Financial Accounting Concepts and Practices

This assignment focuses on various aspects of financial accounting. It examines issues related to financial accounting, explores concepts like asset revaluations and earnings management, analyzes the impact of adopting IFRS, and discusses the usefulness of fair value accounting. The provided references encompass academic articles, company annual reports, and books that delve into these accounting principles and practices.

Running head: Advanced Financial Accounting
Advanced Financial Accounting
University Name
Student Name
Authors’ Note

2
ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Enumeration notions in relation to historical cost as well as fair value accounting..................2
Analysis of benefits along with challenges of utilizing historical cost as well as fair value ....5
Detection of valuation exercise for specific non-financial assets..............................................7
PPE and intangibles....................................................................................................................7
Assessment whether PPE and intangibles are consistent across three different corporations. 12
Viewpoints as regards free choice between historical and fair value system of accounting. . .12
References................................................................................................................................14

3
ADVANCED FINANCIAL ACCOUNTING
Enumeration notions in relation to historical cost as well as fair value accounting
In accordance with regulations of IFRS 13 for fair value measurement, fair value is
necessarily a market founded system of enumeration and not an entity specific aspect of
measurement. Basically, market transactions otherwise market information might possibly be
made available or not made available for specific assets and liabilities. Nonetheless, the
primary objective of fair value enumeration in each of the two cases can be said to be
identical for approximating the price at which particular orderly business transaction to sell or
transfer the firm’s assets occurs between market participants right at the enumeration date
(Williams 2014). In essence, this specific regulation of IFRS is pertinent when another IFRS
permits fair value measurement otherwise disclosures as regards those measurements
(reference to paragraph 5 under IFRS 13). As per paragraph 11, a fair value system of
measurement is necessarily for a particular asset otherwise a liability. Therefore, at the time
of enumerating fair value a particular entity has the need to take into consideration various
characteristics of asset/liability if market participants would take into account those
characteristics during pricing of firm’s assets/liabilities at the enumeration date. Nevertheless,
this type of features comprise of conditions along with locations of the asset together with
controls if any on mainly the sell or usage of the firm’s asset (Warren and Jones 2018).
Particularly, asset/liabilities calculated at fair value can be a separate asset or else liability or
a group of asset/liability.
In essence, historical cost can be identified as the original cost of a particular asset as
recorded in the accounting records of a firm. Most of the business transactions recorded in the
accounting documents of a business concern are stated at the historical costs (Henderson et
al. 2015). In actual fact, a historical cost can be verified by way of accessing the source
purchase otherwise trade documents. Nonetheless, historical cost necessarily has the

4
ADVANCED FINANCIAL ACCOUNTING
disadvantage of not essentially replicating the real fair value that is expected to diverge from
the cost of purchase over a specific time period. According to the accounting standard,
historical costs have the necessity for specific adjustments with time. Armstrong et al. (2015)
suggests that historical cost differs from several other costs that are necessarily assigned to a
particular asset, such as replacement cost else wise cost of inflation adjustment. Nevertheless,
historical costs can still be considered as a central notion of recording assets, although fair
value is substituting the same for particular types of assets. The ongoing substitution of the
historical cost by fair value system of dimension is based on the argument that historical cost
represents a conventional image of a firm.
Nevertheless, the choice between utilizing fair value as well as historical cost scheme of
accounting can be regarded to be widely argued matter of concern. Nonetheless, the argument
essentially dates back to the year 1990s. Most of the accounting standards, IFRS presents a
choice between fair value and historical cost measurement system for different non-financial
assets. Furthermore, IFRS also has the requirement of an ex-ante commitment that indicates
commitment to one of two stratagems of accounting (Francis et al. 2015). Therefore,
managers necessarily have a reason to market demands and commit to a particular accounting
treatment that can aid in maximizing value of the corporation. In addition to this, fair value
accounting system for diverse non-financial assets have the advantage of augmented value
relevance along with information content, reduced information asymmetry and increased
comparability. Reports recommend that utilization of fair value instead of historical cost is
not essentially random and occurs when benefit overshadows the costs (Hermason et al.
2016).

5
ADVANCED FINANCIAL ACCOUNTING
Analysis of benefits along with challenges of utilizing historical cost as well as fair value
accounting for both PEE and intangibles
According to the regulations stipulated under AASB 116, fair value can be regarded as an
amount for which specific asset could essentially be exchanged primarily well-informed and
enthusiastic parties especially in arm’s length business deals. According to paragraph 15 of
the directive AASB 116, a specific item of the plant, property as well as equipment that
effectively qualifies for recognition and can be regarded as a particular asset can be
calculated at cost (Oulasvirta 2016).
As rightly indicated by Laing and Perrin (2014) the directives stipulated under AASB 138
lays down accounting treatment for diverse intangible assets that are essentially not in
another accounting regulation. Essentially, this specific standard that is applicable to business
entities that need to arrange and present financial declarations according to the regulations of
Part 2M.3 of Corporations Act and that too necessarily is a business concern. According to
the regulations of the standard AASB 138, cost is basically the carrying amount of
specifically cash along with cash equivalents that is disbursed otherwise fair value of diverse
other considerations that are made available to acquire a specific asset during period of
acquirement. Hu et al. (2015) mentioned that this standard when implemented, the complete
amount is ascribed to the specific assets during the time when they are initially identified
according to precise necessities of the other standards and treatment of accounting.
According to AASB 3, in specific case of a business combination an intangible asset gets
acquired, then the cost of that specific intangible asset is presented at fair value at the
acquirement date. Fundamentally, fair value of intangible asset might help in reflecting
anticipations of market participants at the acquirement date as regards probability that the
predictable economic advantages will flow to the business entity (Abbott and Tan‐Kantor

6
ADVANCED FINANCIAL ACCOUNTING
2017). However, if a specific intangible that is necessarily acquired in a particular business
combination can be separated otherwise it arises from agreements or legal rights, then in that
case adequate information exists to calculate asset using fair value dimensions. Business
concerns might possibly identify intangible assets along with grants at fair value according to
AASB 120. Furthermore, according to the cost model that is described according to
paragraph 74 of the regulation AASB 138, after process of initial recognition, a particular
intangible asset of a business entity shall essentially be undertaken at a certain revalued
amount that is essentially the fair value registered at the date of revaluation after deduction of
any consequent accumulated amortisation and subsequent impairment losses. As rightly
indicated by Kaya (2014), fair value dimensions along with systems of accounting treatment
for PPE can be regarded to be superior to mainly historical cot that is based on characteristics
of predictive value, acquired feedback, representational faithfulness, neutrality as well as
comparability and timeliness among many others. Basically, verifiability appears to the lone
qualitative characteristic that supports the historical cost system over the fair value system.
Edeigba and Amenkhienan (2017) suggest that there are several advantages of utilizing
historical cost for valuation of plant, property as well as equipment (PPE) on the balance
sheet. Therefore, it is such that historical cost can easily be verified. Usually, the cost that a
firm incurs during period of purchase is recorded with different types of contract, expends,
transfer taxes and many others. In essence, the historical cost of PPE is also used for the
purpose of determination of depreciation expenditure that is registered as a deduction from
particular historical cost of the firm’s assets pronounced on the balance sheet. Nevertheless,
for impairment, there are specific assets of firms that might possibly be registered at a certain
amount that is lower than the one calculated on historical cost (Wingard et al. 2016). In point
of fact, the utilization of the historical cost can also bear out to be a disadvantage for the
financial information users of various financial declarations that has the requirement to

7
ADVANCED FINANCIAL ACCOUNTING
comprehend the current value. Again, intangible assets might probably has to be valued for
various reasons.
However, it can be witnessed that fair value dimensions in accounting has higher possibility
of getting selected for mainly PPE than firm’s other non-financial assets since property
makers are usually more liquid. There is more likelihood of adopting fair value when it
essentially smoothes the progress of enumeration of performance. In this particular case,
value transformation of investment property is somewhat informative of diverse operating
performance specifically when capital gains become a significant part of the entire business
model (Palea 2014). Nonetheless, fair value accounting treatment also adversely exerts
impact on various dimensions of performance mainly if administration of the corporation
intends to hold different unproductive assets.
Detection of valuation exercise for specific non-financial assets
PPE and intangibles
In this current study, Woolworths Limited is selected as a listed firm under the Australian
Stock Exchange (ASX), Tesco Plc is chosen as a listed firm under the London Stock
Exchange and Alcoa Corporation is selected as listed corporation under the New York Stock
Exchange.
Woolworths Limited: Analysis of Woolworths Limited’s consolidated financial assertions
reveal the fact that the entire group presents a general purpose financial statement. This
deceleration is essentially prepared as well as presented in accordance with the directives of
the Corporations Act of the year 2001, regulations of the Australian Accounting Standard and
directives of the Interpretations along with International Financial Reporting Standards
(IFRS) (Wow2016ar.qreports.com.au 2018). Analytical evaluation of the financial

8
ADVANCED FINANCIAL ACCOUNTING
pronouncement of the firm replicates the fact that plant, property as well as equipment (PPE)
of the entire group is necessarily calculated at cost taking away accumulated depreciation
otherwise amortisation along with accumulated losses from impairment. In particular, cost
incurred for various self-constructed firm’s assets contains material cost, overhead
proportions along with cost of direct labour. As such, the cost incurred for development
properties includes borrowing, holding cost together with development until the asset
becomes complete (Steenkamp and Steenkamp 2016). Essentially, the yearly financial
declaration of the corporation also states that PPE are essentially assessed as per the
stratagem of impairment of firm’s non-financial assets. In addition to this, estimation of
economic lives also require correct judgement of the management and are assessed every
year (Hu et al. 2015). Particularly, in Woolworth’s case, PPE impairment primarily relates to
PPE, assets of the stores along with distribution centres associating to the Home
Improvement Business (Wow2016ar.qreports.com.au 2018).
In addition to this, according to the annual report of the firm for the financial year 2016, it
can be hereby observed that intangible assets of the firm are calculated at cost deducting
particular accumulated amortisation along with losses of impairment. However, at the time
when intangible assets are gathered in a specific business combination, particular costs
replicate the fair value especially at the date of acquirement. Furthermore, intangible assets of
the corporation that has finite lives are essentially amortised with diverse finite lives that are
necessarily amortised by way of straight line mechanism over estimated economic lives.
Tesco Plc: Critical analysis of the annual declaration of the firm for the financial year 2016
replicates that the financial pronouncements of the corporation are both prepared as well as
presented in conformation to the directives under International Financial Reporting Standards
(IFRS) as has been assumed by the entire European Union (EU) (Tescoplc.com 2018). In
essence, financial declarations are necessarily prepared as per the requirements of the

9
ADVANCED FINANCIAL ACCOUNTING
Companies Act of the financial year 2006 regarding the financial reports of the entire group
and in compliance with the article 4 stipulated under IAS Regulation. As such, analysis of the
significant accounting policies of the business concern reflects the fact that the PPE is
essentially carried and presented at cost less the particular amount of accumulated
depreciation along with any detected impairment value. In itself, plant, property as well as
equipment (PPE) is depreciated by utilizing the straight line mechanism to necessarily the
residual value over the approximated economic lives (Tescoplc.com 2018). Analysis of the
financial reports of the firm for the FY 2016 also helps in understanding the fact that non-
financial asset of the corporation including intangible assets along with PPE; the entire group
assumes impairment testing in which there are specific gauges of impairment. However, in
specific cases in which asset does not essentially generate cash flows are independent from
other assets (Tran and Zhu 2017). Thereafter, the group estimates the overall recoverable
amount of cash generating unit.
Furthermore, annual financial report of the corporation also reads that intangible assets for
example, software together with pharmacy licenses of the corporation are calculated at
acquirement cost otherwise costs borne for asset development. Furthermore, expenditure for
development on a particular project is essentially capitalized when specific criteria are met. In
this case, the asset generated will possibly generate economic advantage in the future.
Basically, intangible assets that the firm acquires in a particular business combination are
identified at fair value at the date of acquisition (Williams 2014). Nevertheless, after the
period of initial recognition, particular intangible assets that have finite economic lives are
measured at cost deduction of the amortisation along with accumulated losses for
impairment. In essence, they are essentially amortised on a straight line manner over the
estimate economic life that rovers around 10% -20% of cost every year. For different other

10
ADVANCED FINANCIAL ACCOUNTING
non-financial assets including firm’s intangible assets, the entire group assumes impairment
testing especially in cases when there are different gauges of impairment.
Alcoa Corporation: Analysis of the annual report of the firm Alcoa Corporation for the
financial year 2016 shows that the consolidated financial statements is essentially prepared in
compliance to the accounting directives usually assumed in USA that is GAAP. In actual fact,
this calls for the firm’s management to undertake particular judgement, approximations along
with suppositions (Warren and Jones 2018). Nevertheless, this might possibly exert impact on
the recorded amount of the corporation’s assets/liabilities together with diverse disclosures on
particular contingent assets as well as liabilities at the pecuniary statement date.
Particularly in Alcoa Corporation, PPE are documented at cost. In essence, depreciation is
recorded using the straight line mechanism at specified rates based on estimated economic
lives of firm’s assets. As such, for different Greenfield assets of the firm that refer to
construction of diverse new assets on diverse undeveloped land, different production methods
is used for recording the depreciation. Essentially, these assets need a considerable period
(usually greater than one year) to augment the overall production potential (Henderson et al.
2015)
In actual fact, plant, property as well as equipment (PPE) are assessed for impairment
whenever there are specific incidents otherwise transformations in conditions. This
necessarily replicates that the carrying amount of this category of assets/group of assets might
possibly not be recoverable. Again, it can also be witnessed that asset recoverability can be
determined by means of comparing estimated undiscounted flow of net cash operations
related to carrying amounts of assets/ group of assets of the corporation (Armstrong 2015).
Furthermore, impairment losses can necessarily be identified when firm’s assets/group of
assets carrying amount go over undiscounted net cash flow. The amount of impairment loss

11
ADVANCED FINANCIAL ACCOUNTING
has to be registered is calculated as excess of carrying value of the asset or else group of asset
of the firm over its fair value. In this, fair value is determined by way of prominent
information acquired from discounted cash flow model. In addition to this, determination of
what consists of asset groups, the associated estimated undiscounted net cash flow, and the
estimated useful lives of the assets requires substantial judgements (Investors.alcoa.com
2018).
As per the annual report of the corporation Alcoa Corporation, it can be hereby mentioned
that goodwill as well as other intangible assets is not inevitably amortised and instead it is
examined yearly or more regularly for the purpose of impairment when impairment indicators
exist or when management decides to sell or to exit from business (Francis et al. 2015).
Essentially, policies of accounting that are stated in the financial assertions elucidates
illustratively that a substantial amount of management judgement is involved in the
determination process when a specific parameter of impairment is in place. Furthermore, this
types of indicators and might possibly takes in deterioration in usual economic situations,
unfavourable developments in equity and credit market, undesirable alterations in the market
in which the business concern functions. Essentially, these indicators also contain
augmentation in costs of input that essentially have unfavourable influence on earnings,
downward trend of cash as well as cash flow of the company (Hermason et al. 2016). In
essence, impairment tests of mainly goodwill in different previous years presented replicated
that the corporation’s goodwill was not in fact impaired. Particularly, intangible assets that
have finite economic lives are unavoidably amortised in a normal way using a straight line
mechanism over a specific period of time (Investors.alcoa.com 2018).

12
ADVANCED FINANCIAL ACCOUNTING
Assessment whether PPE and intangibles are consistent across three different
corporations
The calculation of PPE as well as intangible assets of the corporation is moderately consistent
among the corporations Tesco Plc and the Australian firm Woolworths Limited, whilst it is
somewhat different for Alcoa Corporation. For Tesco Plc, PPE of the firm is essentially
carried out at cost less accumulated depreciation together with equipment of the corporation
is essentially carried out at cost less accumulated depreciation along with any kind of
recognized impairment value. In addition to this, in case of Woolworths Limited, PPE of the
overall corporation is necessarily calculated at cost less accumulated depreciation otherwise
amortisation along with accumulated losses of impairment. Nonetheless, for Alcoa
Corporation, PPE are recorded at cost (Oulasvirta 2016). In essence, depreciation is recorded
using straight line mechanism at specified rates based on the estimated useful lives of firm’s
assets. However, in case of intangible assets of the firm Tesco Plc, it is calculated initially the
cost of acquirement otherwise costs that is borne for asset development. Furthermore,
specified intangible asset that has finite economic lives are undertaken at cost deducting
accrued amortisation along with accumulated losses of impairment. For Woolworths Limited,
intangible assets are calculated at cost and deducting from it accumulated amortisation and
losses for impairment. In addition to this, in case of enumeration of intangible assets of Alcoa
Corporation, assets that have finite useful lines are essentially amortised using straight line
methods.
Viewpoints as regards free choice between historical and fair value system of accounting
The present study aids in comprehending diverse benefits of IFRS that permits free choice
between fair value and historical accounting mechanism. In essence, IFRS necessarily has an
ex-ante commitment to one of the two accounting schemes. In particular, it is according to

13
ADVANCED FINANCIAL ACCOUNTING
the management’s concern to limit the overall scope for various actions in the future time
period, for let us say, management of firm’s earnings. Therefore, managers have specific
incentives to properly react to different market demand and commit to accounting treatment
that subsequently can aid in optimization of the overall value of the corporation. Laing and
Perrin (2014) suggests that fair value accounting for different non-financial assets of the
corporation heads to augmented relevance value along with content regarding information,
reduced comparability. Prior reports recommend that the choice to use and adopt the fair
value is not undertaken arbitrarily and takes place when the acquired benefits surpass the
specified costs. Nonetheless, there are substantiations that help in replicating that net benefits
that can be acquired from this fair value accounting treatment is necessarily limited in scope
(Hu et al. 2015). Hence it can thus be inferred that the choice between two diverse systems
need to be specified in the financial assertions of the corporation following the assumptions
of directives of IFRS. Essentially, this has the need to be consistently applied moving
forward.

14
ADVANCED FINANCIAL ACCOUNTING
References
Abbott, M. and Tan‐Kantor, A., 2017. Fair Value Measurement and Mandated Accounting
Changes: The Case of the Victorian Rail Track Corporation. Australian Accounting Review.
Armstrong, C., Guay, W.R., Mehran, H. and Weber, J., 2015. The role of information and
financial reporting in corporate governance: A review of the evidence and the implications
for banking firms and the financial services industry.
Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate
Transparency and Accountability: Evidence from New Zealand. Australasian Accounting,
Business and Finance Journal, 11(3), pp.3-19.
Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting
decision making: Evidence from accounting conservatism. Contemporary Accounting
Research, 32(3), pp.1285-1318.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Hermason, R., Edwards, J. and Maher, M., 2016. Accounting Principles: Managerial
Accounting.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

15
ADVANCED FINANCIAL ACCOUNTING
Investors.alcoa.com. 2018. Available at: http://investors.alcoa.com/~/media/Files/A/Alcoa-
IR/documents/annual-reports-and-proxy-information/annual-report-2016.pdf [Accessed 26
Jan. 2018].
Kaya, C.T., 2014. Fair Value Accounting Under FAS 157 and IFRS 13: Evidence from
Borsa, Istanbul. GSTF Business Review (GBR), 3(2), p.7.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB
116 non-current asset measurement models. International Journal of Critical
Accounting, 6(5-6), pp.509-519.
Oulasvirta, L., 2016. Accounting Principles. Global Encyclopedia of Public Administration,
Public Policy, and Governance, pp.1-9.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal
of Financial Reporting and Accounting, 12(2), pp.102-116.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions
reducing R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-
130.
Tescoplc.com. 2018. Available at: https://www.tescoplc.com/media/264194/annual-report-
2016.pdf [Accessed 26 Jan. 2018].
Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax
income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.

16
ADVANCED FINANCIAL ACCOUNTING
Wingard, C., Bosman, J. and Amisi, B., 2016. The legitimacy of IFRS: An assessment of the
influences on the due process of standard-setting. Meditari Accountancy Research, 24(1),
pp.134-156.
Wow2016ar.qreports.com.au. 2018. Available at:
https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf [Accessed
26 Jan. 2018].