of benefit obligation 23000000
fair value of plan assets 20130000
Deficit of fund 28700000
The defined net benefit liability on the year ended 31st December 2016 stood at 2870000. The amount is same as that of deficit of fund.
Working notes:
Expense of interest Defined Benefit obligation’s components:
Brought forward value of Defined Benefit Obligation $20, 000, 000
Service cost of previous year $2, 200, 000
(2, 000,000+2, 200,000*10%)
Components of Interest income 19,000,000
(19,000,000*10%)
|
Liability of Net Defined Benefit |
Obligation of Defined Benefit |
Plan Assets |
|
|
Balance as on 1/1/16 |
1,000,000 |
20000000 |
19000000 |
|
Cost of Past service |
2000000 |
||
|
Adjusted Balance |
22000000 |
||
|
10% interest |
2200000 |
1900000 |
|
|
Cost of Present service |
800000 |
||
|
Fund Contributions received |
1000000 |
||
|
Funds’ paid Benefits |
(2100000) |
(2100000) |
|
|
Return on Plan Assets excluding Interest |
330000 |
||
|
Remeasured Actual loss of Defined Benefit Obligation |
100000 |
||
|
Balance as 31st December 2016 |
2870000 |
23000000 |
20130000 |
Working note for Return on Plan Asset
Fair value of Plan Asset as on 31st December 2016 $20 130 000
Minus:
Opening balance $ 19 000000
Income from Interest $ 1 900000
Contributions $ 1 000000
Payment of benefits (2 100 000) – 19 800 000
Return on Plan Assets $ 330 000
|
Date |
Particular |
Dr. |
Cr. |
|
30/6/2013 |
Expense related to Superannuation (P/L) Dr |
3 100 0000 |
|
|
Superannuation Income Account Cr |
230 000 |
||
|
Bank A/c Cr |
1 000000 |
||
|
Superannuation liability A/c Cr |
1 870000 |
||
|
(being Superannuation expense and contributions accounted) |
References
Basu, A. and Andrews, S., 2014. Asset allocation policy, returns and expenses of superannuation funds: recent evidence based on default options. Australian Economic Review, 47(1), pp.63-77.
Cheung, E. and Lau, J., 2016. Readability of Notes to the Financial Statements and the Adoption of IFRS. Australian Accounting Review, 26(2), pp.162-176.
Davies, B., 2014. Defined Benefit vs Defined Contribution or is There a Third Way? Defined Ambition Schemes: An Alternative Approach to Risk Sharing.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
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.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.
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.
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 30th September 2017.]
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