The current study sheds lights on the measurement processes of property, plant and equipments (PPE). Two types of PPE valuation processes are there; they are cost value method and fair value method. One of the main purposes of the revaluation of the assets is to bring forward the fair value of the fixed assets.
Example of Companies
In Australia, many companies value their PPE with both cost and fair value. Two of these companies are Woolworths Limited and Telstra. The details of PPE valuation of these two companies are shown below:
Woolworths Limited: It can be said that the PPE of Woolworths Limited consists of freehold land, developed properties, lease improvements, plant and equipments. Woolworths has adopted the cost basis for the purpose of recording them in the financial statements. The total amount of PPE of Woolworths after the deduction of accumulated depreciation is $ 10,062.10 million for the year 2016. Despite of the reliability of the information, this amount of PP failed to depict the true value to be realized at the time of sales.
In order to provide information that is more appropriate to the users of the financial statements, the organization has revalued their PPE on the fair value method. An impairment loss of $ 203.10 million associated with significant items and a loss of $ 1431.80 million related to discontinue operation was recorded. The latter categories of assets are recognized for sale. It implies that the recoverable amount was lower than the carrying cost. Hence, the process of revaluation has helped the company to provide information that is more appropriate to the stakeholders (woolworthsgroup.com.au, 2017).
Telstra: It can be seen that the PPE of Telstra consist of communication assets, building and other plants. In the process of the settlement of the deferred cash consideration, the future valuable amount is discounted to the existing value; this is considered as finance cost. It is a fact that Telstra plays both the roles of the lesser and lessee; hence, the measurement of the lease properties is considered as lower than the fair value of the assets. On the other hand, the company recognizes the lease receivable after the termination of the lease term. However, in case of the other PPE assets, Telstra has adopted the method of historical cost as there is not any change in the value of these assert from the time of acquisition (telstra.com.au, 2017).
Factors to be Considered
Some factors need to be considered by the Australian companies at the time of revaluation of the assets. They are discussed under:
Characteristics of the Firms: The population of Australia is strongly attached with the belief of labor and peace. In order to avoid any kind of social chaos situation before elections, the Australian politicians have implemented measures so that peace can be ensured. This is the reason for the revaluation of the assets of so many firms. Due to this reason, the organizational mangers use to apply upward revaluation process to minimize the return on various assets (Lopes & Walker, 2012).
Need of Foreign Stakeholders: The listed organizations in the Australian Stock Exchange have diversified their business operations in foreign countries due to the restricted size of the Australian Stock Market. For the presence of foreign business activities, the Australian companies have to provide necessary business information to both domestic and foreign stakeholders. The lack of knowledge and expertise, the foreign stakeholders face difficulties to convert the financial statements or information in local currencies. Hence, the Australian companies have the opportunity to earn incentives to strengthen their financial position by minimizing the information asymmetry. For this purpose, the organizational managers need to conduct upward revaluation for the completion of the organizational objectives (Small, Yaseen & Schmidt, 2016).
Audit Fees: The process of revaluation of the assets generates extra costs of contracts. As an example, it can be said that the auditors spend more times to analyze the financial figures and to discuss them with the directors of the companies. The revaluation process of the fixed costs largely depends on the appraisal judgment that can lead to biasness. The dishonest CEO and CFO of the organizations may adopt the policy of fair valuation of assets so that the net profit can be manipulated. In order to avoid this situation, the PPE of the organizations must be revalued at the date of evaluation (Bobitan, Costuleanu & Dumitrescu, 2013).
Financial Portfolio: At the time of measurement of the assets in revaluation method, the accountants must update it before categorized for sale. As an impact of this method, the cost of sales is place in the income statement (Manganelli & Basile, 2013).
Conclusion
From the above analysis, it can be understood that Woolworths are Telstra has adopted the revaluation method in order to provide more specific and appropriate information to the users of financial statement. On the other hand, at the time of revaluation of assets, some of the major factors that need to be considered are Characteristics of the Firms, Need of Foreign Stakeholders, audit fees and financial portfolio.
References
Lopes, A. B., & Walker, M. (2012). Asset revaluations, future firm performance and firm-level corporate governance arrangements: new evidence from Brazil. The British Accounting Review, 44(2), 53-67.
Small, R., Yaseen, Y., & Schmidt, L. (2016). Amortisation of intangible assets: accounting technical. Professional Accountant, 2016(28), 16-17.
Bobitan, N., Costuleanu, C., & Dumitrescu, D. (2013). The Differences Between Revaluation and Assets Impairment. Anale. Seria ?tiin?e Economice. Timi?oara, (XIX), 64-72.
Manganelli, B., & Basile, G. (2013). Appreciation model of a public entity set of assets in the accounting system. International Journal of Finance and Accounting, 2(2), 55-60.
Telstra.com.au. (2017). Retrieved 22 April 2017, from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Report.pdf
Woolworthsgroup.com.au. (2017). Retrieved 22 April 2017, from https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf.
