Usefulness of the IFRS-Free-Samples for Students-Myassignment

Question: Identify the Principal types of Non-Current (fixed) asset owned by your Chosen Company depending on the company chosen, these may be Intangibles or Tangibles, or both if there are many different types of Non-Current asset, restrict your report to the three most significant types of asset. Answer: Introduction The present report demonstrates the importance of fair value and measurement in the statement of financial positions of business organizations. The term fair value as per the IASB is the price realized by selling an asset or paid through transfer of a liability in a transaction occurring between the market participants on the date of measurement (IFRS 13 Fair Value Measurement, 2010). For the purpose, the report presents an analysis of the company having equity share capital listed on a stock exchange. The company selected for the purpose is Wesfarmers Limited operating in the retail sector of Australia. The report, in this context, identifies the major type of fixed assets of a selected company and discusses the problems faced by it for assessing the fair value of these identified assets. In addition to this, the report carries out a critical analysis of whether the IASB approach to fair value measurement is practical for businesses having non-current assets that are not actively tr aded on broad markets. IFRS 13 Fair Value Measurement The IASB has developed and adopted the approach to measure fair value in its International Financial Reporting Standard of IFRS 13. The IFRS 13 has defined the fair value as a price that is received for selling an asset or is paid for transferring a liability. The IFRS 13 provides a standard framework to business entities regarding the measurement of fair value. The standard is based on measuring fair value on the basis of market rather than using entity-specific measurement (Abdalrahim and Hammad, 2015). The main objective behind the development of IFRS 13 by IASB is to enhance the consistency and comparability in measurement of fair value. The business entities for assessing the fair value should appropriately determine the respective assets or liabilities whose fair values are to be assessed. However, in the case of measuring the fair value of a fixed asset, the entities should select the valuation premise that is appropriate for its measurement. The business entities under IFRS 1 3 should also determine the major market for the asset or liability by taking into consideration the availability of data within the market that would be used by the participants at the time of pricing an asset or liability (IFRS 13 Fair Value Measurement, 2017). The IFRS 13 standard also incorporates specific guidelines for providing guidance to business entities in relation to the measurement of fair value. The business entities are required to consider the asset condition and the location and any type of limitations imposed on the sale and asset use. Also, the measurement of fair value requires an orderly transaction to take place between the participants within the market on the date of measuring the assets or liabilities. The fair value of a liability states the non-performance risk that takes into account the credit risk of a business entity. The business enterprises should also use appropriate valuation techniques for measuring the fair value of an asset or liability (Christensen and Nicolaev, 2011). The main purpose the valuation technique is to predict the actual price at which an organized business contract for selling an asset or transferring a liability ocuurs. The main valuation techniques used for measuring the fair value of an asset are market approach, cost approach and income approach. The market approach incorporates the use of price and other information available in the market for carrying out orderly transactions. On the other hand, the cost approach uses the current replacement cost that would be required for replacing the serving ability of an asset. However, the income approach depicts the recent fluctuations in the market by transferring the future amount of cash flows unto a single amount (IFRS 13 Fair Value Measurement, 2010). Major types of Non-current (fixed) asset owned by Wesfarmers Limited The non-current assets of a business entity refer to the long-term investments made by it such as in property, plant and equipment. The term non-current asset is used mainly to depict the assets that cannot be easily liquidated, that is they cannot be easily converted into cash. On the other hand, the current assets refer to the assets that can be easily liquidated such as cash or bank accounts (IFRS 13 Fair Value Measurement, 2010). The non-current assets of Wesfarmers Limited are described in the present section of the report. Wesfarmers, a recognized retail company of Australia has described its type of non-current assets in the notes to financial statements section of its annual report. The major types of non-current assets recognized by the company are as follows: Freehold Land: The freehold land is categorized by the company under non-current asset of property. As depicted form the balance sheet of the company, the initial value of freehold land at the beginning of the financial year was $1,547m. The subsequent addition to its value of $118 m was made during the year. The acquisition of its controlled entities increased its value to $49m and foreign exchange movements also raised its value by $3m. On the other hand, disposals and write-offs decreased its value by $247m. Thus, at the end of the financial year the value of freehold land was $1,470m. The fair value of freehold land was measured by the company with the use of cost approach as stated by IFRS 13 standard. The cost of the asset has included all the cost of replacing parts subjected to capitalization and also includes the cost of major inspections. The freehold land non-current asset is not subjected to depreciation and amortization (Wesfarmers: Annual Report, 2016). Buildings: The buildings represent another type of non-current asset owned by Wesfarmers as depicted in its balance sheet in the annual report of the company. The net carrying amount of buildings at the beginning of the financial year 2016 is $928m. The subsequent additions increased its value by $272m and acquisition of controlled entities further raised its value by $29m. On the other hand, the disposal, write-offs, depreciation, transfers between classes and foreign exchange movements decreased its value. The net carrying amount at the end of the financial year is $926m. The carrying value of the buildings is measured as the cost of asset minus deprecation and impairment. The fair value of buildings is measured through the use of cost approach in accordance with the IFRS 13 standard. The deprecation is calculated through the use of straight-line basis method and estimated useful life of buildings is assessed to be between 20-40 years (Wesfarmers: Annual Report. 2016). Goodwill: The goodwill is depicted as intangible non-current asset in the balance sheet of Wesfarmers Limited. The net carrying amount of the goodwill as depicted in the balance sheet of the company is $14,708m. The acquisition of controlled entities has increased the value of goodwill. On the other hand, the impairment charge and foreign exchange movements have decreased the value of goodwill. Thus, the net carrying amount of the goodwill at the end of the financial year is $14,448m. The fair value of goodwill is measured by the use of cost approach. The cost is measured as the cost of business combined by deducting the net fair value of acquired and identifiable assets, liabilities and contingent liabilities. The accumulated impairment losses are deducted from the cost of goodwill measured (Wesfarmers: Annual Report. 2016). Problems faced by Wesfarmers in measuring the fair value of Identified Non-Current Assets The business entities generally face great difficulty in assessing the fair value of illiquid assets. As such, the companies face problems at the time of selecting the most appropriate measurement method for recognizing the fair value of their fixed assets. This is because the use of incorrect method for recognizing and measuring the fair value of fixed assets can result in depicting incorrect financial information to the end-users of the financial reports. This can result in causing huge losses to the investors. Also, the companies faces large problem at the time of measuring the fair value of intangible assets such as goodwill. The companies have to invest large amount of time in distinguishing the goodwill into different components for recognizing and measuring its fair value (Measuring Assets and Liabilities, 2007). As such, the selection of the most appropriate fair value measurement method requires significant level of judgment and estimation on management perspective. The comp anies have to comply with the IASB standard of providing useful and understandable information to the investors and thus encounter difficulties in selection of the most appropriate method that would provide relevant information to the end-users (IFRS 13 Fair Value Measurement, 2010). These all problems are to be faced by Wesfarmers also in measuring the fair value of its fixed assets as identified above (Wesfarmers: Annual Report. 2016). standard is used for measuring the fair value of an asset or liability by estimating the current replacement cost that would be required for replacing the service capacity of an asset. The cost approach used for estimating the fair value of land is not depreciated while the value of building is depreciated through the use of straight-line basis method. On the other hand, the fair value of goodwill measured at cost by deducting the accumulated impairment losses. The measurement method used by the company is reviewed annually by the management for determining the real value of its fixed assets and thus protecting the investors confidence. The company as such also face problem in reviewing the measurement method adopted whenever there us change in the economic circumstances such as change in store performance or changes in the long-term coal price forecasts (Wesfarmers: Annual Report. 2016). Critical analysis for determining the practical basis of IASBs approach to fair value measurement for companies with fixed assets not actively traded The international and national accounting standard-setting bodies have mandated the business companies to integrate the use of fair value measurement concept. The use of fair value accounting technique is mandated by the IASB for securing the interests of investors by providing them relevant information for decision-making. However, there has been continuous debate on the usefulness of IASB approach to fair value measurement for companies with fixed assets (Herrmann, Saudagaran and Thomas, 2006). The fair value measurement concept was criticized as it estimates the value of some assets at zero that resulted in the downfall of many business entities. The use of fair value measurement concept makes it rather difficult to identify the managerial fraud and the estimation is more difficult if the company has non-current asset. The fair value amendments are also rather difficult to be understood by the auditors and therefore its application becomes very complicated by the business entities (Alaryan, Haiji and Alrabei, 2014). The IFRS 13 standard adopted by the IASB regarding measuring the fair value of assets and liabilities requires businesses to adopt appropriate valuation techniques to estimate the fair value of its assets. As such, the business having non-current assets rather face difficulty in effectively complying with this IFRS standard as it requires appropriate judgment of management and annual review. Also, special training has to be provided to the auditors and accountant for estimating the fair value of its non-current assets fairly and adequately. This requires companies with non-current assets to develop and establish new procedures for determining the appropriate measurement policies and procedures (Edwards and Walker, 2009). Thus, the use of fair value measurement concept can provide misleading information for the business having assets that fluctuate largely in value throughout the year. Also, the information available from the market in relation to the non-current asset may not indicat e its fundamental value due to market inefficiencies. In addition to this, the manipulation in the price of an asset by a business entity also poses a major risk in assessing the fair value of an asset. This happen mainly in illiquid markets as trading by firms can impact its traded as well as its quoted prices. Therefore, it can be stated from the overall discussion that IASB approach to fair value measurement is not largely practical for companies that operates in illiquid financial market (Scarlata, Sole and Novoa, 2009). Conclusion Thus, it can be stated from the overall discussion that IASB has adopted the IFRS 13 standard in relation to the fair value measurement for improving the quality of financial reporting. However, the business entities having non-current assets also face difficulties in recognizing and measuring the fair value of its fixed assets such as property, plant and equipment. The appropriate use of fair value accounting requires correct judgment and selection on the part of management otherwise it can result in incorrect valuation of the fixed assets of the company. The measurement method also requires annual review on the part of the company in order to ensure that the method adopted is in accordance to the external market conditions. References Abdalrahim, A.A. and Hammad, S.M. 2015. The Impact of the Application of Fair Value Accounting on the Quality of Accounting Information. An Empirical Study on a Group of Companies Listed on the Khartoum Stock Exchange. International Journal of Academic Research in Accounting, Finance and Management Sciences 5 (1), pp. 148160. Alaryan, L., Haija, A. and Alrabei, A. 2014. The Relationship between Fair Value Accounting and Presence of Manipulation in Financial Statements. International Journal of Accounting and Financial Reporting 4(1), pp. 221-237. Christensen, H. B. and Nicolaev, V. V. 2011. Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies 18 (3), pp. 734-775. Edwards, J.R. and Walker, S. 2009. The Routledge Companion to Accounting History. Routledge. Herrmann, D., Saudagaran, S. M. and Thomas, W. B. 2006. The quality of fair value measures for property, plant, and equipment. Accounting Forum 30 (1), pp. 43-59. 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