Financial Analysis: Cost Model vs. Fair Value for PPE, Coursework

This report delves into the comparison between the cost model and fair value methods for recognizing Property, Plant, and Equipment (PPE) in financial analysis. It explores the application of the cost model, as per IAS 16, highlighting its use in capitalizing assets and determining their value through accumulated depreciation and impairment charges. The report contrasts this approach with the fair value system, discussing its limitations in accurately representing the value of tangible assets, particularly within a manufacturing context. It also provides justification for using the cost model, such as the ability to derive probable future economic benefits from the assets and the ease of measuring their costs. References to relevant research and academic sources are included to support the analysis.

Running head: FINANCIAL ANALYSIS
Financial Analysis
Name of Student:
Name of the University
Authors’ note

1FINANCIAL ANALYSIS
Use of Cost Model instead of Fair value system for recognition of Property, Plant and
Equipment:
According to the provisions issued by IAS 16 PPE, generally an item of Property,
Plant and Equipment should be capitalized as an asset of an organization. Such assets are
considered as the tangible assets of an organization and are held for production or
administrative purpose. In case of recognizing the value of such assets followed the cost
model instead of the fair value system (Hossain, 2019). The fair value system is used to
present the market value of such particular assets. Such fair value system is not able to
provide the entire value structure of such assets. Normally such models are considered as
beneficial for marketable assets that are used for selling purposes (Sharma & Singh, 2017).
However, for a manufacturing organization, to present their tangible assets, the cost of a
particular asset is deducted from the value of accumulated depreciation and the accrued
impairment charges on such assets. The main reason for using the cost model as stated below;
 In case if any probable future economic benefits are derived from such assets that
would flow to the business.
 Or, the cost of such assets can easily be derived and measured.

2FINANCIAL ANALYSIS
References:
Hossain, M. S. (2019). Disclosure of Property, Plant and Equipment as per BAS# 16: A
Study on Selected Pharmaceutical Companies in Bangladesh. The Millennium
University Journal, 4(1), 1-11.
Sharma, S., & Singh, G. (2017). Impact of IFRS on the Financial Reporting Practices of
Selected Countries: Review and Analysis. International Journal of Economic
Perspectives, 11(2).