Acc100 Introduction To Accounting: Aasb Assessment Answers
Answer:
The Australian Accounting Standard Board has introduced AASB 13 Fair Value Measurement with the aim of providing guidance on fair value accounting. The said standard has been issued wide section 334, Corporations Act, 2001. This accounting standard was made applicable to the entities for the annual reporting periods commencing from 1st January, 2013. However, it can also be applied to the reporting periods after 1st January, 2005. If entity applies this standard during the reporting periods between the years 2005-2013, then it shall make a disclosure of this fact in its financial reports. AASB 13 provides the definition of fair value. It is the amount which is received on sale of an asset or paid on transferring a liability as a result of a transaction that takes place between the market participants, on the measurement date.
The accounting standard on fair value measurement prescribes that the said measurement is done for the particular asset and liability. Hence, while measuring their fair values entities must take into consideration the features of those assets and liabilities that market participants would have considered while pricing them at the date of measurement. Those characteristics include: asset’s condition and location and the restrictions on disposal of asset (AASB Standard, 2011).
Fair value measurement is based on market conditions and hence it is not entity specific. In case of certain assets and liabilities, similar market transactions or relevant information is available in the market but for the other assets and liabilities similar market transactions or relevant market information is not available. However, in either cases, the basic objective behind fair value measurement remains same i.e. the determination of the value at which an order transaction of asset sale or liability transfer will take place between the market players on the date of measurement under the given market conditions. In those cases where the price of alike asset or liability is not available, another valuation techniques are used which can maximise the use of evident inputs and lessen the use of unrealistic input. An entity must use only those valuation techniques which are most adequate in the given situation and for which necessary data is available for the measurement of fair value. Since, fair value is the market based approach, it is determined on the basis of the assumptions that will be used by the market players while pricing the assets and liabilities and the assumptions related to risk. Due to this, the intention of entity to retain an asset in the business or to settle down the liability is irrelevant at the time of measuring the fair value (Barth, Landsman & Lang, 2008).
AASB 13 focuses on the assets and liabilities mainly because these items are the basic subject in the areas of accounting measurement. Along with the assets and liabilities, this standard is also applicable on the equity instruments of the entity and hence such assets are also measured at their fair prices. However, the requirement of measurement as well as disclosure under this accounting standard does not apply to certain transactions such as transactions related to share-based payments which fall in the purview of AASB 2: Share based payments, leasing transactions which fall in the purview of AASB 117: Leases and the measurements which are although observed to be similar to fair value yet are not the fair values actually such as net realisable value approach under AASB 102: Inventories or the value in use under AASB: 136 Impairment of Assets.
As per this standard, the assets or liabilities of the entity whose measurement is undertaken under the fair value approach can either be a stand-alone balance sheet item such as financial instrument, non-financial asset or the collection of assets or the collection of liabilities or the group of both assets and liabilities such as cash generating unit. It depends upon the unit of account, that whether to classify the asset or liability as a stand-alone item or assets or liabilities group or assets and liabilities group for the recognition and disclosure purposes. The unit of account of an asset or liability must be determined as per the standard which requires or allows their measurement on the fair value basis except in the situation which is provided in AASB 13.
The fair value measurement approach works on the assumption that the transactions in relation to the disposal of asset or settling a liability occurs either in principal market relevant to the entity’s asset or liability or in the best advantageous market related to entity’s assets or liabilities. An entity which is undertaking the use of fair value measurement approach does not require carrying an exhaustive search of all the potential markets for the purpose of identification of primary market, but it shall consider all the available information (Hu, Percy & Yao, 2015). The price in principle market must not be adjusted for transaction cost for the purpose of determination the asset or liability’s fair value.
When asset is purchased or a liability is assumed in the transaction of exchange nature in relation to such asset or liability, the transaction price implies the amount paid for the purchase of such asset or obtained to assume liability. It is also called as entry price (Dunbar & Laing, 2017). In contrast to the transaction price, fair value of asset or liability is the amount that would be involved in the sale of an asset or in the settlement of liability. It is called as exit price. However, in certain cases transaction value is equal to the fair value.
The disclosures that are to be made in compliance with standard are not required in certain cases such as plan assets that are measured under AASB 119: Employee Benefits and the assets whose recoverable amount is calculated as fair value net of disposal costs under AASB 136. From the above examination of AASB 13: Fair Value Measurement, it can be concluded that this standard has great significance in the accounting of assets and liabilities and hence it must complied in stricter sense.
References:
AASB Standard (2009) AASB 136: Impairment of Assets. [online]. Available from https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf [accessed 23 September 2018]
AASB Standard (2011) AASB 13: Fair Value Measurement. [online]. Available from https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf [accessed 23 September 2018]
Barth, M.E., Landsman, W.R. and Lang, M.H. (2008) International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498.
Dunbar, K. and Laing, G.K. (2017) Deconstructing the Accounting Standard AASB 13 Fair Value: Exit vs Entry Price for Assets. Journal of New Business Ideas & Trends, 15(2).
Hu, F., Percy, M. and Yao, D. (2015) Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), 930-939.
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