Motivations for not revaluing property, plant and equipment in advanced financial accounting

Advanced Financial Accounting 1
ADVANCED FINANCIAL ACCOUNTING
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Advanced Financial Accounting 2
ADVANCED FINANCIAL ACCOUNTING
a. What might motivate directors not to revalue the property, plant and equipment?
The AASB 1041 Revaluation of the Non-Current assets (2001) posits that, “revaluation
implies the act of recognizing a reassessment of carrying amount of the non-current asset to its
fair value as at a specific date, but leaves out recoverable amount write-downs and impairment
loss”. Fixes Asset (FA) revaluation can either be downward or upward. The latter can either
surge the FA value and shareholder equity value or decrease financial leverage ratio. Property,
Plant and Equipment (PPP) is Non-current fixed asset that has been bought by firm to hold or use
for a duration more than 1 year from the balance data and is not meant to be resold in normal
trading course (Herrmann, Saudagaran and Thomas 2006).
A major challenge of revaluation is cost incurred in the process of revaluation. The cost
triggers surges in the expenses that ultimately culminate in net profit decline and decreased cash
flow. Such costs vary from paid fees to valuation officer, consumed time in figure’ review, cost
of record-keeping and auditors’ fees. “Asset market values for utilization in covenants
monitoring are expensively to obtain. Thus revaluation would take place where the impacts on
agency cost of disparity between book and market value surpassed the revaluation cost.
Moreover, several nations have forbidden revaluation of asset like SEC in accounting
series release no. 4 (1938) that posits: “Financial statements....prepared according to accounting
principles without significant authoritative assistance will remain presumed to stay
misleading/inaccurate irrespective of disclosures entailed in the accountant certificate or in
statement’s footnotes”. This often takes place when revaluation of assets is utilized as a form of
window dressing account or due to utilizing judgment alongside estimates. Hence, it might never
be a dependable source for decision making.