Accounting Financial Analysis Report: Depreciation, IAS 16 & Valuation

This accounting financial analysis report discusses depreciation, defined as the reduction in an asset's monetary value over time due to use or obsolescence, and its purpose in matching costs with revenues. It outlines factors affecting the determination of an asset's useful life as per IAS ...Read More

Running head: ACCOUNTING FINANCIAL ANALYSIS REPORT
Accounting financial analysis report
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1ACCOUNTING FINANCIAL ANALYSIS REPORT
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................3
Bibliography...............................................................................................................................6

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Answer to Question 1
The term depreciation is defined as the monetary value of the asset reduced over time
owing to its use or obsolescence, wear and tear. This reduction in value is measured or
computed as depreciation. Purpose of charging depreciation is matching the cost of
productive asset that has more than 1 year of useful life with the revenues that is earned from
the asset1. This is known as matching principle under which the expenses and revenues are
recorded income statement to reveal the performance of the company for the particular
accounting period.
Depreciation is charged over the useful life of the asset on systematic basis. Useful
life is termed in the expected utility of the asset to the company. The company’s policy for
asset management may involve disposal of the asset after a particular period of usage or
particular percentage of consumption. In that case the useful life for the asset may be lower
than the economic life. Therefore, the estimation for useful life is the matter of judgement
that is depended on experience with the similar asset. As per IAS 16 on property, plant and
equipment following factors affect the determination of useful life –
 Legal or similar type of limits on usage of the asset like expiry date of associated
leases
 Commercial or technological obsolescence owing to improvements or changes in the
production or owing to change in market demand of the service output or product
output from the asset
 Predicted usage of asset. The usage is generally assessed by referencing to the
expected physical output or capacity of the asset
1 Pacter, Paul. "Global accounting standards-From Vision to reality." The CPA Journal 84.1 (2014): 6.

3ACCOUNTING FINANCIAL ANALYSIS REPORT
 Predicted physical tear and wear that depends on the operational factors like shift
numbers for the asset is expected to be used, maintenance and care and repair
programme of asset while it kept idle.
Answer to Question 2
As per IAS 16 on plant, property and equipment the asset initially is calculated at cost
and afterwards is measured using the revaluation model or cost and depreciation is
systematically allocated over the useful life of the asset2. The asset is recognised if it is
probable that –
 Cost of the asset can be reliably measured
 Economic benefits for future period of asset will generated to the company.
IAS 16 allows 2 accounting models for asset’s measurement after the initial recognition –
Cost model – under this method the asset is recorded at the cost reduced by the accumulated
depreciation and the impairment loss, if any. The cost here is the historical price and will not
change3. However, the organization is required to compute the depreciation on the asset using
suitable method like straight-line method or reduced value method based on the judgement
and the policy of the company.
2 Zakaria, Adam, et al. "A Review of Property, Plant and Equipment Asset Revaluation Decision Making in
Indonesia: Development of a Conceptual Model." Mindanao Journal of Science and Technology 12.2014
(2014): 109-128.
3 Liang, Lihong, and Edward J. Riedl. "The effect of fair value versus historical cost reporting model on analyst
forecast accuracy." The Accounting Review 89.3 (2013): 1151-1177.

4ACCOUNTING FINANCIAL ANALYSIS REPORT
Revaluation model – As per the revaluation method, the asset is recorded at the revalued
amount that is fair value on the revaluation date reduced by impairment and depreciation,
provided that fair value can reliably be measured. If the asset is revalued then the entire class
of the asset under which the asset included shall be revalued. The reduction in value shall be
recognized as expenses to the extent it exceed the amount that is credited previously as
revaluation surplus. If the revalued asset is disposed then any surplus owing to revaluation
shall be transferred to retained earnings or shall be recorded under equity as revaluation
surplus. However, the transfer to the retained earnings shall not be made through the profit
and loss.
Impact of 2 models on the financial statement
Cost model – under this method the assets are transacted at the acquired price. Therefore, the
changes in the market value are not taken into consideration. As this does not take into
consideration the price changes it fails to reveal the true and fair view of the financial
statement4. Moreover, depreciation is provided on the historical cost that is not sufficient for
the asset’s replacement.
Revaluation model – under this model the assets are recorded at the current values and
therefore provide with more realistic information of financial statement. The main objective
of revaluation model is presenting balance sheet with the current values therefore, the
increase in the value are not included under income rather it is recorded under equity without
its association with the profit and loss account5. On the other hand, owing to conservatism
concept the reduction due to revaluation are considered as expenses and charged to profit and
4 Haller, Axel, and Martin Wehrfritz. "The impact of national GAAP and accounting traditions on IFRS policy
selection: evidence from Germany and the UK." Journal of International Accounting, Auditing and
Taxation 22.1 (2013): 39-56.

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loss account. However, the surplus owing to revaluation is added to the retained earnings
only when the asset gets derecognized.
5 Christensen, Hans B., and Valeri V. Nikolaev. "Does fair value accounting for non-financial assets pass the
market test?." Review of Accounting Studies 18.3 (2013): 734-775.

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Bibliography
Christensen, Hans B., and Valeri V. Nikolaev. "Does fair value accounting for non-financial
assets pass the market test?." Review of Accounting Studies 18.3 (2013): 734-775.
Haller, Axel, and Martin Wehrfritz. "The impact of national GAAP and accounting traditions
on IFRS policy selection: evidence from Germany and the UK." Journal of International
Accounting, Auditing and Taxation 22.1 (2013): 39-56.
Liang, Lihong, and Edward J. Riedl. "The effect of fair value versus historical cost reporting
model on analyst forecast accuracy." The Accounting Review 89.3 (2013): 1151-1177.
Pacter, Paul. "Global accounting standards-From Vision to reality." The CPA Journal 84.1
(2014): 6.
Zakaria, Adam, et al. "A Review of Property, Plant and Equipment Asset Revaluation
Decision Making in Indonesia: Development of a Conceptual Model." Mindanao Journal of
Science and Technology 12.2014 (2014): 109-128.