Measurement Of Fair Value And Accounting Standards

Definition of Fair Value

The conceptual framework of measurement of the fair value is dealt with the Australian accounting standard number 13 on the fair value measurement. As per paragraph number nine of the accounting standard, fair value of the asset is defined as the price which will be received when the asset is sole or as the price which will be paid to square off the liability at the particular date (AASB, 2011).  

In the given case study, the subject of measurement is consists of two assets namely land and factory. These are to be considered as jointly and also severally. It means these are to be considered as the separate assets and also to be considered as the single asset as a group of land and factory while measuring the fair value of the asset.

Para number 31 of the accounting standard 13 describes the valuation premise of the non financial asset. It defines that the highest and best use of the asset determines the valuation premise of the asset.  In case the highest and best use of the asset is achieved when it is used in connection or together with other asset, the fair value will be the price which will be received to sell the asset assuming that the aforesaid asset will be used by the other market participant in different manner. The highest and best use of the asset may give the higher value to the other market participants. Therefore, the valuation premise will measure the fair value at the price equals to the recent sale price of the land less the amount incurred to demolish the factory. Thus, the fair value will be $1000000 – $100000 = $900000 (Draft and Standard, 2005).

The market in the current scenario is the active market. It is because the active market occurs at the situation where the transactions are being taken place on the frequent basis. In the given case study, the prices of the residential house have been increased over the few years and simultaneously the price of the land has been increased from $200000 to $1000000. It exhibits that with the increased requirement of the residential buildings; the cost of land will grow higher and thus has been regarded as the active market as also both the market participants are dealing effectively and actively (Marton, 2009).     

In the given case study, the cost approach is applicable. It is because as per the cost approach, the fair value will be equal to the amount required to replace the existing capacity of the asset. To develop the residential apartment, the cost is $900000. 

Measurement of Fair Value for Land and Factory Assets

As per the Australian accounting standard 16 on property plant and equipment, asset is valued using either cost model or the revaluation but initially the cost model is used and subsequently the revaluation model is used (Aboody, Barth and Kasznik, 2009 ; Easton., Eddey and Harris, 2013).

The intangible assets have been dealt in the Australian accounting standard number 138 on the intangible assets. As per the accounting standard, the intangible assets are those assets which can be identified and expressed in the monetary terms but does not have any physical substance.

The company has to classify the generation of the asset in order to meet the criteria of recognition for internally generated intangible assets as laid down by the accounting standard.  The accounting standard requires that the generation of the intangible assets which are being developed inside the organization will follow two stages research stage and the development stage. 

As per the provisions of the accounting standard, the intangible assets shall not be able to be recognized as an asset in the research phase. It is due to the major fact that the company which is doing research project for the intangibles can never confirm that the intangible in actual exists and there will be the flow of the economic benefits in the future from such research work. Due to this reason the expenses incurred during the research phase shall be charged to the statement of the profit and loss for the year in which the said expense has been incurred.

Secondly the amount incurred during the development stage shall be capitalised only if all of the following requirements are met:

• There shall be feasibility in the technical terms that the project of intangible assets will be completed.
• There shall be the clear intention and thought in the mind of the management of the company for completing the project.
• The intangible so developed or made available for use shall be able to be available for use or sale.
• There shall be the high probability that the intangible assets so developed will be able to generate the high economic benefits in the future.
• The expenditure so incurred shall be able to measure in the reliable terms (AASB, 2015).

Thus, in this manner the accounting of the intangible is done.

The major difference between the accounting for internally generated intangible assets and the acquired assets is that in the case of the former the accounting of the amount incurred has to be done stage wise and whereas in case of the acquired intangible assets the amount so paid to purchase of the intangible asset will be capitalised as an asset.

Second major difference is that in the former case the expenditure incurred during research stage is charged to the statement of the profit and loss account whereas in the latter case nothing is charged to statement of profit and loss rather the whole amount paid for acquiring the intangibles is mentioned in statement of financial position as intangible asset (Padrtová, 2013). 

The companies are reluctant for bringing the changes in the accounting standard because of the following reasons:

• The acquired intangible will always have the value associated with it and will be able to establish the generation of the future cash flows.
• The value of capitalised internally generated intangibles will always be low because of the fact that the major expense incurred in research stage will be expensed off.

The employee benefits has been dealt by the accounting standard number 119 and it has laid down the procedures for accounting and ten adequate justifications (AASB, 2011).

Deficit or Surplus of the Fund is calculated by deducting the fair value of the plant asset from the present value of the defined benefit obligation.

Deficit = Present value of Defined benefit obligation as on 31-12-2016 minus the fair value of plan asset

Deficit = $23000000 – $20130000 = $2870000.

The net benefit liability is the deficit adjusted for any effect of limiting a net defined asset to any asset ceiling. In the given case, Net defined benefit liability is $2870000.

Net Interest = Interest Expense – Interest Income

Net Interest = $2200000 – $1900000 = $300000       

Interest Expense = ($20000000 + $2000000)*10% = $2200000

Interest Income = $19000000*10% = $1900000

Return on Plan Assets = $20130000 – ($19000000 + $1900000 + $1000000 – $2100000) = $330000.

References

Aboody, D., Barth, M.E. and Kasznik, R., (2009), “Revaluations of fixed assets and future firm performance”, Evidence from the UK. Journal of Accounting and Economics, 26(1), pp.149-178

AASB, (2011), “Fair Value Measurement” available at www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf accessed on 28/09/2017

AASB, (2011), “Employee Benefits” available at www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdfaccessed on 28/09/2017

AASB, (2015), “Intangible Assets” available at www.aasb.gov.au/admin/file/content105/…/AASB138_08-15_COMPoct15_01-18.pdf accessed on 28/09/2017

Draft, E. and Standard, I.A.,( 2005). “Fair Value Measurement”. MEASUREMENT, 9, p.90

Easton, P.D., Eddey, P.H. and Harris, T.S., (2013), “An investigation of revaluations of tangible long-lived assets” Journal of Accounting Research, pp.1-38.

Marton, J,(2009). “Fair Value Measurement” COMMENT LETTER ON THE EXPOSURE DRAFT (ED/2009/5) University of Gothenburg

Padrtová, M., (2013), “Accounting of Internally Generated Intangible Assets at Public Universities in the Czech Republic”. Littera Scripta, p.104.

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