Measurement Practical Guidance and Implementation †Free Samples

Question: Discuss about the Measurement Practical Guidance and Implementation. Answer: Introduction Increasing number of accounting standards all over the world are allowing the standards of Fair Value Accounting (FVA) for the purpose of financial reporting. The International Financial Reporting Standard (IFRS) can be considered as one of them allowing FVA for the accounting treatment of non-current assets of the companies (Graham, Carmichael Carmichael, 2012). It needs to be mentioned that IFRS have agreed on the application of FVA for ascertaining the value of their non-current assets without involving the market value of them over Historical Cost Accounting (HCA). While the main aim of the development of financial statements is to reflect the reality of financial situation, variation in the accounting opinion can be seen under the process of FVA and HCA. The main aim of this report is to ascertain whether FVA should permanently replace HCA for the valuation of non-current assets. For the purpose of this report, the 2017 Annual Report of Wesfarners is taken into consideration. All the details related with the implementation of fair value measurement can be seen in the IFRS Framework 13 Fair Value Measurement. According to this standard, all the business entities under Australian Securities Exchange (ASX) need to use fair value measurement for the measurement of the fair value of all of their assets including non-current assets. According to this standard, the definition of faire value can be provided based on an exit price notion and used the hierarchy of fair value that results in market based measurement rather than any entity specific measurement (iasplus.com, 2018). In this aspect, IFRS 5 Non-current Assets Held for Sale and Discontinued Operation states the process of accounting treatment of non-current assets. According to this standard, assets held for sales are not depreciable and they are required to be valued on the basis of fair value less costs to sell. Moreover, they are required to be presented separately in the financial statements. In addit ion, there is a need for separate disclosure for all these non-current assets (iasplus.com, 2018). Fair Value vs. Historical Cost Accounting There are major differences between FVA and HCA. It can be seen that FVA is regarded as the improvement of HCA as the concept of FVA has been developed to overcome the drawbacks of HCA (Chircop Novotny-Farkas, 2016). Under the process of HCA, the initial price paid at the time of purchasing any asset or liability only matters. The prices of the assets and the liabilities in the balance sheet cannot include any fluctuations of price. However, difference can be seen in case of FVA. FVA takes into account all the changes in the value of assets and liabilities from time to time basis. Thus, it needs to be mentioned that the value of the assets and liabilities reflect the correct market value under the process of FVA (Ayres, Huang Myring, 2017). From the above, it can be seen that the process of FVA takes into account the volatility in the price of assets and liabilities where HCA does not consider this volatile in price. This volatility make FVA superior to HCA as it provides the finan cial results of the companies that are not based on possible subjective valuation or any other method (Ellul et al., 2015). It needs to be mentioned that the process of FVA has some major advantages. At the same time, there are also some major limitations of FVA. They are discussed below: Benefits The use of FVA helps in providing the accurate valuation of the assets and liabilities of the business organizations. FVA takes into account the increases and decreases in the value of assets and liabilities. It helps in providing the correct financial position of the company (Laux, 2016). Under the process of FVA, there is less possibility of doing manipulation with the accounting data. Under FVA, the tracking of sales price is done based on the actual or estimated value that helps in providing the measurement of true income (Zack, 2012). FVA helps in tracking the value of all types of assets where the valuation of assets and liabilities is not always correct in case of HCA. For this reason, accountants all over the world prefer the application of FVA (Wang Zhang, 2017). FVA helps the companies by allowing the process of asset reduction within the market. This particular aspect helps the companies in surviving in difficult economy (Bick, Orlova Sun, 2017). Limitations Under the process of FVA, large fluctuations in the value of assets can be seen many time in the year and this changes are required to be recorded in the financial statements. This particular aspect affects the financial position of the companies (lorian Marcel Nu, 2015). There are investors for the companies who do not notice that the company is using FVA. This particular aspects create major dissatisfaction among the investors as they can only seen the reduction in the net income. It can be considered as another limitation of FVA (Liao et al., 2013). Although it is crucial to consider the present value of the assets and liabilities, it is necessary to have the historical record for measuring the accuracy. The loss of historical aspect under FVA can be considered as a major limitation of FVA (Zyla, 2013). Thus, from the above discussion, it can be seen that FVA has both benefits and limitations and the accountants are required to consider all of these aspects while using FVA. Effects on Balance Sheet As per the earlier discussion, Wesfarmers Limited is considered for measuring the superiority of FVA over HCA. From the 2017 Annual Report of Wesfarners, it can be seen that there are some major items under non-current assets. They are shown below: The first non-current asset is investments in associates and joint venture. From financial note 18, page no. 127, it can be seen that the company measures and recognizes their investments in the balance sheet at the cost price after adding the post-acquisition changes. It can be found in IAS 1(54) (e) of IFRS statements. This calculation considers all the recent changes in the investments under FVA. The next non-current assets are Deferred Assets. In the calculation of deferred tax assets, the company follow the IFRS standard of IAS 1 (54) (o), (56). According to this standard, the recognition of this asset is done in the date of balance sheet. It implies that the company consider all the changes in the value of deferred tax assets while it would not be possible in case of HCA (wesfarmers.com.au, pg no: 106). The next non-current asset is property. According to IFRS IAS 1 (54) (a), while measuring the cost of plant, Wesfarmers considers all the necessary changes in the value like depreciation, impairment, cost of replacing parts and others. It implies the adoption of FVA by the company (wesfarmers.com.au, pg no: 109). The next non-current asset is Plant and equipment. Same like property, Wesfarmers use IFRS standard IAS 1 (54) (a) for the valuation of their plant and equipment. In this process, the company considers all the necessary changes in the value of this asset while reporting them in the balance sheet. It indicates the adoption of FVA by the company (wesfarmers.com.au, pg no: 109). The next non-current asset of Wesfarmers is Goodwill. In the financial note no. 8, it is clearly stated that the company uses FVA for the measurement and reporting of their goodwill. In this context, the company follows the IFRS principle of IAS 1 (54) (c). It implies that the company takes into consideration all the current changes in goodwill (wesfarmers.com.au, pg no: 110). The next items are Intangible assets other than Goodwill. It needs to be mentioned that the company uses the same standard for these assets (wesfarmers.com.au, pg no: 110). The next non-current asset of the company is Derivatives. As per the financial note no. 16, it can be seen that the company uses fair value method for valuation of their derivatives on the date of their contracts and the company re-measures them on the basis of fair value. For this reason, the company follows the standards of IAS 1 (54) (d) and IFRS7 (8) (a). It needs to be mentioned that the company also use FVA in case of the measurement and valuation of hedging instruments. It needs to be mentioned that the values in the amounts of balance sheet have major impact on the financial position of the business organizations as the investor largely reply on the figures of balance sheet for determining the credit worthiness of the company (Graham, Carmichael Carmichael, 2012). For this reason, the financial statements including balance sheet need to reflect the actual financial position of the companies. The same aspect is also applicable for the financial statements of Wesfarmers. The above discussion denotes that the company has complied with the regulations of IFRS in order to follow the principles of FVA. However, in case Wesfarmers used HCA, there would be significant difference in the values of non-current assets. Due to not taking into consideration the recent changes in the values of assets under HCA, the value of the assets did not express the actual financial position of the company and it would mislead the investors in the investment decision-making process. Conclusion The selection of appropriate accounting method is an important factor for the success of the whole organization. In this process, business organizations are required to consider both the advantages and disadvantages of the accounting methods. From the above discussion, it can be seen that IFRS has provided all the details related to the use of FVA for the ASX listed companies. According to the above discussion, it can be observed that the process of FVA has both advantages and disadvantages, but the portion of advantages is more than the portion of disadvantages as compared to HCA. In case of Wesfarmers, the above discussion indicates that the company uses FVA method for the valuation and presentation of their non-current assets in the financial statements. The above discussion shows that in case of the adoption of HC instead of FVA, there would be major differences in the values of non-current assets; and this would lead to the miss-presentation of the financial position of Wesfarme rs. This whole process would mislead the investors in determining the actual financial position of the company. Thus, on the basis of the whole discussion, it can be concluded that FVA should permanently replace FVA as the accounting process of the companies. References 2017 Annual Report. (2018).Wesfarmers.com.au. Retrieved 27 March 2018, from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 Ayres, Huang, Myring. (2017). Fair value accounting and analyst forecast accuracy.Advances in Accounting,37, 58-70. Bick, Orlova, Sun. 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