Calculation of Carrying Amount of Machine

Added on - 28 May 2020

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Question – 5aBriefly explain why, after the fire, Rebecca and Dario do not want to record the revaluation for thebuilding and impairment loss for the machinery and whether they can change from the revaluation to thecost model for the building. Identify and discuss which qualitative characteristics of financial reportingwould be violated if the revaluation and impairment loss are not recorded.SolutionThe recognition of downward revaluation and impairment loss reduces the value of the assets andsubsequently have negative impact on the stakeholders.Further, downward revaluation directly impactsthe profit & loss account of the company as it is debited to P&L a/c. Hence, it will reduce the profit of thecompany and have a negative impression due to reduced profitability.Due to these factors, after the fire,Rebecca and Dario do not want to record the revaluation for the building and impairment loss for themachinery.As per AASB, 108 “Accounting Policies, Changes in Accounting Estimates and Errors” para 17,“17 The initial application of a policy to revalue assets in accordance with AASB 116 Property, Plantand Equipment or AASB 138 Intangible Assets is a change in an accounting policy to be dealt with as arevaluation in accordance with AASB 116 or AASB 138, rather than in accordance with this Standard.”Hence, the change in valuation method from revaluation to cost model is considered as change inaccounting policy and as per AASB 116, this change needs to be accounted for retrospectively.The following qualitative characteristics of financial reporting would be violated if the revaluation andimpairment loss are not recorded:1.True and Fair view- The financial statements are mandated to be presented on the basis of trueand fair view meaning thereby they should reflect the actual value and amounts of the assets,liabilities, equities, incomes and expenses presented. Non recognition of revaluation orimpairment loss will result in higher book value of the assets in the financials whereas in actualtheir fair value or recoverable value or realizable value is lower than presented. Thus, it will failthe basic criteria for preparation and presentation of the financials.2.Comparability- Comparability means the financials of the company should be comparable withthe financials of other companies in the same industry. If the value of assets in the financial is notcorrect, then the financials will become incomparable.3.Impact on Decision Making- Due to non-recording of revaluation and impairment loss, the assetvalue as shown in the financials will be higher and simultaneously the profit shown underretained earnings will also be higher. Due to this, the balance sheet will be overstated and thefinancial ratios calculated on the basis of these figures will also be lead to misleading results.Hence, the stakeholders and management will not be able to take correct decisions as thefinancials are not true and fair.
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