ACC510 Financial Reporting-Fair Value Measurement

Fair value of an asset is the true estimation of what can we get when an asset is being sold to a willing party who is having considerable knowledge of the same in an arm’s length transaction. This has been defined in Para B2 of AASB 13 which deals with the concept of Fair Value Measurement. (Abbott & Kantor, 2017) The same has also been covered in Para 11 and Para 36 of the conceptual framework of general purpose financial statements. The concept of fair value is fully based in the judgement, estimates and circumstances of the case. It depends on what assumptions have been taken by the user and may change from user to user. It may incur and see huge fluctuations in the values as it is a subjective topic. Further, the transaction cost here for selling an asset or transferring a liability to the other in the best possible transaction and market (the principle market) should be related directly to the asset and should meet the below mentioned criteria:

1. It should directly pertain to the entity.
2. The transaction would not have occurred in any case had the entity not decided to sell asset or transfer liability.

Relevant Issues: 

The relevant issue here is that the fair value being a subjective topic may vary immensely based on the assumptions taken. It may give different values for PPE on different days. It may be fairly difficult to ascertain the fair value of the asset for a non-profit organization as the asset may be valued much higher when it is being utilized in highest and best use i.e., in the commercial purposes. (Alexander, 2016)

Highest & Best Use

The concept of best and highest use of non-financial asset for which fair value determination is done is based on the principle that how the asset can be best utilised by the market participant to derive the maximum economic benefits out of it or if it can be sold to another willing party who can best utilize it. 3 factors namely, the physical existence, legality of transaction and financial viability is considered in this concept. (Das, 2017)

Application to aged care home

For an aged care home, an asset may value less as compared to the commercial entity doing business, but actually, the market value does not changes based on the type of entity or the valuation method used. Therefore, it should be uniformly used be it an old age care home or if it is business doing entity based on the exit price as on measurement date.

Two possible uses

Fair valuation is used in many case like the impairment of the tangible and intangible assets, while selling the assets in the market, while valuation of the inventory in the financial books and also for the disclosure purposes as per the IFRS reporting of financial assets.

Accounting Justification:

The impairment of the assets is being dealt by AASB 136. Further, agenda 10F(a) of the conceptual framework of accounting also deals with impairment of both tangible and intangible assets. Impairment may be defined as the permanent write down in the value of the asset in case the indicators of impairment so exist. (Dichev, 2017) The indicators may be external as well as internal depending on the circumstances and then the assets may have to be reassessed based on the impairment test. The asset should not be valued at more than the recoverable value in the books, which is higher of the value in use or the fair value of the asset less the cost of disposal.

Relevant Issues:

In the given question, two cash generating units of the company have been recognised as Time and Leisure. Both have to be reassessed for impairment, if any based on the inputs given. The company has changed the amount of depreciation for the year and the impact of the same needs to be seen. (Visinescu, Jones, & Sidorova, 2017)

Impairment Test 31/12/16

a. Calculations: 

In the given question, the impairment loss for the 2 CGUs Time & leisure comes to $ 200 and $ 12 respectively, where first it needs to be allocated to goodwill and then to other assets except inventory and receivables which are in the nature of current assets held for sale. Therefore, no impairment for them. (Murray & Markey?Towler, 2017)

Impairment Test 31/12/17

a. Calculations 

The carrying values of the assets will change since the company has changes the values of depreciation for year. Further, goodwill once impaired cannot be reversed based on any circumstance. Thus, the impairment assessment based on the above inputs is as follows:

 b. General Journal Entries 31/12/17: 

Accounting Justification:

AASB 138, paragraph 8 deals extensively on accounting and classification of the research and development costs on the intangible assets. Also, SSAP 13 of the conceptual framework deals on the same issue. The issue of bifurcation generally arises in the case of the internally generated intangible assets. (Trieu, 2017) Research cost is the pre requisite to the incurrence of the development cost. Development cost cannot be there in absence of research cost. Research cost is the initial cost being incurred to get the technical and scientific understanding on the subject to see whether the same will be financially viable and economically beneficial for the company to incur. Development on the other hand is a post facto activity which is done one the decision has been taken based on the finding of the management and there is an objective to develop a substantially enhanced product or to come up with the improved version of the existing version. Further in case there is an issue in classifying between research and development cost, everything would be considered to be the part of research cost. (Heminway, 2017)

Relevant Issues:

The most important and critical issue is how the bifurcation between the research and development costs should be done and how the same should be accounted in the books of accounts.

Difference between two phases:

There are a lot of differences between the 2 accounting terms but the major difference is research may or may give rise to an asset but development does so as it is certain to give the expected future economic benefits to the entity and it is proceeded with only when the company is sure on it financial viability. (Raiborn, Butler, & Martin, 2016)

Accounting for Research & Development:

The research phase of any project is not certain to give the future economic benefits to the entity neither the company is sure to demonstrate the same. Hence, the same should be charged as expense in the P&L straightaway as and when it is incurred. (Félix, 2017)However, the development is an advanced phase of research by the company and they are sure that it would give rise to economic benefits in the future and so the same should be capitalized in books of accounts as intangible assets. Further, if any incidental or related costs are being incurred during the development phase of the asset, the same should also be capitalized in the value of the asset.

 Decision / Conclusion / Reasons and Justification:

The decision or conclusion based on the above discussion points is that the research should be charged off in the P&L and the development costs should be capitalized in the value of the asset. However, before taking such an accounting decision, it should be seen that whether the motive was there to create the asset, whether it is saleable and marketable in the open market, whether the same will reap economic benefits to the entity in the future and whether the same can be reliably measured.

Accounting Justification:

The defined benefit obligation and superannuation are the benefits being offered by the company to the employees and it is being dealt in details by AASB 1056. This is a kind of pension benefit being given by the company to employees in return of the services rendered. (Werner, 2017) The employee can opt for defined benefit plan where only the company contributes towards the employees or it can opt for the contribution plan where both the employer as well as the employee contributes towards the employees’ funds which are given to employee only after retirement. In the given case, the company has stopped the policy of giving this benefit to the new employees however, it continues to contribute for the old employees who opted for it. The return on these funds is dependent on the investment being made by the company which keeps on fluctuating based on many factors both internal and external. (Jones, 2017)

Relevant Issues:

The relevant issue here is the determination of the asset or liability as the case may be for the company to be shown in the books. The same has been shown via calculations below:

Deficit of Fund

 The amount of deficit in the fund comes to $ 1,100,000 (2,100,000 – 1,000,000) Net Defined Benefit Liability

At the end of the period, the net defined benefit liability for the company is $ 23,000,000 From the calculation shown above, it can be seen that the net interest (Present value of defined benefit obligation account) as on 31^st December 2016 is $ 2,200,000.The reconciliation accounts of the company. 

References

Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), 10-17.

Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632.

Félix, M. (2017). A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, 1-69.

Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.

Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.

Murray, C., & Markey?Towler, B. (2017). A Theory of Return-Seeking Firms. SSRN, 1-14.

Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.

Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124.

Visinescu, L., Jones, M., & Sidorova, A. (2017). Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), 58-66.

Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25, 57-80.