MAA716 Financial Accounting: Asset Measurement and Valuation Report

This assignment provides an analysis of different valuation models used by businesses to measure asset values, focusing on Fair Value, Historical Cost, Realizable Value, and Present Value methods. It discusses Australian Accounting Standards such as AASB 116 (Property, Plant and Equipment), AASB 13 (Fair Value Measurement), and AASB 102 (Inventory Valuation). A comparative analysis is conducted between Downer EDI Ltd and Ausdrill Ltd, examining their approaches to non-current asset valuation, particularly property, plant, and equipment, highlighting the use of the historical cost method. The report also evaluates the impact of the historical cost valuation model on enhancing qualitative characteristics of financial reports, including comparability, relevance, understandability, and timeliness, as per the financial statements of both companies. Desklib offers additional resources for students seeking solved assignments and past papers.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note

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Executive Summary
The main purpose of this assignment is to discuss the various valuation models which are used
by business in order to measure the assets of the company. In addition to this, the assignment
will be discussing the various accounting standards which utilizes the fair value of valuation
model. The accounting standards will be such that they are in force in Australia. In addition to
this, this assignment will also be identifying and analysing the valuation model which is used by
two different companies. The companies which are selected for this assignment are Downer EDI
ltd and Ausdrill ltd. The analysis of valuation model will be based on the two selected
companies.

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Table of Contents
Introduction......................................................................................................................................3
Accounting Standards......................................................................................................................4
Comparison Between Two Companies...........................................................................................4
Enhancing Qualitative Characteristics.............................................................................................5
Reference.........................................................................................................................................7

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Introduction
The main purpose of this assignment is to analyze the different valuations model which is
used by businesses. Valuation Model in accounting may be defined as the process of measuring
the value of the asserts of the company. For this purpose, a number of valuation models are used
by businesses to value the assets of the company (Gleason, Bruce Johnson and Li 2013). The
different valuation models which are used by businesses for valuing assets of the company are
discussed below:
1. Fair Value Method: In this method the assets are valued at the fair market value which is
current in the market. This is one of the most popular methods for valuation of assets. It
can be defined as the price that would could be received from sale of assets or that could
be paid for liabilities considering the market value between two parties (Christensen and
Nikolaev 2013).
2. Historical Cost Method: This method allows the assets of the company to be recorded at
original cost at which the company had originally acquired the asset. The method is a
popular one as it allows the business to record assets at original costs (Jaijairam 2013).
The market value of the assets if recorded at market value than it will distort the fabric of
accounting and affect comparability of the assets as market are continuously changing.
3. Realizable Value Method: The assets are measured under this method at cash or cash
equivalents which the company will be receiving if they sold the assets (Niccolini et al.
2013). Similarly, in case of liabilities they amount of cash which the business will be
liable to pay in order to satisfy the liability.

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4. Present Value Method: The present value method values the assets taking into
consideration time value of money concept for the purpose of valuation of assets of the
business.
Accounting Standards
The accounting standard which utilizes the concept of Fair Vale Valuation model and
which are widely recognized and followed in Australia are AASB 116 is related to Property,
Plant and Equipment and AASB 13 is related to fair value measurement. In addition to this,
AASB 102 deals with inventory valuation. In case of AASB 116, recoverable amount of the
assets is higher of fair value less cost to sell and value is use of the asset (Hu, Percy and Yao
2015). Moreover, the concept of fair value is used in the revaluation model as per the standard of
AASB 116. In case of AASB 102, the disclosure requirements of the standard requires to
disclose the carrying amount of inventories which is valued at fair value less cost to sell
(Capalbo and Sorrentino 2013). In addition to this, AASB 13 directly relates fair value
measurement which business can use.
Comparison Between Two Companies
The companies which are selected for this assignment are Ausdrill ltd and Downer EDI
ltd. The non-current assets of Downer EDI ltd comprises of Trade receivables which are of non-
current nature, property, plants and equipment, other financial assets. The valuation of the
property, plants and equipment is based cost of the assets less cost less accumulated depreciation.
The valuation of the property, plant and equipment of the company as per the AASB 116
requires management to either follow cost model or revaluation model.
In the case of Ausdrill ltd, the non-current assets of the company comprise of property,
plants and equipment, available for sale of financial assets, deferred tax assets. the company

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follows historical cost method of valuation. The assets are valued at historical cost less
depreciation. The historical cost of property, plant and equipment consist of all the cost which
are attributable for the acquisition of the asset. The assets of the company are measured at
historical cost which is fulfilling the requirements of AASB 116.
Thus, from the analysis of the financial statements of both the companies and considering
the valuation techniques which are adopted by both theses companies are same for non-current
assets such as property, plants and equipment.
Enhancing Qualitative Characteristics
These refers to the characteristic which enhances the fundamental qualitative
characteristic of a financial reports prepared by the company. Generally, there are four enhancing
characteristics which are relevance, comparability, Understandability, Timeliness. As per the
financial statements of both the company (O’Brien et al. 2014). The valuation method which is
followed by both the companies in case of valuation of assets is historical cost method. The
impact of such valuation model on the enhancing qualitative characteristics are given below in
details:
1. Comparability: This principles states that the financial reports of the company should be
recorded in such a way that such information are comparable with previous years results
and also with the performance of other reporting entities. The historical cost method
which is followed by the company is disclosed in the notes to accounts which can be
compared with the policies which are followed by other companies.
2. Relevance: This principle states that the information which is provided in the financial
reports should be relevant for decision making process for investors. In case of both

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Ausdrill ltd and Downer EDI ltd, the information is relevant when it comes to
recognizing the valuation techniques which is used by both the companies.
3. Understandability: This principle states that information which are contained in the
annual reports which are prepared by the business needs to be in such a way that they are
easily understood by the users of the financial statements. In other words, the information
which are contained in the financial statements of both the companies should be in such a
way that it promote simplicity and ease of understanding of the methods which are used
by the business for valuation of the assets (Henderson et al. 2015). The valuation for the
non-current assets mainly property, plants and equipment are done as per the
requirements of AASB 116 which is standard to promote a consistency accounting
policies and treatments. This consistency results in simplification of the valuation
methods which is used by the management.
4. Timeliness: As per this principle, an annual report should be made available to the
shareholders of the company in a timely manner so that they are able to take decisions
considering the same.

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Reference
Capalbo, F. and Sorrentino, M., 2013. Cash to Accrual accounting: Does it mean more control
for the public sector? The case of revenue from non-exchange transactions. Risk Governance &
Control: Financial Markets & Institutions, 3(4), pp.28-35.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets
pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Gleason, C.A., Bruce Johnson, W. and Li, H., 2013. Valuation model use and the price target
performance of sell‐side equity analysts. Contemporary Accounting Research, 30(1), pp.80-115.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Jaijairam, P., 2013. Fair value accounting vs. historical cost accounting. The Review of Business
Information Systems (Online), 17(1), p.1.
Niccolini, M., Kirkbride, K., Williams, J.J., Hancock, W. and Newcomb, W.L., MCMCAP
Partners LLC, 2013. Systems and methods for asset valuation. U.S. Patent 8,442,908.
O’Brien, B.C., Harris, I.B., Beckman, T.J., Reed, D.A. and Cook, D.A., 2014. Standards for
reporting qualitative research: a synthesis of recommendations. Academic Medicine, 89(9),
pp.1245-1251.