Valuation Methods in Financial Accounting

FINANCIAL ACCOUNTING
2019

Accounting
Answer – 5
As Canadian Beach Pty Ltd is following the revaluation method for valuation of Property,
Plant, and Equipment, it should be followed for each class of Assets and not upon individual
assets. As per AASB 116, two methods are allowed to be used; one is Cost Method and other
one being Revaluation Method. In the cost method, we value the assets on historical cost less
accumulated depreciation and accumulated impairment loss and in revaluation method we
regularly revalue the assets to its fair value.
Thus a company should follow one method for the entire class of Property, Plant and
Equipment for uniformity in valuation purpose. We may say deciding the method for
valuation is the Accounting Policy of the company and determining the fair value is the
accounting estimate. A change in accounting policy is done retrospectively as the company is
expected to have consistent accounting policy as on the other hand accounting estimates are
changed prospectively. A company cannot change accounting policy if it is not for a better
presentation of Financial Statements or for the fulfillment of Statues (Murphy, 2015).
In the case of the revaluation, the method is chosen, revaluation of volatile assets needs to be
done annually (para 31, AASB 116). In case of none, volatile asset revaluation may done on
3-5 years. Basically, it must be ensured that carrying the amount of asset is not materially
different from fair value at the end of the reporting period.
Impairment in an asset may be caused due to various factors as a result of which future
recoverable amount may reduce (Albrecht, Stice & Stice, 2011). In such a case loss due to
impairment should be recognized in the financial statements. In case of revaluation method,
impairment loss should be shown as a revaluation reserve under equity through other
comprehensive income (Henry & Hick, 2015).
In the given case company was following the revaluation method for valuation of its assets
but due to a storm, the recoverable value may be impacted. So the company should revalue
the whole class of land building and consider the remaining useful life of the building, its
depreciation, and residual value.
Thus the company cannot change the valuation from revaluation to cost model as this would
lead to a change in accounting policy and should be supported with proper reasons for
changing it. If such reduction in valuation is not recorded in the books the assets would not
show fair value and there would inflated value in the financial statement giving stakeholders
a false view of the affairs of the company (Henry & Hick, 2015).
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