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Accounting and reporting in the cost model

   

Added on  2020-04-07

8 Pages2580 Words291 Views
Political Science
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Running head: FINANCIAL ACCOUNTING AND REPORTINGFinancial accounting and reportingName of the studentName of the studentAuthor note
Accounting and reporting in the cost model_1

1FINANCIAL ACCOUNTING AND REPORTINGRequirement 1 As per the cost model, the value of the asset is carried out at the the purchase cost reducedby the accumulated impairment and depreciation. On the contrary, as per the revaluation approachthe assets is carried out at the revalued value that is the fair value of the asset reduced by theamount of impairment and depreciation, with the condition that the fair value of the asset can bereliably measured. Under revaluation approach the activities of revaluation shall be regularly carriedout so that carrying amount for the asset shall not differ from the fair value of the asset materiallyunder the balance sheet, however, under the cost approach it is not like that. The major differenceamong the two model is that under cost model the value of the non-current asset are measured atthe price that is spend for acquiring the asset whereas under the revaluation model, assets arerecorded at the fair value that is the estimated market value (Goh et al., 2015).(a)Reasons behind non-revaluation of asset by the directorsVarious reasons may be there for not adopting the revaluation model for the equipment,property and plant. However, evaluating the main motivation behind not adopting revaluationmodel is not an easy job. If the assets are measured as per the cost model, the depreciation to beprovided will be at lesser amount (Müller, Riedl & Sellhorn, 2015). Therefore, the amount of sale aswell as profit will be higher. Thus, one probable motivation for non-revaluation is to show the assetat lower amount that will improve the company’s return on asset ratio. Further, while selling theasset it will be difficult to assess the value under different market scenario that may lead to lesseramount of value comparing with the revaluation value. If assets are not considered for revaluation,it will b shown under the balance sheet at lower value if compared with the cost model and thedirectors may feel that for accounting purpose applying the cost model is more relevant (Hu, Percy &Yao, 2015). However, among others few reasons behind non-revaluation may be as follows –1.Three dimensional approaches – the cot model is considered as the three dimensionalpuzzle against the puzzle. Reports, calculation and accounts may be viewed and manipulatedwith various other angles. Further, the management can evaluate the data on the basis ofvarious criteria that can be used to value the asset which may guide to allocate the assets,set the price and assume the risk and capital (Picker et al., 2016). 2.Labour cost – the directors may be in the view that the labour cost can be monitored andcontrolled easily under cost accounting as compared to the revaluation approach. Based onthe business nature, the expenses for wages and salaries can be analysed from contracts,jobs, orders, sub-departments and departments through the cost model approach only. It
Accounting and reporting in the cost model_2

2FINANCIAL ACCOUNTING AND REPORTINGmeans the management can select how the productivity or efficiency is to be determined.This plays crucial role while estimating the performance of individual employees as well asthe marginal productivity. However, all these activities can be smoothly performed underthe cost valuation model and therefore, the director may not be motivated to adopt therevaluation model (Wali, 2015).3.Conservative – the cost model does not take into consideration the business records, profitsfrom the asset appreciation and that is not yet taken place and will be recognized throughthe current value for sale in the market. If the assets are stated at the revaluation model, itwill leave a scope for the management to restate the figures that will enable them toachieve personal gain. 4.Consistency and simplicity – the directors may be in the view that the cost model can bemore consistent and simpler to value the assets as it is difficult to reassess the value of theassets on regular basis as per the changing scenario of the market. Further, though thefinancial statements are used by the shareholder and various other users for the financialperformance projections, however, this is not the only reason of financial statement analysiswhere only the past record are considered.(b)Non-revaluation impact on the financial statement of the company The main drawback of not adopting the revaluation model is the cost model does not takeinto consideration the effect of changes in the prices for property equipment and plant. Further, thebook values that are considered under the cost model may be the out of date for cost. This createsmore problems when the assets are purchased. In the same way, they are aware about the proceedsthey are receiving for their obligations (Small, Yaseen & Schmidt, 2016). Therefore, the historical costmethod is considered as an objective method as the subjective forecasting is not taken intoconsideration. Other impacts for not adopting the revaluation model are as follows –1.Under the cost model the performance of the company are based on only the past recordsand the changes in the market are not taken into consideration. 2.Cost for the current year will not be similar to the previous year, therefore, the revaluationmodel will be most appropriate in comparison with the cost model (Sellhorn & Stier, 2017).3.If the management of the company chooses the cost model as against the revaluationmodel, the costs will be absorbed based on the rate that is pre-determined. It will result intounder absorption or over absorption of the cost related to overheads.4.Various problems related to motion and times study, work study and the operationalresearch can be solved
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