Examination of Market Values in Assessment of Assets by Reporting Entities - Essay Example

Examination of Market Values in Assessment of Assets by Reporting Entities Prepared by Submitted to Length 1555 words (excluding Abstract) Abstract The paper deals with the accounting standards of the AASB that asserts the importance of measurement of assets. The market values and methods needed for the measurement of assets and the standards in AASB that facilitate them are discussed. The identification, recognition, measurement, acquirement, disposal of the assets of all the companies are done uniformly by reporting entities. The avoidance of different methods for different companies that increases the transparency is underlined in this analysis. The financial services division is given the responsibility for the compliance of accounting standards that deals with the intangible assets. The method that is important in dealing with the estimation and identification of intangibles assets is taken as important issue in the measurement of assets using market values. 1. Introduction The market values can be taken into consideration while the policy of accounting is considering capitalization and amortization of assets. According to AASB the financial services division can be charged with the responsibility of ensuring compliance with accounting standards and to maintain centralized control. In AASB 138 the intangible assets is defined as the one that is identifiable non monetary asset that have no physical substance. The market value definition for the intangible asset is complex as it can be separable, transferred, licensed, rented or exchanged either individually or collectively. The complexity is also due to the contractual and legal rights regardless of transferable rights from the entity. The assigning of market value for any asset particularly intangible asset will help the reporting entities to be transparent in estimating the values of a company in financial reporting. This gives professionalism for the judgment of the assets. According to AASB 138 the reporting entities can recognize the intangible asset when there is probability in future for economic benefits from the asset and the measurement of cost of asset is reliable. The method of measurement of cost should involve direct attributable costs. The training costs should be considered as expenses. The intangible assets that are generated internally like the assets which are a result of research phase and development phase should be valued according to the market demand. The de recognition also should be considered in the case of intangible assets and can be done on disposal or due to the absence of economic benefits in future. If there is any cash in result of disposal it can be classified as revenue due to the asset. The market values can be used in measurement of intangible assets but the method is not limited to measure intangible assets only. According to AASB the method can be extended to fixed and movable assets also. 1 2. Reporting Requirements The reporting requirements according to AASB are the changes in accounting estimates and identification of criteria, accounting estimates and criteria for correction of errors. The financial information supplied by financial reporting should be understandable, relevant, reliable and comparable that ensures the substance underlying transactions. The repeating of the information must be done in the case of understanding the presentation and relevance of the reporting. The evaluation of past, present and future values of the assets must be possible with the provided information and its organization. This is possible when it is free from errors and bias. The financial reporting should be done according to the legal needs and market values. This is possible when it is neutral and non bias. The standards applicable for the prescribed requirements are the: 1. framework for the preparation and presentation of financial statements, 2. AASB 1 first time adoption of Australian accounting standards, and 3. AASB 108 accounting policies, changes in accounting estimates and errors. The AASB 3 business combinations, AASB 101 presentation of financial statements, AASB 107 cash flow statements that allow components of cash and their equivalents, AASB 111 construction contracts that need changes in estimates, AASB 114 involve segment reporting that brings out accounting policies that relate significantly to segment reporting, AASB 116 that tell about the depreciation of property, plant and equipment, AASB 138 that measures the assets including the intangible ones for the sake of capitalization and amortization, AASB 1038 life insurance contracts that changes in underlying assumptions. The exemptions should consider AASB 108 that tell about the accounting estimates and errors. The AASB 108 will exempt the first time adopting companies from the purview of the accounting policies estimates and errors. The adoption of AEIFRS is needed to deal with the transitional provisions. 2 3. Standards for Measurement of Assets The standards required for the measurement of assets is AASB 102 that enables the measurement of inventory at the lower of cost and realizes the net value. This is exempted for the non profit organizations. This will be helpful when the inventories are held for distribution and involves the current replacement cost. The standard required for the cash flow statements is the AASB 107. the need of the mentioning of AASB 107 in the analysis of the market values of assessment of assets is due to the cash flow created by the assets. The cash can be due to cash in hand and demand deposits which are movable and intangible assets. This involves the measurement of assets and can be considered as a standard that is needed in using the market values for the measurement of assets. The reason for this is that the definition of cash equivalents in AASB 107 is wider than the AASB 1026 and gives wider area for the movable assets or non fixed assets. The next important standard is AASB 116 that deals with the property, plant and equipment. This enables the measurement with and after recognition. In this standard the reporting entity will choose the cost model or the revaluation model as its accounting policy to recognize and measure the property, plant and equipment. This involves the depreciation and future cash generation also. This applies to entire property, plant and equipment of the company. The cost model will recognize the asset as an item of property, plant and equipment. This will be estimated at the cost after the deduction of depreciation and any accumulated impairment losses. In case of revaluation in AASB 116, the recognition of the asset as an item of property, plant and equipment will measure the cost at fair value at the date of the revaluation. This will deduct the consequent accumulated depreciation and subsequent impairment losses if any. After the revaluation, all the items of the property, plant and equipment in which the asset is a part also will be revalued. These models are different for profit entities and the revaluations will be done on the asset basis. The not for profit will be the revaluations on a class basis. 3 AAS10 deals with recoverable amount of non current assets. This standards can be termed as the issuing of requirements concerning the recoverable amount test for non current assets in AASB. This gives accountability for the revaluation of non current assets. The net cash flows are discounted to their present value in revaluation. This measures the recoverable amount of non current assets. This must be done on the requirement of disclosing the assumptions made in respect of the assets recoverable. The discount rate used also should be made public. The carrying amounts of non current assets should be written down. This writing down should to the recoverable amount providing the carrying amount is greater. It can be calculated as the net amount that can be recovered using cash inflows and the out flows of the assets. This standard also is exempted for non profit entities. This defines the non profit organization as the one that creates no profit. When there is no profit there is no recoverable amount for the asset from the cash flows. 4 The AAS21 deals with the acquisition of assets. This standard will deal with acquired assets reconstruction within the economic entity. This can be measured at the acquisition date at the cost of acquisition. The applicable, identifiable and liabilities are assumed while acquiring the assets. The difference between the cost of acquisition and the aggregate of the fair values of the identifiable assets acquired. The person or the company acquiring can account for a reconstruction by measuring the value at the acquisition date or the operation at the cost of acquisition. This is due to the identifiable assets required that are applicable, identifiable and liabilities assumed. These are measured at their fair values of the identifiable assets. The fair values aggregate can be taken according to AAS 18. 5 AAS 25 of AASB deals with the financial reporting with comprehensive plans. There are potential implications regarding it. The management investment schemes should be excluded from the replacement for AAS 25. The similarities between MIS and the MISS and pooled super annuation trusts are listed for findings of the comprehensive review. This is regarding the pooled superannuation trusts for the assistance in the future. The high priority to a domestic project is given in AAS 25 for financial reporting by superannuation plans. This will consider the natural standard settlers in other countries. The reporting entity concept is retained to determine the application of the proposed replacement for Australian accounting. The proposed replacement of AAS 25 if any can be excluded will apply for the superannuation trusts. The users of financial reports of superannuation trusts can be termed as broader class of users. In this broader class the comprehensive review of AAS 25 is needed to provide the opportunity to examine the presentation and disclosure issues. 6 4. Arguments on AASB The application of AASB will result in transparency and gives a method that involves the measurement of assets by market values. This will give opportunity to valuate the assets of the company by reporting entities in an uniform manner without bias. There can be another problem if there are no restrictions or guidelines for reporting entities these entities can even devalue the assets of the companies. Along with the AASB the guidelines for the reporting entities also should be issued by making compulsory the publishing of the source and methods of getting information from the companies and the market. References: 1. ]Central queensland university, 2006, Intangible Asset Capitalisation and Amortisation, Queensland University, electronic, 13-9-07, http://policy.cqu.edu.au/Policy/policy.jsp?policyid=351 2. Treasury, 2005, ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS, Treasury, ,electronic, 13-9-07, http://www.treasury.qld.gov.au/office/knowledge/docs/accounting-guidelines/2005-06/apg-15.pdf 3. Teresa Rafter, 2003, Australian International Financial Reporting Pronouncements, Treasury, ,electronic, 13-9-07, http://www.treasury.qld.gov.au/office/knowledge/docs/state-gov/Seminars/2004-03-24/4teresa.pdf 4. Public Sector Accounting Standards Board, 1999, Recoverable amount of non current assets, AASB, ,electronic, 13-9-07, www.aasb.com.au/public_docs/aas_standards/AAS10_12-99.pdf 5. AASB, 1999, AAS21, AASB, ,electronic, 13-9-07, www.aasb.com.au/public_docs/aas_standards/AAS21_11-99.pdf 6. Project Summary, 2007, AASB, AASB, electronic, 13-9-07, www.aasb.com.au/public_docs/project_summaries/Review_of_AAS25_04-07.pdf Read More