Financial Reporting Assignment | Valuation Assignment

Running head: FINANCIAL REPORTING 1
Financial Reporting
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FINANCIAL REPORTING 2
Question 1
The highest and best use principle
This is a principle used by the valuation experts in finding the possible and probably the best
use in which a property particularly land can yield the maximum reward if put into best use.
It is based on the principle of maximum gain from a real estate. This is presumably so if the
current use of land does not yield maximum output therefore not relevant to the best use and
highest principle. It is usually established by conducting a site analysis for the property where
the following factors are then considered by the valuer; first is the physical possibility and
whether the land is legally allowable. Then the valuer will ascertain whether the use will be
financially feasible and profitability levels that would accrue also known as the maximum
utility level (Harrington, Nunes & Roland, 2010).
In this report, Anne Lockwood is discouraging valuation at fair value as it has too much
judgment required to make a decision. There is a lot of time used and consumed in
determining the fair value where the global economic volatility always causes the fair value
to vary. The financial auditor suggest that it is wise to use the market value in valuation of a
property due to a lot of inconsistencies in the way different businesses use the fair value to
give account in Plant, Property and Equipment valuation.
AASB 13 gives clear directions to accountants on how to prepare financials using the market
value and not fair value due to changes in valuations. The highest and best use principle is
always considered in determining the value of a property but also possess a lot of problems
for nonprofit making organizations (Hitchner, Hyden & Mard, 2013).
The example given is that the age care home will be knocked down and the owner of the
building will build flats on the same piece of land. In this case, considering that the age care

FINANCIAL REPORTING 3
home was not for profit organization, it wasn’t expected to realize profits. However, building
of the block of flats will ensure that the land is put into maximum use and not used for
altruistic purposes. Furthermore, the real challenge is determining the value of the asset as
there is no intention shown by the owners to get the value of the land. The value given of
$10 million is not the market value and factors such as inflation of the assets makes the
valuation even more complex and requires the judgment call for use of fair value in asset
determination (Hyman, n.d.).
Question 2
Determine how Last Ltd should account for the results of the impairment tests at both 31
December 2016 and 31 December 2017.
Relevant Issues:
IAS 36 brings into limelight the concept of cash generating units (CGU). Cash generating
units are also called cash impairment units (Reeve, 2012)
Impairment Test for year ended 31/12/16
a. Calculations:
Impairment loss= Carrying amount CA- Recoverable amount RA
At Time= 1500 – 1044
= $ 456
Impairment loss at Leisure= CA – RA

FINANCIAL REPORTING 4
= 1200-990
= $ 210
Since it is impairment at Cost model impairment loss is recognized as following in the ledger
journals entries
DR; PL impairment loss CR; Asset allowance account
b. General Journal Entries 31/12/16:
Date Account DR CR
31/12/2016 Profit and loss account - Time 456
31/12/2016 Asset allowance account 456
31/12/2016 P&L - Leisure 210
31/12/2016 Asset allowance account 210
2. Impairment Test 31/12/17
a. Calculations
This is a revaluation model/ Revaluation surplus
Impairment loss= Carrying amount CA- Recoverable amount RA
At Time= 1322 – 1502
= $ (180)
Impairment loss at leisure= CA – RA