Analyzing Profit Discrepancies in Accounting Models

This assignment examines the computation of profit for two companies, Good Ltd and Better Ltd, using the revaluation model and the cost model respectively, over the years ending 30th June 2018 and 30th June 2019. The analysis highlights discrepancies in reported profits due to the different accounting treatments under AASB 116. Under the revaluation model adopted by Good Ltd, fixed assets are adjusted for appreciation, leading to higher asset values and profit figures when sold. Conversely, Better Ltd uses the cost model, maintaining historical costs with no upward adjustments unless impairment occurs, resulting in lower reported profits despite potential increases in market value. The assignment underscores the importance of consistent application of accounting methods across asset classes to avoid discrepancies and provide a true representation of a company's financial position.

Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and financial reporting
Name of the student
Name of the university
Author note

1ACCOUNTING AND FINANCIAL REPORTING
Table of Contents
A. Computation of profit for the year ended 30th June 2018 and 30th June 2019....................2
A. Reasons for discrepancy in profit.......................................................................................2
B. Computation of profit for the year ended 30th June 2019...................................................3
Reference....................................................................................................................................4

2ACCOUNTING AND FINANCIAL REPORTING
A. Computation of profit for the year ended 30th June 2018 and 30th June 2019
Date Particulars Good Ltd
(Revaluation model)
Better Ltd. (Cost
model)
1st Jan 2016 Purchase cost of land $ 100,000.00 $ 100,000.00
30th June 2018 Value of land $ 180,000.00 $ 100,000.00
30th June 2018 Profit $ 80,000.00 $ -
30th April 2019 Selling value $ 200,000.00 $ 200,000.00
30th June 2019 Profit $ 20,000.00 $ 100,000.00
A. Reasons for discrepancy in profit
Discrepancy in the profit for 2 companies arises as according to AASB 116, under the
revaluation model the fixed are recorded at cost initially but thereafter the carrying amount of
the asset is increased for adjusting the appreciation. On the other hand, under the cost model
the fixed asset are carried at the historical cost and no upward adjustment is made to the value
of the asset (Emmanuel Iatridis and Kilirgiotis 2012). The main difference among the 2
methods is that the revaluation model allows upward as well as downward adjustments both
whereas the cost model allows the downward adjustments only that takes place for
impairment. Discrepancy will not make sense if the company consistently applies any one of
the method.
Under IFRS the company is allowed for using the revaluation model for some of the
assets and cost model for for specific class of assets. However, it shall apply the same method
for all the class of assets and revalue all the assets within the class for avoiding selective
revaluation.
Regarding the performance of the companies it can be stated that good Ltd is
presenting its assets at fair value and presenting the true value of the company as it applies
the revaluation model. On the other hand, as Better Ltd opted for cost model, it will not take

3ACCOUNTING AND FINANCIAL REPORTING
into consideration the upward valuation of the assets and therefore will not present the true
value of the company (Zinkeviciene and Vaisnoraite 2014).
To avoid the discrepancy the company shall apply any one method that is cost model
or revaluation model consistently for all the assets.
B. Computation of profit for the year ended 30th June 2019
Date Particulars Good Ltd
(Revaluation model)
Better Ltd. (Cost
model)
1st Jan 2016 Purchase cost of land $ 100,000.00 $ 100,000.00
29th April 2019 Revalued amount $ 180,000.00 $ 100,000.00
30th April 2019 Selling value $ 200,000.00 $ 200,000.00
30th June 2019 Profit $ 20,000.00 $ 100,000.00
The reporting results seems satisfactory as the upward revaluation of the land will not
have any impact on Better Ltd as it adopted the cost model. In case of Good Ltd the asset will
be carried at the revalued figure that is $ 180,000 (Blankespoor et al. 2013). Thereafter when
the company sold the land the revalued amount will be deducted from the selling value that is
$ 200,000 to compute the profit. However the profit of Better Ltd will remain same
irrespective of the revaluation time.

4ACCOUNTING AND FINANCIAL REPORTING
Reference
Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C., 2013. Fair value
accounting for financial instruments: Does it improve the association between bank leverage
and credit risk?. The Accounting Review, 88(4), pp.1143-1177.
Emmanuel Iatridis, G. and Kilirgiotis, G., 2012. Incentives for fixed asset revaluations: the
UK evidence. Journal of Applied Accounting Research, 13(1), pp.5-20.
Zinkeviciene, D. and Vaisnoraite, G., 2014. Factors affecting the choice of tangible fixed
asset accounting methods: theoretical approach. European Scientific Journal, ESJ, 10(10).