Fixed Asset Revaluation: Motives and Factors

This assignment delves into the concept of fixed asset revaluation, examining the motivations driving companies to revalue their assets and the key factors influencing these decisions. It analyzes an academic study on Swiss data exploring motives for revaluation and discusses the impact of accounting standards like AASB 116 and IAS 16. The assignment further examines a practical example using Wesfarmers' annual report, illustrating how companies apply revaluation practices in real-world scenarios. Students are expected to understand the complexities of fixed asset revaluation and its implications for financial reporting.

Financial Accounting
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Part 1: Summary of Academic Paper ‘Motives for fixed-asset revaluation: An empirical
analysis with Swiss data’
Purpose of Paper
This academic paper aims at investigating the major reasons responsible for fixed-asset
revaluation undertaken by the Swiss listed companies.
Research Questions
The main research questions addressed in the study are as follows:
 What is the impact of revaluation motives of fixed assets on the accounting standards?
 What is the need of introducing revaluation model for measuring the fixed assets?
Background
As per the article, revaluation of fixed assets can be described as the process adopted for
increasing or decreasing the carrying value of fixed assets in accordance with the major changes
in their fair market value. The AASB 116 standard has introduced changes in the measurement
and recognition principle for fixed assets as per which they should be measured at either cost or
at revaluation model.
Research Findings
The study has depicted that interest rates have significantly decreased for the companies
that have adopted the revaluation model for measurement of their fixed assets and thus
emphasized on the benefit of debt-costs hypothesis.
Implications
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The research paper has demonstrated the economic factors that caused the significant
changes in the accounting standards in relation to fixed-assets valuation (Missonier-Piera, 2007).
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Part 2: Factors that companies would consider when deciding whether to revalue their
non-current assets
Introduction
The revaluation model is developed for providing the opportunity to businesses for
carrying their fixed assets at the revalued amount for depicting their true value. The main
purpose of the model is to record the fair market value of fixed assets. The fair value as per the
IFRS standards can be defined as the price received for selling an asset or transferring a liability
on the date of measurement during an orderly transaction. The non-current assets referred to the
fixed assets owned by a business entity such as properly, plant or equipment that may be
depreciated, amortized or depleted and hence their value is reduced on balance sheet for
recognizing the expense incurred due to them (Cairns et al., 2011).
Factors
 Firm Characteristics: The firm characteristic such as their size and amount of debt has a
significant impact on their assets revaluation. The large firms tend to revalue their assets
more as compared to small firms as governments, unions and associations pays more
attentions on them and demand benefits from them. Also, the high ratio of debt in the
balance sheet of a firm indicates its increase in its borrowing cost. As such, these firms
adopt an accounting method that helps in reduce the debt costs. The revaluation of fixed
assets tends to raise the book value of total assets and therefore help the firm in
improving its debt to assets ratio.
 Foreign Stakeholder needs: The business firms are increasingly exposed to global
economic conditions today as they have expanded their activities to foreign countries as
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well. Thus, the global firms tend to adopt the accounting method that help in meeting the
need of its foreign stakeholder as well and tend to reduce the information asymmetry.
The revaluation model of fixed assets measurements fits best in the position (Tabari and
Adi, 2014).
 Investment: the adoption of revaluation accounting model of fixed assets is extremely
expensive for business firms. Thus, a firm that incurs heavy investment in fixed assets
should implement this model.
 Growth Factors: The business firms with higher growth potential tend to revalue their
assets more as they place large concern on potential profitability of their projects in
foreign countries. Also, revaluations help the firms to enhance their borrowing capacity
and decreasing their debt costs (Cairns et al., 2011).
Example
Wesfarmers, a retail giant of Australia listed on ASX, had adopted the revaluation
approach for measurement of its fixed assets that are, property, plant and equipment. The firm
had adopted this model as per the amendment in AASB 116 standard for effectively complying
with the IAS 16 accounting standard. The firm has selected the revaluation approach due to
increase in the current value disclosure requirements regarding the valuation of non-current
assets as per the Corporations Act 2001. The act requires the business entities listed on ASX to
disclose adequately the current values of land and building assets that have not been reported as
per their recent value (Accounting Standard AASB 1041, 2001). As such, the firm needs to
revalue their fixed assets at least every three years for identifying their revalued amounts. Thus,
the financial managers of the firm have introduced the approach of revaluation of current assets
to comply with the disclosure requirements for recognizing revaluations. The amendment in
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AASB 1010 standard has required the firms to revalue all their non-current assets across its
overall economic entity and not on company basis. . Also, the accounting standard of AASB
1021 has mandated the business firms operating in Australia to record the valuation of
deprecation of buildings as per their revalued amount (Cairns et al., 2011). Thus, as per the
amended standard, the Wesfarmers need to revalue its overall assets types rather than revaluating
only its undervalued assets (Wesfarmers: Annual Report, 2016).
Conclusion
It can be stated from the overall discussion that major factors to be considered by
business firms at the time of adopting revaluation approach are nature of business, operating
leverage and cash flow, growth factors and investment opportunity. The major benefit of
revaluating the fixed assets is that it helps in assessing the true value of the capital goods owned
by a business.
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References
Accounting Standard AASB 1041. 2001. Revaluation of Non-Current Assets. Retrieved on 5
September, 2017, from
http://www.aasb.gov.au/admin/file/content102/c3/AASB1041_07-01.pdf
Cairns, D. et al. 2011. IFRS fair value measurement and accounting policy choice in the United
Kingdom and Australia. The British Accounting Review 43, 1–21.
Missonier-Piera, F. 2007. Motives for fixed-asset revaluation: An empirical analysis with Swiss
data. The International Journal of Accounting 42 (2), 186-205.
Tabari, N. and Adi, M. 2014. Factors Affecting the Decision to Revaluation of Assets in Listed
Companies of Tehran Stock Exchange (TSE). International Journal of Scientific
Management and Development 2 (8), 373-377.
Wesfarmers: Annual Report. 2016. Retrieved on 5 September, 2017, from
https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?
sfvrsn=4
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Appendix
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