ACC2014 Financial Accounting: Fair Value Model & IAS Compliance

This financial accounting assignment delves into the application of the fair value model, particularly in relation to IAS 40, for a company with residential properties and investments. It contrasts the fair value model with the revaluation model under IAS 16, highlighting the key difference that the fair value model does not depreciate the asset's value but adjusts it based on market revaluation. The report analyzes specific transactions from a case study, demonstrating how the company benefits from using the fair value model over historical cost accounting, which could lead to inaccurate financial statements. The assignment also underscores the importance of conservative accounting practices and provides references to support its analysis, all of which are available, along with other solved assignments, on Desklib.

Financial
Accounting
Assignment

By student name
Professor
University
Date: 5th Oct 2018.
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Question 4
4ii) The major properties that have been included in this section as per the relevant case study are
the residential properties. The assets must be valued as per the fair value model and not the
historical basis of accounting to decide what would be the value of the property. Fair value is
determined based on the market value of the assets that are in question, for example in this case
the asset is the residential complex that the contractors are developing. The property should be
valued based on IAS40, that is the fair value method of accounting of valuation of property for
the company, and then revaluation of the same should be considered. The major difference
between IAS 40, the fair value model and IAS 16, the revaluation model is that in case of FV
model the value of the asset is not depreciated but the revaluation in respect to the property is
either appreciated or depreciated and is credited or debited to the asset account. In case of IAS
16, the asset needs to be revalued based on the market value, the item is revalued up or down
based on the given FV and the difference is either credited to the PL or OCI account, thus the
new item of FV gets depreciated over the life of the asset (Charles H, Giovanna, Dennis M, &
Robin W, 2015). This is the main difference between the given accounting standards for the
valuation of the property of the company. In case of the given company, they are having both
residential properties and some major investments have been done by them, and all are valued
based on the fair value model.
4iii) Based on the transactions that have taken in the case of the given case study, the assets have
been revalued on many aspects and we see that the company has adopted the fair value model as
per which the asset is not depreciated as per the revaluation model, and the value directly is
debited or credited to the accounts of the company. In this case we see that, Sima constructed its
office building in Ara Damansara with an expected useful life of 50 years at depreciated
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historical cost of RM200 million, the company is also having certain apartments. It can also be
seen that the company as per the case study” The previous office building in Ara Damansara will
be leased out in March 2018 and the fair value of the office building is revalued at RM280
million” this revaluation difference will not pass through P/L or OCI and would be debited or
credited to the account of the company, but what we see is that the investment property that is
sold off for RM2.2 million, and in this case the profit would be credited to the PL of the
company, thus we see that on various aspects and based on all these transactions the company
would be getting a benefit as they are not following the revaluation model as per IAS 8 but are
following the fair value model of accounting that is important for the company on various
aspects (Cundill, Smart, & Wilson, 2017). It can also be seen that if historical basis of accounting
is valued the correct value of the assets won’t be judged and this may make the financial
statements redundant and the investors will not have a correct picture of the assets of the
company, and that might cause overvaluation or undervaluation of the assets for the company.
The revaluation method would cause depreciation of the revalued value of the assets and that
would cause loss to the company as the benefit would pass through the PL and not through the
asset account of the company, and thus it is important that accounting should be done in a
conservative manner (Kaufmann, 2017).
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References
Charles H, C., Giovanna, M., Dennis M, P., & Robin W, R. (2015). CSR disclosure: the
more things change…? Accounting, Auditing & Accountability Journal, 28(1),
14-35.
Cundill, G., Smart, P., & Wilson, H. (2017). Non‐financial Shareholder Activism: A
Process Model for Influencing Corporate Environmental and Social
Performance. International Journal of Management Reviews, 20(2), 606-626.
Kaufmann, W. (2017). The Problem of Regulatory Unreasonableness (First ed.). New
York: Routledge.
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