Cost accounting of AASB 116 Plant

Question 1

AASB 116It is very clear that AASB 116 Plant, property and Equipment shows the accounting calculation for the plant, property and equipment comprising their determination and recognition of the carrying amounts, impairment loss and depreciation. In simple words, non-current assets considered as assets which don’t fulfill the current assets definition and characteristics. In general, there are two models for accounting of non -current assets such as revaluation model and cost model.

Factors influence the entity in its choice among the revaluation and cost modelThe factors likely to influence the entity in its choice among the revaluation model and cost model because assets accounted under the model of revaluation, the sum is recognized in revaluation reserve at transition date and calculated excess of fair value above the depreciated cost. AASB 116 permits the choice among the models and choice must be based upon significance of the information like costs indulged in method adoption, consequences on the income statement and regardless of any method, assets are depreciated at the same rate. On the other side, assets calculated under cost model, business entities are motivated, where possible to apply exemption of deemed cost for avoiding the burden of calculation of accurate historical costs under Accounting Standard 116 (IAS Plus guide, 2008). It has been examined that AASB 116 needs business entities to predict the dismantling costs and eliminating components of non -current assets and re-positioned the site where it is situated. In general, some entities are encouraged by cost model and some entities are encouraged by revaluation model because of their benefits and features. It is very clear that business entities use cost model because with the help of deemed cost exemption they want to avoid the calculation of historical cost under the AASB 116. The advantages of both models attract the entities to choose between the revaluation and cost model for the accounting and measurement of non- current assets (IAS Plus guide, 2008). Revaluations will be created with adequate regularity to make sure that carrying sum does not change materially from that could be found out by using fair value at reporting date. In simple words, revaluation model could result in the greater assets position in case when prices of the asset are enhancing and could also show the more genuine structure of the capital for the Company. The disadvantage of the revaluation model is, it depreciates the assets at the higher value and which shows the less profitability of the Company. Since decrease in the assets value may result in depleting the revaluation reserve and enhance the expenses for recent period and hence make the organization as less profitable in comparison to the cost model. Revaluations created with adequate regularity that carrying sum does not distinct materially from which could be find out by using fair value at reporting date (IAS 16, 2003). On the other side, cost model refers to the carrying sum of each and every item throughout the whole class of the plant, property and equipment is its cost minus accumulated depreciation and minus impairment losses. The applicable element of revaluation reserve might be shifted to the retained earnings when PPE item is derecognized.

Rationale for offering entities a choice in measurement models, and analyzes the pros and cons of this choice in terms of its potential effects on the relevance and reliability of financial reports.It has been examined that under AASB 116 Plant, Property and the Equipment, and the cost of the item of the plant, property and equipment comprises the starting estimation of dismantling cost and eliminating the item and re-positioned the site where it is situated. In most of the arguments associating to the decision among two models, there is common proposition that the current price named as fair value shall offer more applicable information as compared to past price and whereas the cost related with constantly finding out the current price minimize the incentives on cost-advantage basis and move to recent values.

AASB 116 permits the choice among the models and choice must be based upon significance of the information like costs indulged in method adoption, consequences on the income statement and regardless of any method, assets are depreciated at the same rate (Barth, 2006). In general, accounting standard for the fixed asset needs fixed asset to be recorded initially at the cost, but after some time they permit 2 models for accounting of fixed assets such as revaluation model and cost model. In cost model, fixed asset is calculated at historical cost minus impairment loss and accumulated depreciation and there are no any upward changes to the value because of changing situations. On the other side, some components of plant, equipment and property face volatile and significant alterations in the fair value and therefore necessitate the annual revaluation.  Such kind of revaluation is not necessary for components of plant, property and equipment with non-significant alterations in the fair value. For example If the business entity decided to use the model of revaluation then AASB needs the assessment to be stored adequately and ensures that carrying sum does not distinct by using the fair value at the date of balance sheet. This evaluation needs an alteration in the recognized restoration, decommissioning to be deducted or added from the asset cost. In general, any changes in liabilities do not impact the asset valuation for purposes of financial reporting. As compared to change the asset valuation, the change in liability impacts the distinction among what could have been accounted for asset throughout the cost model (Holmes, 2010).  The items throughout the class of plant, property and the equipment are revalued constantly to avert selective assets revaluation and reporting of sums in financial statement which is a combination of values and cost at distinct dates. The disadvantage of the revaluation model is, it depreciates the assets at the higher value and which shows the less profitability of the Company.

Question 2

Purpose of the Revaluation

AASB 116 needs revaluation to be taken with adequate regularity to make sure that the carrying sum of the assets don’t distinct materially from the sum calculated by implementing fair value at the date of reporting. This Standard recommends that revaluations every 3 or 5 years might be adequate for non current asset which face non significant alterations in fair value.

It is very clear that AASB 116 needs the business entity to measure each and every category of Plant, Property and Equipment at the fair value and also reveal the carrying sum of that category had it been recorded at the cost (Holmes, 2010). In comparison, AASB 116 needs revaluation decrements and increments of the profit entity to be balanced against the assets being revalued. AASB 116 offers that specific group of assets might be revalued on rolling basis which shows that revaluation of assets is executed throughout the shorter period and revaluations are maintained properly. For example: Property is first recognized at the cost and comprises the transaction cost and later on calculated at the fair value. In general fair value, of the property is to show the conditions of the market at the date of reporting.

Issues for the consideration on the transition to fair value basis

It can be said that any revaluation increments prevailing from revaluing asset to its fair value should be credited to the reserve of asset revaluation except net increase reverses the net revaluation decrease earlier recognized as the expense in the profit and loss account in respect to same category of non- current assets, it should be credited to reserved losses and profits (AASB 1041, 2001).

On the other side, any net revaluation decrements prevailing from revaluing asset to its fair value should be debited to reserve of asset revaluation and any left portion of the net revaluation decrease should be debited to reserved losses and profits.

Issues for the consideration on the transition to the historic cost basis

It has been examined that the asset measured at the historic cost is required to recoverable test. In general, non-current asset calculated at the historic cost, the recoverable sum of the non –current asset applicable where upcoming economic advantages are reliable on the capability of assets which produce cash flows.

Revaluation Decrements and Increments based upon the class by class basis 

On the other side, not for profit entity may constantly offset the revaluation increments and decrements against the specific category of same assets. It is very clear that net revaluation increases in respect to each category of the non-current assets should be credited to revaluation surplus of the agency, except that they maintain the earlier decrement recognized as the expenses for that category in the financial statements (IAS Plus guide, 2008). In this position the reversal part of increment should be understood as the revenue in the Comprehensive Income Statement.  On the other side, net revaluation decreases in respect to each category of non- current assets should be treated as the expense in the financial statement, except that they maintain the earlier increase for that category and the positive balance prevails in the ARS for that category of assets. In this situation, the reversal part of decrement is charged to ARS.

Revaluation decrements and Increments based upon the Individual assets

The rules are same for profit entity revaluation increments and decrements as in the case for not for profit agency (Bromwich, 2004).  It has been observed that profit agency may offset the decrements and increments of the non -current assets in respect to similar assets not to the similar class of assets. This shows that profit agency should be capable to search decrements and increments for each category of non -current assets.

 It has been analysed that where fair value method is used for the category of the non-current asset then sums are debited or credited to profit and loss account in which they could be understood as expense or revenue throughout the requirement for further use of standard.

If the entity, records revaluation decrements and increments on class by class basis, there are some effects on the relevance and reliability of the financial reports such as

Any increment is credited to the equity as the surplus of revaluation

ARS is used to store any kind of increments

Any decrement calls for the immediate expense recognition

No extra entries of tax effect is required beyond the worksheet of tax-effect Question 3

Factors which explain the low adoption of the revaluation model for measurement by the entities.

According to me, the factors which explain the low adoption of the revaluation model for measurement by the entities are it depreciates the assets at the greater value which depict the lower profitability (E & Y, 2002). The reduction in assets value would depleting the revaluation reserve and at the same time enhances the expenses for recent period and make the company as less profitable in comparison to the cost model (Bromwich, 2004). Most of the entities use cost model because it includes the capability to maintain the assets value of the entity based upon the historical cost and not affected by any alterations in market. It has been examined that AASB 116 replaced AASB 1041 and explains fair value as the sum for which the asset would be exchanged and liability is settled among the willing and knowledgeable parties in the arm length transaction (AASB 1041, 2001). It is analyzed that AASB 116 reveals that the fair value is calculated in concern to the best and highest use of the assets for which participants of the market could be willing to pay. It can be said that AASB 116 is slowly changing the basis of the measurement. The foundation for the voluntary change in the policy of the accounting is offered in the Accounting Standard. In general, AASB 116 restricts the decision of the measurement basis to fair value and historical cost. Under both standards AASB 116 and AASB 1041, assets calculated on the fair value and should be revalued when the carrying sum distinct from the fair value.

AASB 116 offers extra suggestion on the costs comprised in the cost of the item of the PPE.

The buying price plus associated costs such as taxes and duties minus rebates and discounts

Directly attributable cost for bringing the asset to location and condition of working to operate in the same manner as referred by the management

Restrict the requirement to disclose the reconciliation of carrying sum in starting and end of reporting period for each category of plant, property and equipment.

Mentions that sums are credited to assets revaluation reserves in category of noncurrent assets as the outcome of using this standard and using the requirements of other standards.

Changes the transitional contracts to mention that when the entity uses the basis of fair value to calculate the category of the non current asset, and any type of revaluation increment emerging on revaluing assets to its fair value should be directly credited to accumulated losses and retained profits.

Agencies shall have the option concerning the measurement of the revalued asset and any associated accumulated depreciation. If agencies decide to restate accumulated depreciation and book values, this shall result in gross value of accumulated depreciation and assets.

The basic changes which shall impact the profit agencies are

Revaluation decrements/increments could be only offset against each other in respect to same asset.

There are extra disclosure needs for PPE in regards to procedures and considerable assumptions applied in predicting out fair values of the assets and limit to which fair value was determined.

The basic changes which shall impact the nonprofit agencies are

DTF shall discuss with the VGO to make sure that sufficient information is accessible to agencies to meet with disclosure needs in the AASB 116.

The requirement throughout the AASB 116 constantly alter the carrying sum of assets to measure at fair value so assets are not materially distinct from recent fair values and offers the cost dis-incentive to the management for adopting the revaluation model. The impact of using the revaluation model is to enhance the equities and assets of the entity. Therefore, business entities are required to report the greater sums in these regions could refer the revaluation model adoption.

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