BAO3309 Advanced Financial Accounting

Concepts of Measurement in Relation to Historical Cost and Fair Value 

The concept of fair value is defined by International Financial Reporting Standard (IFRS) 13 (Warren and Jones 2018). Fair value may be defined as the market value at which assets is sold or a transfer of liability is done within the market at a particular date. The measurement of fair value can be done for any kind of liabilities and assets of a company as per the policy of the company. Whenever the company is following fair market valuation, the characteristics of the particular assets or liabilities are also taken into consideration as some times potential buyers and seller also takes such factors into consideration. Some of such factors can be the condition of the asset, position of the asset and restriction during the sale or purchase of the asset.

Furthermore, the goal that is related to the measurement of the fair value in both circumstance are similar for projecting the price within which a systematic transactions that are being taken in the market related to the asset or in scenarios of transfer of the asset takes place among the market participants during the measurement date within the current assessment scenario. Specifically, the “IFRS” would be appropriate during the time when the other “IFRS” permits the enumeration of the fair value or the declarations in accordance to the measurement of the fair value that has been established on the fair value or else the declarations in accordance to assessments (ref: paragraph 5 IFRS 13).

As per “Para 16 of the IFRS 13”, measurement of fair value estimates that the transactions which have taken place are either in the standard market for assets and liabilities or in the most beneficial market where the liabilities or assets can be sold in the absences of principle market. More as per para 34 of the standard states the general principles which company has to follow in case of financial and non-financial liabilities of the business or even the business’s equity is assumed to be transferred to the potential buyers at the measurement date. Therefore it can be concluded that fair market valuations can be done by any business in accordance with the policies of the company (Henderson et al.  2015).

In order to understand the measurement process under historical cost method, the first thing which is needed to understand is that the concept of historical costs. Historical costs is a value measurement concept which is used in accounting in which assets are shown in the balance sheet at its nominal or original cost at which the company had acquired the asset.  The key business transactions that are recorded in the accounting aspect of a company are registered at cost. It is seen that historical expense can be recognised by gaining access to the trade documents or the foundation of the purchase. Additionally, the historical expenditure has the drawback of not fundamentally imitating the factual fair value of a distinct asset that can deviate from the acquisition expense of a precise time frame. In accordance to the accounting standards, the historical cost is in need for various modifications within the advent of time.

Primarily, the historical cost is different from any other sort of costs that are allocated to a distinct asset that is even known as the cost of replacement or the adjustment of the inflation expense (Williams 2016). Conversely, the historical cost can be observed to be a core theme for the purpose of asset registration even though the fair value is substituting the similar sorts of the assets. The continuing historical cost substitution by the system of the fair value assessment is established on the argument that the historical cost replicates a conventional outlook of a company.

Conversely, the selection among the utilisation of the historical cost process and the fair value method of accounting can be granted to be a vastly debatable matter of worry. Conversely, the disagreement has been arising during the decade of 1990s. Contrasting to the most of the standards of accounting, “IFRS” provides a selection among the historical cost prices and the fair value method of accounting for an assorted assets that are non-financial in nature. Furthermore, the “IFRS” even asks for the requirement of an ex-ante obligation that explains the obligation to any one of the two accounting regulations and policies. Therefore the managers have a remuneration to answer to the market demands and the pledge to a distinct accounting treatment that aids in optimising the value of an organization.

Additionally, the fair value accounting process for the variant assets that are non-financial in nature have the advantage of a developed value preciseness as well as the content of the data, lowered level of asymmetry of the data and the amplified comparability (Wild 2015). The statements recommend that then the utilisation of the fair value instead of the historical cost is not random in most of the cases but only occurs when the benefit is more than the costs.

Challenges and Benefits of Using Historical Value and Fair Value

According to “AASB 116”, the fair value can be regarded as the value in accordance to which a specific asset can be switched among primarily the parties who are close to the business transactions and who are even knowledgeable. It is seen in “Paragraph 15 of AAS 116” (Assessment at identification), an entity of plant, machinery and property that essentially is eligible for the intention of identification and can be regarded as a distinct asset which can be reckoned at the cost.

“AASB 138” suggests the accounting treatment for numerous assets that are intangible in nature that are not essentially with specifically in any other kind of accounting standard. In this aspect, this standard can be implied to the reporting of the entity that has the requirement to construct fiscal statements according to “Part 2M 3 of the Corporations Act” and this is necessarily an entity for reporting. As explained in the “AASB 138” standard that is associated with the intangible assets, the cost is essentially known as the carrying value of specifically cash and cash counterparts that is paid and is shown as fair value of the other deliberations that are given in order to gain a distinct asset during the period of procurement.

During the applicability of this standard, the total amount is recognised to the specific asset during the time when it is recognised initially according to the specific needs of the other standards related to accounting. According to “AASB 3”, in scenario, if an asset that is intangible in nature is gained in a distinct blend of the business, the distinct expense of that specific intangible asset is essentially seen at the fair value during the acquisition time. Primarily, the asset fair value that is intangible in nature would be helpful in duplicating the anticipations of the participants of an economy during the acquisition date in accordance to the potentiality that the projected future economic benefits that are essentially embarked in a specific asset that will flow in to the documenting entity (McLaney and Atrill 2014). In circumstances, if an elusive asset which is purchased in a distinct mix of business can be aggregated or if it comes from an agreement or from any other aspect of lawful rights then the sufficient data lives to compute the assets at a fair value.

The documenting entity may look to identify the intangible asset and even permit at the fair value in accordance to the “AASB 120”. Additionally, in accordance to the framework of cost, that is explained in “Paragraph 74 of AA 138”, that after clear primary identification, a distinct imperceptible asset of a body shall be fundamentally be taken at a specific revalued figure that looks to be at a fair value and is recorded at the date of revaluation after substitution of any sort of successive accrued amortisation and any upcoming accrued impairment losses.

The Basic Advantages of Fair value Measurement which are associated with all assets and liabilities of the company are given below in details:

The fair value measurement has certain disadvantages which are that the value of the company of the company fluctuates widely many times during a year. Another disadvantage which the company faces is in case the company facing losses, in such cases fair value measurement method is not appropriate as such will be affect by the downward trend of the company.  

In Case of Historical Cost Method the Basic Advantage which the Company has are given below in details:

The main limitation which the company faces is that the method completely ignores the inflation rates and also the effects of inflation in the business. Another limitation which the method faces is that the current revenues and the current costs from operations do not match.  

The dimensions of fair value and the process of accounting for the plant, property and equipment can be regarded to be larger to specifically historical expense established on the characteristics of primarily estimated value, feedback value, figurative faithfulness, reliability, timeliness comparability and neutrality. Specifically, verifiability is found to be only of the qualitative characteristics that is in favour of the historical cost over the fair value theme.

Conversely, there are advantages of making use of the historical costs for the PPE (Plant, Property and Equipment) valuation within the balance sheet. It is in such a manner that the historical cost can be confirmed. In general circumstances, the cost that has been incurred during the time of buying is registered in numerous treaties, disbursements, taxation transfers and various others. Particularly, the historical cost of a specific PPE is even exploited for the intention of determination of the depreciation value that expands and that have been disclosed on the income statement of the entity. In this essence, the total amount of depreciation is addressed as a distinct subtraction from the historical cost of the registered asset on the balance sheet (Hoyle, Schaefer and Doupnik 2015).

Conversely, in circumstances of impairment, there exists assets that may be documented at the value that is lower than the one that is established on the historical cost. In reality, the utilisation of the historical cost can be found to be a drawback for the financial assertion users that has the requirement to understand the present value. The intangible assets may have the requirement to be valued for several factors.

It is seen that the process of fair method of accounting has extensive likelihood to be chosen for specifically the “PPE” than any other sort of assets that are the non-financial in nature as the property creators that are specifically liquid. The managers have the probability of incorporating the fair value when it essentially accelerates the computation and assessment of the performance. In this scenario, the amount changes in the investment property are generally enlightening of the various operational performance during the time, when the capital gains are essentially a section of the business framework (Callen 2015).

Nonetheless, the process of fair value undesirably has an impact on the key performance dimensions in circumstances if the management chooses to hold the diversified assets that are unproductive in nature.

Recognition of Practices of Valuation and the Non-financial assets: Intangibles and PPE 

In this paper, the organization selected in accordance to the “Australian Stock Exchange” has been Woolworths Limited, the firm chosen in accordance to “London Stock Exchange” is Tesco Plc and the enterprise that has been selected in accordance to “New York Stock Exchange” is Alcoa Corporations.

Alcoa Corporations: The financial report that is consolidated in nature for Alcoa Corporation is constructed essentially according to the fundamentals of accounting that is normally acknowledged in United States of America which is “GAAP”. This needs the management to undertake distinct judgments, projections and estimations. Conversely, this may in certain cases have an impact on the amounts that have been registered for the liabilities and assets of the body in addition to the declarations on the distinct contingent liabilities and assets at the date of the financial report.

In Alcoa Corporations, the plants, properties and equipment are recorded at the cost. Primarily, the depreciation is recorded generally in the straight line process at distinct rates established on the estimated asset life. Specifically, for assorted Greenfield assets that concentrates on the development of numerous innovative assets on numerous lands that are underdeveloped the various mechanisms of production is exploited in order to record the depreciation. Therefore, these assets have the requirement for a substantial time period that is generally one year and above in order to increase the production capability (Investors.alcoa.com 2018).

“PPE” are assessed with the intention of diminishing in situations there are various proceedings or else have changes in the scenario of the concerns. This replicates that the factor of the carrying value of these types of assets or in the asset groups may not be recovered. It is even seen that the asset recoverability can be determined by the process of making a comparison of the estimated undiscounted net cash flow operations related to the asset of the company and even in the group of the asset in the carrying amount of the company. Furthermore, a loss in impairment can be observed at the time when the carrying value of the asset and the asset group goes past the estimated undiscounted net cash flows.

Additionally, the amount of the impairment loss that is to be recorded is computed as the additional carrying value of the asset group or the individual asset over the fair value, with which the fair value that is determined by exploiting the effective data that is gathered and is generally a discounted flow of the cash framework. Additionally, the fortitude of the comprises of the asset group the linked projected undiscounted net cash flow and the projected economic asset lives even has the requirement of considerable judgments.

With respect to the annual report of Alcoa Corporations, it is explained that the goodwill is not essentially repaid, and in area of that which is evaluated for annual impairment and even in more frequent in circumstances if the indicators of the impairment is existent or else if a distinct decision to exit or sell a company is undertaken. The policies of accounting explained in the annual report explains that a reasonable amount of the management judgment is associated with the method of determination in scenarios, if a distinct impairment indicator may be inclusive of the worsening of the general economic scenarios, developments that have been negative in the aspect of equity and even in the credit market, unfavourable transitions in the economy where the company functions (Investors.alcoa.com 2018).

These parameters are even inclusive of the developments in the cost of input that essentially have a bad effect on the earnings of the firm along with the cash flow or a stable pattern of reducing flow of the cash. Impairment examination of the goodwill in the past years explained that the goodwill of the company is not impaired. The intangible assets that have limited lives are essentially amortised on the basis of a straight line method over a specified time frame.

Woolworths Limited: The financial reports that are consolidated for the overall body are actually the common intention of the financial reports that have essentially been constructed and presented according to the “Corporations Act 2001” and the “Australian Accounting Standards” along with “International Financial Reporting Standards and Interpretations”. In accordance to the annual report of the company, the PPE of the overall group is generally constructed at the deduction cost accrued depreciation, accrued impairment loss or amortisation. Specifically, the expense associated to any self-generated assets of the company consists of the material expenses, direct labour additionally to the percentage of the overheads.

The cost associated with the developmental properties even consists of the cost of holding, borrowings and development till the asset is comprehensive. The annual financial declarations of the company even addresses the fact that the PPE are generally assessed in accordance to the strategy of non-financial asset impairment (Wow2016ar.qreports.com.au 2018). Furthermore, the estimation of effective lives also ask for the requirement of significant management decisions and are evaluated at least once a year. In accordance to Woolworths Limited, the PPE deficiency generally relates to the impairment of the property, store assets and the distribution centres that are associated to the Home Development Business.

Additionally, according to the annual report of Woolworths Limited, there has been an observation that the intangible assets are calculated at cost less distinct accrued amortisation as well as the losses of impairment. In scenarios, when the intangible assets have been attained in a distinct business mixture, the distinct expenses indicate that the fair value specifically at the acquisition date. In addition, the intangible assets of the company having limited exists are repaid essentially with several limited lives that are have been amortised by making use of the straight-line process over the projected economic lives.

Tesco Plc: The assessment of their annual report for the accounting year of 2016 explains that the financial statement of the company are constructed and presented in accordance to the regulations that have been put forth by the “International Financial Reporting Standards” that has been incorporated by the “European Union”. The financial declarations are constructed in accordance to the provisions of the “Corporations Act” in the year 2006 that is worried about the financial statements of the groups and as article 4 of specifically the regulations of IAS. The assessment of the key accounting principles of the company explains that the PPE of the organization is essentially undertaken at the cost deducting accrued depreciation over any recognised impairment amount (Tescoplc.com. 2018). Specifically, the PPE is depreciated by making use of the straight line process for the computation of the residual value over the projected economic live.

The critical assessment of the annual report of the firm for the accounting year 2016 even highlights the fact that in case of the non-financial assets of a company that counts the intangible assets along with the PPE, the group initiates the examination of impairment within which there are various pointers of specifically impairment. In scenarios, if these kinds of impairments are existent, the overall recoverable value of the asset of the organization is projected in a proposition to the extent and level of the impairment losses. In scenario, where the assets does not essentially create cash flows that are distinctly free from the several assets, then the group estimates the overall recoverable value of the total cash creating units.

Additionally, the annual report of the company even explains that the intangible assets specifically the software that have pharmacy licences are generally computed primarily at the acquisition cost or the expense that is accrued for the asset development. Then again, the expense of development that the company accrues on a distinct individual project is capitalised essentially only when specific criteria are contended by assessing the asset created shall probably create economic advantages in the future time period. In this aspect, the imperceptible assets attained by the company in a distinct organization mix are perceived at the fair value at the acquirement date (Tescoplc.com. 2018).

Nonetheless, after primary identification, the distinct intangible assets having limited effective lives are undertaken at a cost that is less than the accrued amortisation and even the impairment loss that is accumulated. Particularly, they are generally amortised with the help of the straight-line process during the projected effective lives at 10 to 25% of the expense annually. For the other diversified assets that are non-financial in nature that counts the imperceptible assets of the company, the group undertakes a damage examination generally in cases where there loss indicators.

Assessment whether PPE and intangibles are stable among the three companies 

The computation of the intangible assets and the PPE of the organization are fairly dependable among the companies Woolworths and Tesco Plc but on the other hand is a bit different for Alcoa Corporation. In case of Tesco Plc, PPE of the company is fundamentally undertaken at the expense deducting accrued depreciation in accumulation to any recognised impairment value. In case of Alcoa Corporation PPE are recorded at cost. Specifically, the depreciation is generally registered in the straight line process at distinct rates established on the estimated economic asset lives. In accordance to the intangible assets of Tesco, it is calculated primarily at the acquisition cost or else the expense that has been incurred for the asset development.

The distinct assets having limited effective lives are undertaken at a cost less accrued amortisation along with the accrued loss of impairment. In accordance to Woolworths, the intangible assets are calculated at the cost less distinct amortisation that has been accumulated along with the loss of impairment. Furthermore, for Alcoa Corporations, the assets that are intangible that have limited lives are essentially repaid generally at a straight-line process.

Opinion regarding free choice between historical cost and fair value accounting

The report is based on the focus of analysis the various benefits which are associated with the applications of methods of fair value measurement and historical cost measurement. Thus management of any company is under the responsibility to make decisions whether the company is going to follow fair value method of accounting or historical cost method of accounting. It can be said that fair market valuations can be done by any business in accordance with the policies of the company.

Nonetheless, there are even instances that explain the nature that the net benefits that are attained from the fair value process of accounting is fundamentally regulated. The adoption of the method of valuation for the method of accounting fair value and accounting of historical cost has to be selected by the management of the company based on the goals and objectives of the company. The method thus selected by the company needs to be properly implemented and the same should be controlled.

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