Accounting Assignment: Revaluations and Impairment Testing (ACCT20073)

This assignment solution addresses the topic of revaluations and impairment testing of non-current assets, focusing on the application of AASB 13/IFRS 13 for fair value measurement. The document explores the requirements for fair valuation, including the use of market participant assumptions and the consideration of market prices. It also discusses the differences between cost and fair value models for asset valuation, highlighting the complexities and managerial preferences. The solution further delves into impairment testing, explaining the concept of Cash Generating Units (CGUs) and their role in identifying cash inflows and outflows. It illustrates the process of determining CGUs, particularly in the context of a bus company, and emphasizes the importance of independent cash flows for impairment calculations. The assignment provides a comprehensive overview of the key concepts and practical applications related to revaluations and impairment in accounting.

Running head: REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT
ASSETS
Revaluations and Impairment Testing of Non-Current Assets
Name of the Student
Name of the University
Author’s Note

1REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
Table of Contents
Answer to Question 1.................................................................................................................2
Requirement (a)......................................................................................................................2
Requirement (b).....................................................................................................................2
Requirement (c)......................................................................................................................2
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................3
Requirement (a)......................................................................................................................3
Requirement (b).....................................................................................................................3
Requirement (c)......................................................................................................................4
References..................................................................................................................................5

2REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
Answer to Question 1
Requirement (a)
AASB 13/IFRS 13 provides the necessary rules and regulations of the assets’ and
liabilities’ fair valuation and necessary disclosures. It states that the fair value of assets and
liabilities is considered as current market price of the same. It states that it is needed to pay
the net realizable value of assets and liabilities for meeting the liability obligation and this
needs to be considered as the fair value of the assets and liabilities. As per AASB 13/IFRS
13, an active market of the object should be there and it is needed to consider the best price
quotes for the valuation purpose (aasb.gov.au, 2019). It states that there is no need of the
identification of market participants individually. According to Paragraph 22 of AASB 13,
there is no need to identify the market participants in case fair valuation, but it is needed to
use the assumptions of market participants (aasb.gov.au, 2019).
Requirement (b)
There is a need to use market participant assumptions at the time to measure the assets
and liabilities in fair value. Every expected cash flow needs to be considered along with
appropriate discount in order to measure the asset values. As per AASB 13, Appendix A, it is
needed to use the risk assumption at the time to consider the concept of market participants of
fair value (aasb.gov.au, 2019). It is needed to take into account the inherent risk factors.
Thus, it is needed to consider the rational behaviour of a market participants as a market
participant assumption at the time to use the technique of fair value.
Requirement (c)
AASB 13/IFRS 13 requires to use the market price at the time to do the fair valuation
of the assets and liabilities (iasplus.com, 2019). The recent and best price needs to be taken
into consideration as a fair value without any adjustment in the transactions of identical assets
and liabilities. In case the item is unobservable and unidentifiable, then it is needed to
consider the best assumption from the market participant perspective with judiciousness
(Hodder, Hopkins & Schipper, 2014). However, in case there is availability of market price
for the same item, then it is not possible to neglect the price quote at the time to apply the fair
value technique. Thus, in this kind of situation, it is needed to take into consideration the
market participant’s price quote for fair value (aasb.gov.au, 2019).

3REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
Answer to Question 2
According to AASB, depreciation of the assets are done on their historical costs
instead of its replacement cost on realizable value. It is not needed to take into consideration
the appropriate amount of expenses in order to use the assets because the firm might have to
face more costs in case the firm would have purchased the assets at present or leased.
Conversely, since the companies consider depreciation as an income statement expenses, the
same rate needs to be used for the inflation in the expenses; but this method should not be
followed at the time to calculate depreciation on historical cost basis (Zimmerman & Bloom,
2016).
Managers might favour to use cost model for asset valuation instead of fair value
model as it makes the fair allocation of sunk cost possible that the companies incur while
acquiring the assets. It is needed to restate the assets under the fair value method while
considering the gain or loss that stays unrealized in actual. In addition, the managers might
prefer to use the cost model because of the high complexity of fair value model and therefore,
they use cost model for avoiding this complexity (Jaijairam, 2013).
Answer to Question 3
Requirement (a)
It is the requirement of impairment testing to compare the cash inflows and cash
outflows regarding certain aspects. The Cash Generating Unit (CGU) refers to the lowest
asset group and the cash inflows and outflows associated helps in identifying this. It might
not be possible to gain actual information regarding cash inflows and outflows from a single
asset while a CGU contains both the cash inflows as well as outflows and they are mostly
independent from other asset groups. It is needed for testing impairment or to calculate the
impairment loss to compare the fair value in use and fair value less disposal cost of the assets
and the assets’ net recoverable amount. It is needed to consider future cash flow estimation
and associated risks for the determination of value in use; and these calculations are
dependent on the financial budgets as well as forecasts; and therefore, it is needed to consider
the CGU for testing impairment (Camodeca, Almici & Bernardi, 2013).
Requirement (b)
The key aspects for the determination of CGU are the independent nature of the cash
flows and their separate identification. It is needed to take into consideration the routes as
well as number of buses for the determination of the CGUs of Saferide Bus Company. In

4REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
case, it is possible for the identification of independent net cash flow with each bus in every
route, then every bus needs to be considered as CGU. Therefore, it is required to take into
consideration the number of buses, routes, management and business operations for
determining CGU for Saferide Bus Company (Swanson, Singer & Downs, 2013).
Requirement (c)
It can be seen that it is possible to identify the net cash flows related to every route on
separate basis, but the cash flow per bus might not be possible to identify. For this reason, it
is needed to consider each route as a CGU (Vogt et al., 2016).

5REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS
References
Aasb.gov.au. (2019). Fair Value Measurement. Retrieved 8 August 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf
Camodeca, R., Almici, A., & Bernardi, M. (2013). Goodwill impairment testing under IFRS
before and after the financial crisis: evidence from the UK large listed
companies. Problems and perspectives in management, 11(3), 17-23.
Hodder, L., Hopkins, P., & Schipper, K. (2014). Fair value measurement in financial
reporting. Foundations and Trends® in Accounting, 8(3-4), 143-270.
IFRS 13, Fair Value Measurement [Completed]. (2019). Iasplus.com. Retrieved 8 August
2019, from https://www.iasplus.com/en-ca/projects/ifrs/completed-projects-2/ifrs-13-
fair-value-measurement
Jaijairam, P. (2013). Fair value accounting vs. historical cost accounting. The Review of
Business Information Systems (Online), 17(1), 1.
Swanson, Z. L., Singer, R., & Downs, A. (2013). Goodwill impairment: a comparative
country analysis. Academy of Accounting and Financial Studies Journal, 17(1), 25.
Vogt, M., Pletsch, C. S., Morás, V. R., & Klann, R. C. (2016). Determinants of goodwill
impairment loss recognition. Revista Contabilidade & Finanças, 27(72), 349-362.
Zimmerman, A. B., & Bloom, R. (2016). The matching principle revisited. Accounting
Historians Journal, 43(1), 79-119.