Revaluation of Fixed Assets in Aristocrat

This assignment requires a critical analysis of Aristocrat Leisure Limited's financial statements for the year ended 2016. The focus is on the company's treatment of equipment, property, and plant, currently valued using the cost model. The analysis should explore the advantages of adopting a revaluation approach for these assets, comparing their presentation under both models and highlighting the potential for increased transparency and accuracy in financial reporting.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial accounting and reporting
Name of the student
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Requirement 1
As per the cost model, the value of the asset is carried out at the the purchase cost reduced
by the accumulated impairment and depreciation. On the contrary, as per the revaluation approach
the assets is carried out at the revalued value that is the fair value of the asset reduced by the
amount of impairment and depreciation, with the condition that the fair value of the asset can be
reliably measured. Under revaluation approach the activities of revaluation shall be regularly carried
out so that carrying amount for the asset shall not differ from the fair value of the asset materially
under the balance sheet, however, under the cost approach it is not like that. The major difference
among the two model is that under cost model the value of the non-current asset are measured at
the price that is spend for acquiring the asset whereas under the revaluation model, assets are
recorded at the fair value that is the estimated market value (Goh et al., 2015).
(a) Reasons behind non-revaluation of asset by the directors
Various reasons may be there for not adopting the revaluation model for the equipment,
property and plant. However, evaluating the main motivation behind not adopting revaluation
model is not an easy job. If the assets are measured as per the cost model, the depreciation to be
provided will be at lesser amount (Müller, Riedl & Sellhorn, 2015). Therefore, the amount of sale as
well as profit will be higher. Thus, one probable motivation for non-revaluation is to show the asset
at lower amount that will improve the company’s return on asset ratio. Further, while selling the
asset it will be difficult to assess the value under different market scenario that may lead to lesser
amount 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 the
directors 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 dimensional
puzzle against the puzzle. Reports, calculation and accounts may be viewed and manipulated
with various other angles. Further, the management can evaluate the data on the basis of
various 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 and
controlled easily under cost accounting as compared to the revaluation approach. Based on
the 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

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means 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 as
the marginal productivity. However, all these activities can be smoothly performed under
the cost valuation model and therefore, the director may not be motivated to adopt the
revaluation model (Wali, 2015).
3. Conservative – the cost model does not take into consideration the business records, profits
from the asset appreciation and that is not yet taken place and will be recognized through
the current value for sale in the market. If the assets are stated at the revaluation model, it
will leave a scope for the management to restate the figures that will enable them to
achieve personal gain.
4. Consistency and simplicity – the directors may be in the view that the cost model can be
more consistent and simpler to value the assets as it is difficult to reassess the value of the
assets on regular basis as per the changing scenario of the market. Further, though the
financial statements are used by the shareholder and various other users for the financial
performance projections, however, this is not the only reason of financial statement analysis
where 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 take
into consideration the effect of changes in the prices for property equipment and plant. Further, the
book values that are considered under the cost model may be the out of date for cost. This creates
more problems when the assets are purchased. In the same way, they are aware about the proceeds
they are receiving for their obligations (Small, Yaseen & Schmidt, 2016). Therefore, the historical cost
method is considered as an objective method as the subjective forecasting is not taken into
consideration. 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 records
and 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 revaluation
model 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 revaluation
model, the costs will be absorbed based on the rate that is pre-determined. It will result into
under absorption or over absorption of the cost related to overheads.
4. Various problems related to motion and times study, work study and the operational
research can be solved

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Further, surplus amount generated from the revaluation of asset can be credited to the
amount of retained earnings at the time while the asset will be derecognized. Moreover, the
difference in depreciation amount calculated on fair value of the asset and revalued amount of asset
can be debited from the retained earnings while the asset is still under use. Moreover, the company
may decide about the thing that whether the surplus arising from the revaluation of property,
equipment and plant is to be allocated among the shareholders or not. There is no hard and fast rule
to allocate the profit among the shareholders; however, if the company decides to do so or not to do
so, it may do on its own discretion. To solve the problem regarding whether to distribute or not to
distribute the surpluses the company may charge or credit the differences arising from difference in
depreciation amount calculated on fair value of the asset and revalued amount of asset to the
amount of retained earnings (Mogylova, 2014).
Further, as per AASB 116, one of the most important aspect of of using the revaluation
model is to present the asset at the financial statement as per the market value and to assure the
fact that the asset is not represent at the value that is martially different from the market value. As
the cost model does not take into consideration the actual value of the asset, the users of the
financial statement will misinterpret the performance and value of the items (Liang & Riedl, 2013).
Moreover, it will not enable the investors to take investment related decisions based on the value
stated in the financial statement based on the historical value. Further, it will have an impact on the
revenue statement as the actual profit will not be represented which in turn will misrepresent the
performance and financial position of the company. Therefore, if the directors do not adopt the
revaluation model it will have big impact on company’s financial statement.
(c) Adverse effect on shareholder’s wealth for non-revaluation
As per the conceptual framework of AASB 136, the financial statement at any point of time
shall express the fair value of the property, equipment and plant as important decisions are taken
based on that. Therefore, the revalued figure of the assets is considered to be more appropriate
approach. Some crucial aspects on the wealth of the shareholders that are valued as per the cost
model are as follows –
1. The revalued model assists in analyzing the value for internal as well as external
reconstruction (Jack, 2015).
2. The lesser amount of depreciation under the cost model will lead to higher level of profit
which in turn will enable the company to distribute higher dividend. However, when the
actual value will be revealed, it will affect the shareholder’s wealth

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3. Lower depreciation will not provide enough amounts for replacing the asset in future.
Therefore, if the asset is required to be replaced it will be taken from the shareholder’s
wealth as the accumulated depreciation will not be sufficient for the replacement of the
asset.
4. The actual value or the fair value will enable the company to bargain for correct value while
the company goes for merger or acquisition by any other company.
5. The revalued asset assists the company to analyse the value of the asset for leaseback and
lease transactions (Jack, 2015).
Further, the revalued figure of the asset enable the company to enhance the borrowing
capacity of the organization, enhance the growth of the company, maintaining the liquidity and issue
of the bonus shares. Therefore, the revaluation model will enable the company to present the
financial data more transparently and more accurately and not adopting the revaluation model will
have large impact on the shareholder’s wealth.
(d) Plant, equipment and property analysis - Aristocrat Leisure Limited
The Aristocrat Leisure Limited is the manufacturer of gambling machine from Australia that
has the administrative centre in North Ryde’s Sydney suburb. However, major part of the
development and research is done in the North Ryde site of the company.
Through analysis of the financial statement of Aristocrat Leisure Limited, it was found that
the carrying value of company’s equipment, plant and property was amounted to $ 217.50 million
for the financial year ended 2016 as compared to $ 203.50 million for the financial year ended 2015.
The company measures all the equipment, plant and property at the historical value reduced by the
accumulated impairment, amortisation and depreciation value. Further, the amortisation,
depreciation useful life of property, equipment and plant are treated as having 1 to 10 years of
useful life and the depreciation is provided on the straight-line method. However, for the financial
year ended 2016, the company reassessed the gaming operation machine’s useful life. The
reassessment changed the expense estimates for depreciation expenses by $ 25.10 million
(Aristocrat.com, 2017).
Further, while the asset is derecognized for the purpose of sale or disposed off or when no
further economic benefits are expected from the assets. Losses or gains from the disposal are
evaluated through comparison of disposal proceeds with the asset’s carrying amount and then
identified under the other income from the profit and loss statement during which the disposal
takes place.

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The conceptual framework of AASB and IFRS focuses on the financial statement’s faithful
representation that will fundamentally enhance the report useful for the required purpose of the
users and make it more transparent. The conceptual framework of AASB requires that the financial
statement of the company to be presented in faithful manner the report must be complete, neutral
accurate and concise in all respect and further it shall be free from error, fraud and material
misstatement. It has been recognized while going through the financial statement of Aristocrat
Leisure Limited for the year ended 2016 that the company present their equipment, property and
plant as per cost model. Therefore, to present it more accurately it shall adopt the revaluation
approach that will further enable it to represent the true picture of the company’s performance.
Thus, it can be said that the financial statement of the company with regard to presenting the
equipment, property and plant will be more precise and accurate rather than valuing it on the cost
model.

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Reference
Aristocrat.com. (2017). Reports. [online] Available at:
http://www.amcor.com/investor-centre/company-performance-news/reports [Accessed 25
Sept. 2017].
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Hu, F., Percy, M., & Yao, D. (2015). Asset revaluations and earnings management: Evidence from
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Jack, L. (2015). Book Review: Fair value accounting in historical perspective. Accounting
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Liang, L., & Riedl, E. J. (2013). The effect of fair value versus historical cost reporting model on
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Mogylova, M. (2014). Institutional provision of agricultural fixed assets revaluation up-to-
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Small, R., Yaseen, Y., & Schmidt, L. (2016). Amortisation of intangible assets: accounting
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