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Value Accounting For Financial Instruments

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Question:

Discuss about the Value Accounting For Financial Instruments.

 

 

Answer:

Computation of profit for the year ended 30th June 2018 and 30th June 2019

Date

Particulars

Good Ltd (Revaluation model)

Better Ltd. (Cost model)

1st Jan 2016

Purchase cost of land

 $              100,000.00

 $        100,000.00

30th June 2018

Value of land

 $              180,000.00

 $        100,000.00

30th June 2018

Profit

 $                80,000.00

 $                       -  

30th April 2019

Selling value

 $              200,000.00

 $        200,000.00

30th June 2019

Profit

 $                20,000.00

 $        100,000.00

Reasons for discrepancy in profit

A discrepancy in the profit for 2 companies arises as according to AASB 116, under the revaluation model the fixed are recorded at cost initially but thereafter the carrying amount of the asset is increased for adjusting the appreciation. On the other hand, under the cost model the fixed asset are carried at the historical cost and no upward adjustment is made to the value of the asset (Emmanuel Iatridis and Kilirgiotis 2012). The main difference among the 2 methods is that the revaluation model allows upward as well as downward adjustments both whereas the cost model allows the downward adjustments only that takes place for impairment. Discrepancy will not make sense if the company consistently applies any one of the method.

Under IFRS the company is allowed for using the revaluation model for some of the assets and cost model for for specific class of assets. However, it shall apply the same method for all the class of assets and revalue all the assets within the class for avoiding selective revaluation.

Regarding the performance of the companies it can be stated that good Ltd is presenting its assets at fair value and presenting the true value of the company as it applies the revaluation model. On the other hand, as Better Ltd opted for cost model, it will not take into consideration the upward valuation of the assets and therefore will not present the true value of the company (Zinkeviciene and Vaisnoraite 2014).

To avoid the discrepancy the company shall apply any one method that is cost model or revaluation model consistently for all the assets.

 

 

Computation of profit for the year ended 30th June 2019

Date

Particulars

Good Ltd (Revaluation model)

Better Ltd. (Cost model)

1st Jan 2016

Purchase cost of land

 $              100,000.00

 $        100,000.00

29th April 2019

Revalued amount

 $              180,000.00

 $        100,000.00

30th April 2019

Selling value

 $              200,000.00

 $        200,000.00

30th June 2019

Profit

 $                20,000.00

 $        100,000.00

The reporting results seems satisfactory as the upward revaluation of the land will not have any impact on Better Ltd as it adopted the cost model. In case of Good Ltd the asset will be carried at the revalued figure that is $ 180,000 (Blankespoor et al. 2013). Thereafter when the company sold the land the revalued amount will be deducted from the selling value that is $ 200,000 to compute the profit. However the profit of Better Ltd will remain same irrespective of the revaluation time. 

 

Reference

Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C., 2013. Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), pp.1143-1177.

Emmanuel Iatridis, G. and Kilirgiotis, G., 2012. Incentives for fixed asset revaluations: the UK evidence. Journal of Applied Accounting Research, 13(1), pp.5-20.

Zinkeviciene, D. and Vaisnoraite, G., 2014. Factors affecting the choice of tangible fixed asset accounting methods: theoretical approach. European Scientific Journal, ESJ, 10(10).

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