SCHOOL OF Business

GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Shermilyn Gatmaitan Student ID number: 19515700

Student name: Mohammad Muhibur Rahman Student ID number: 19493389

Student name: Sima Sunjidmaa Student ID number: 19185880

Student name: Nguyen Tien Nhi Nguyen Student ID number: 19494601

Student name: Student ID number:

UNIT AND TUTORIAL DETAILS

Unit name: Company Accounting Unit number: 200400

Tutorial/Lecture: 1 Class day and time: Tuesday, 6-10pm
Lecturer or Tutor name: Ushi Ghoorah
ASSIGNMENT DETAILS

Title: Group 09: Assignment

9am, Friday 10
Length: 2500 Due date: May 2019 Date submitted: 09 May 2019
Home campus (where you are enrolled):

DECLARATION
I hold a copy of this assignment if the original is lost or damaged.
I hereby certify that no part of this assignment or product has been copied from any other student’s work
or from any other source except where due acknowledgement is made in the assignment.
I hereby certify that no part of this assignment or product has been submitted by me in another
(previous or current) assessment, except where appropriately referenced, and with prior permission
from the Lecturer / Tutor / Unit Coordinator for this unit.
No part of the assignment/product has been written/produced for me by any other person except
where collaboration has been authorised by the Lecturer / Tutor /Unit Coordinator concerned.
 I am aware that this work will be reproduced and submitted to plagiarism detection software programs for
the purpose of detecting possible plagiarism (which may retain a copy on its database for future
plagiarism checking).
Student’s
signature: Nguyen Tien Nhi Nguyen
Student’s
signature: Sima Sunjidmaa
Student’s
signature: Mohammad Muhibur Rahman
Student’s
signature: Shermilyn Gatmaitan
Student’s
signature:
Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has
not been signed.
00398 09/16
Group Assignment: Accountability and
AASB Framework
(1) The article states that ‘Listed companies are required under accounting standards to
revalue their assets regularly.’ Do you believe this would be the case if a listed company
chooses to adopt the cost method of revaluation? Provide justifications for your answer.
Answer:

An Australian Accounting Standard Board (AASB) 116 requires each class of property, plant,
and equipment to be recorded either at cost method or the fair value method (revaluation
method). An item of property, plant, and equipment are to be carried at its original cost less any
accumulated depreciation as well as any accumulated impairment loss is called “Cost method”.
An item of property, plant, and equipment are to be carried at its revalued amount (fair value)
less any accumulated depreciation and any accumulated impairment loss is called “Revaluation
method”. An entity may record some classes of property, plant, and equipment at cost method
and others to be recorded at fair value as long as an entire class is measured under the same
method. If an entity chooses the revaluation method, they are required to revalue their assets
regularly. However, there aren’t any specific rules or conditions about the basis or
comprehensiveness of the revaluations, either in companies’ legislation, stock exchange rule or
pronouncements of professional bodies in Australia.

I believe that If an entity listed on an Australian Stock Exchange market (ASX) chooses to adopt
the cost method, they are not required to revalue its assets regularly. Because there aren’t any
regulations or legislations that specify any requirement on either what asset valuation method a
listed company must use or any condition that requires an entity to revalue its assets even it uses
a cost method for its asset valuation. However, I truly believe that an entity with a large share of
non-current assets should prefer to use revaluation method over cost method no matter if an
entity is listed or not to have an accurate market value of its assets. A value of an entity’s assets
under the revaluation method stays up to date due to its requirement of getting a revaluation done
regularly. Furthermore, the revaluation method costs more because of higher audit cost, takes
more time and uses complex calculations. Nowadays, a value of assets such as real state and land
more often grows over time. Therefore, using the value of an asset many years ago to represents
today’s true value of a company is inaccurate. However, I agree with the companies with a
relatively small share of non-current valuable assets choosing cost method over a revaluation
method. Because if an asset is calculated more straight-forward and requires low cost under the
cost method.

A research study by Sharpe and Walker found that upward asset revaluations of Australian large
(large companies have a big share of valuable non-current assets) public companies had resulted
in the substantial upward movement in share prices during the year 1960 to 1970. Moreover, the
study shows that the stock market reacts very quick to the information about the revaluation,
resulting in the price of the share. The findings from this research prove that how important asset
revaluation of listed companies is. An entity adopting a revaluation method also implies that
there would be most likely an increase in its share price if an entity has a large share of non-
current assets since a value of the most assets usually grows over time. Having said that, there is
some issue arisen from the probability of an unethical revaluation by the management team of an
entity which can be used as power to influence the stock price. I believe that this issue arises due
to the lack of explicit guidelines or legislation on the revaluation process. Because of this reason,
entities value their assets by whatever method they want to use, not to mention whoever can
make the valuation. For instance, in the case of Harvey Norman their revaluation report, made by
its management team and the boards of other companies inside the group, is criticised that it is
lack of transparency and this kind of information can result in the stock price of the company or
there could be some misleading valuation that manipulates a company’s real performance. If
there is a clear guideline on the revaluation process, this kind of issue would never arise. Thus,
audit plays an important role for an entity adopted revaluation method, which as mentioned
above results in the higher cost.

All things considered, public or future investors don’t trust the company very well, having
concerned about its inaccuracy about asset valuations if a listed company chooses to adopt cost
method in which an entity is not required to produce the revaluation of its assets regularly. On
the other hand, it is possible that there is some kind of misleading information related to
revaluation process if an entity chooses to adopt revaluation method even it gives the accurate,
up to date information about company’s assets, due to lack of clear legislation about revaluation
process. This clearly implies that clear and explicit guidelines and legislation on the revaluation
method are required.

(2) The article mentions that ‘experts have criticised the lack of transparency’ around Harvey
Norman’s valuation processes. How could a lack of transparency breach the qualitative characteristics
of the Conceptual Framework?

Answer:

The extracted statement of the article discusses Harvey Norman’s Property Valuation Process,
which would be analyzed in terms of AASB 116, AASB 13 comparing with the qualitative
characteristics of the conceptual framework of financial reporting information, below:

AASB 116 principally refers to the cost, depreciation, derecognition, and revaluation of
Property, Plant and Equipment. As per paragraphs 30, 31 and 36 of AASB 116 which
specifically discusses different valuation models respectively:

Cost Model indicates the recognition of an asset and it’s done through subtracting any
accumulated depreciation and impairment losses from its cost.

Revaluation Model recognizes asset based on the revalued amount, which is calculated at the
date of revaluation, by subtracting accumulated depreciation and impairment losses from its fair
value.

Paragraph 36, describes that if a particular asset types been revalued either by using cost or
revaluation model, all the other same asset type should be revalued with similar model type.

However, AASB 116 also allows the switch of valuation method, but if it only generates
financial information which will be more reliable and relevant with adequate disclosure is
provided for the change of that accounting policy.

In the case of Harvey Norman as per the article, they do comply with the rules without violating
them but they failed to provide any details of independent property and the worth of its asset
portfolio.
As per the AASB 116, paragraph 73 disclosure section, which clearly mentions that each class of
Property, Plant and Equipment in the financial statement should mention measurement bases for
assets, depreciation method and rates, useful lives, gross carrying amount and accumulated
depreciation at the beginning and end of the period, which indicates that Harvey Norman’s not
entirely complying with accounting rules.

Any breach of accounting rules affects the qualitative characteristics of its financial information,
which as a result, affects the users of this information in making decisions. In the case of Harvey
Norman for the purpose of analysis, the qualitative characteristics of its financial information
have been described in two segments: the selection of financial information, which discusses
Relevance, Reliability, and Materiality; and the presentation of financial information which
focuses on Comparability and Understandability.

Relevance according to paragraph QC6 of the Conceptual Framework states that relevant
financial information helps users in making a constructive decision that makes a difference. In
order for financial information to be relevant, it needs to have both Predictive value and
Confirmatory value, where the latter one refers to checking the earlier expected value. Since
Harvey chooses not to disclose individual property information, therefore, users will not be able
to make a constructive decision.

Reliability which also known as Faithful representation of the financial information and as per
paragraph QC12 of Conceptual Framework, reliable information needs to be complete, neutral
and free from error. Harvey Norman fails to provide complete information therefore, the users
would not be able to identify if it is neutral or error-free.

Materiality Mr. Harvey states that disclosure of property information breakdown would benefit
the competitors and therefore refrained from providing any. Although, Materiality characteristic
does provide a window of restricting the amount of information which would be comprehensible
to the users, but, since the property accounts for 93% of its net asset and 60% of its total asset
base, therefore, it is evident that disclosure of its property breakdown is material enough for the
users to make decisions.

Comparability and Understandability the presentation of financial information should be

comprehensible and the users should be able to compare different aspects, policies, transactions
of Harvey that is consistent over one time to another. For example, if Harvey employed
revaluation method, then AASB 13 indicates that they should disclose whether there was an
independent valuer involved and not just by their own property team.

(3) In the article, there is a statement that ‘under Australian accounting rules, valuation
movements contribute to or detract from a company’s declared profit’. Explain, using
examples, how noncurrent asset valuation movements ‘contribute to or detract from’
declared profit.
Answer:

Non-Current Assets – An Overview

Non-current assets or Fixed Assets are classified under the company’s long-term investments
that can’t be liquidated easily into cash within a year. It includes plant and equipment, real estate,
land, goodwill, bonds, stocks, and patents. Non-currents are considered to be the revenue
generators as compared to the current assets in a business setting.

However, the risk involved is greater due to the liquidity issue. The fair value and the market
value also differ with time, unlike current assets. As per AASB framework “Fair value” is
defined in paragraph 9.1 as “the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction”.

Important to Note:

Fixed assets are a vital part of total assets formation. Hence, significant importance is given in its
fair value evaluation with reference to a firm’s financial position. When a firm plans to sell a
fixed asset it needs to take the depreciation expenses into consideration. It has to record the cash
received in the settlement and remove the accumulated depreciation. The difference between the
same is entered as profit or loss on the sale of fixed assets.

Reason for Revaluation

The fixed assets are basically revalued for below mentioned reasons:

1. To show fair market value

2. Negotiate fair price during mergers and acquisitions
 3. To procure loan/sale or issue of shares
4. For efficient fund management – depreciation – excessive dividend – inflated profit

Impact of Non-Current Asset Valuation on Income Statement

A firm’s profitability largely depends on how efficiently it uses its fixed assets. Long-term
investments are predominantly carried at cost. An interim decline in the value of a fixed asset is
brought down to depict the decline and is levied to the profit and loss account. Similarly, it is
reversed as the value of the investment goes up.

For instance, at the time of disposal of an investment, the difference between the carrying
amount and the amount received from the proceeds along with the net expenses is shown in the
profit and loss statement.

Financial ratios like earning price per share (EPS) return to equity ratio and fixed asset turnover
ratio are used to evaluate a company’s financial stability.

As mentioned in the article, under Australian Accounting Rules, revaluation of fixed assets
account for major adjustments to profits. The costing of property, plant, and equipment is
resulting in significant profit increases. An entity should make use of appropriate valuation
techniques for which sufficient data are available to measure fair value.

According to AASB 13, paragraph 62, “The objective of using a valuation technique is to
estimate the price at which an orderly transaction to sell the asset or to transfer the liability
would take place between market participants at the measurement date under current market
conditions. Three widely used valuation techniques are the market approach, the cost approach
and the income approach. The main aspects of those approaches are summarized in paragraphs
B5–B11. An entity shall use valuation techniques consistent with one or more of those
approaches to measure fair value”

However, manipulation by some companies in the name of revaluation can’t be ignored.

For example: Take a firm X that has PP&E worth $6mn. Assume that the land was earlier valued
at $2mn and the rest of the property was worth $4mn. Now the company plans to revalue its
fixed assets. It assigns a higher value to the land i.e. $4mn and a decreased amount to the rest i.e.
$2mn. As there is no depreciation on land, lower value to other assets indirectly contributes to
the profits of the firm.

Hence, the companies resort to revise their profits upwards citing the PP&E adjustments but it
can happen vice versa also due to change in the market value of the assets.

(4) The article describes that Dean Paatsch, from Ownership Matters, is concerned about ‘Harvey
Norman’s reliance on director valuations’ for property revaluations. Is reliance on directors’ valuations
a valid concern? Provide justifications for your answer.

Answer:

Non-Current assets could be needed to be revaluated to efficiently measure the true value of the
future economic benefits of an entity. The entity is required to revalue its class of non-current
assets on a regular basis to guarantee that the carrying amount doesn’t vary significantly from its
fair value at the reporting date. According to AASB 5.1, Subsequent to initial recognition as
assets, each class of non-current assets must be measured on either: a) the cost basis or, b) the
fair value basis. The cost basis is the most straightforward accounting approach. In this method,
a company’s fixed assets are carried at their historical cost less the accumulated depreciation.
Accumulated depreciation is calculated by the fixed asset cost less the salvage value or residual
value divided by the useful life which this amount is presented as a depreciation expense yearly.
The primary reason why the entities choose this approach is that the resulting number is a much
more straightforward calculation with far less subjectivity. On the other hand, in fair value basis,
a fixed asset is journalized at its original cost. However, the carrying value of the fixed asset
could increment or decrement based on the fair market value of the fixed asset on an annual
basis. In this approach, the main advantage is that fixed assets are presented accurately at their
true market value.

The profit or loss statement is affected in two ways. First, as a result of depreciation expense,
when the asset’s cost is allocated or expensed on the income statement and when the entity
recognizes revaluation loss or decrement, the profitability or net income of the entity decreases.
On the other hand, whilst the entity recognizes a revaluation gain or increments the profitability
or net income increases.
In mathematical terms, it can be expressed through measuring depreciation expense with the
historical cost less the residual value divided by the useful life. For example, Ping Pty Ltd
purchased a piece of equipment on the 1st of April 2017 for two hundred thousand dollars with a
five-year useful life with a residual value of fifty thousand dollars. Then the depreciation
expense is calculated as two hundred thousand dollars less ten thousand dollars divided by five
(useful life) is equal to thirty thousand dollars. Due to this expense, the net income is reduced by
forty thousand dollars annually in five years time.

Furthermore, revaluation loss or decrement is recognized when the fair value is lesser than the
carrying amount. Carrying amount is calculated by reducing the cost by the depreciation
expense. For example, in referral to the previous illustration, the historical cost of two hundred
thousand dollars will be deducted by the depreciation expense of thirty thousand dollars which
means the fair value is equal to one hundred seventy thousand dollars. Therefore, a negative
twenty thousand dollars is recognized as revaluation loss or decrement which decreases the net
profit and is stated as other expenses.

On the contrary, revaluation gain or increment is recognized when the fair value is greater than
the carrying amount. For example, the fair value is equal to one hundred ninety thousand dollars
and the carrying amount is one hundred seventy thousand dollars. Therefore, a positive twenty
thousand dollars is recognized as revaluation gain or increment which increases the net profit and
is stated as other income.
References:

WallStreetMojo. (2019, February 07). Non-Current Assets. Viewed 8th May 2019 <
https://www.wallstreetmojo.com/non-current-assets/?fbclid=IwAR0BunKxbY0TsP7KV-
XiyoUKlMcifwLSZ6P-XCC9nKDI85xouqgGW2ymfrs>

Investopedia. (2019, January 26). How to Account for Changes in the Market Value of Various
Fixed Assets. Viewed 8th May 2019. <https://www.investopedia.com/ask/answers/041615/how-
do-you-account-changes-market-value-various-fixed-assets.asp>

Australian Accounting Standard Board. (2001, July). AASB 1041: Revaluations of Non-Current
Assets. Viewed 9th May 2019.
<https://www.aasb.gov.au/admin/file/content102/c3/AASB1041_07-01.pdf>

Australian Accounting Standard Board. (2011, September). AASB 13: Fair Value Measurement.
Viewed 9th May 2019. <https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf>

Australian Accounting Standard Board. (2013, December). AASB CF 2013-1: Amendments to the
Australian Conceptual Framework. Viewed 9th May 2019.
<https://aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf>

Australian Accounting Standard Board. (2016, June). AASB 116: Property, Plant and
Equipment. Viewed 9th May 2019.
<https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun16_01-17.pdf>

Deegan, C (2016), Australian Financial Accounting, 8th edition, McGraw-Hill, North Ryde,
NSW, Australia

Sharpe I.G and Walker R.G, Journal of Accounting Research, Vol. 13, No. 2 (Autumn, 1975),
pp. 293-310 (18 pages). Viewed 9th May 2019 < https://www.jstor.org/stable/2490366?read-
now=1&seq=1#page_scan_tab_contents>