CORPORATE ACCOUNTING ASSIGNMENT

Corporate Accounting Assignment



Part A

Executive Summary

Information of financial statements is used to value the company's equity capital and performance of the management. The financial statements are prepared by following a particular accounting policy based on principles and methods prescribed in accounting standards. The accounting standards sometime provide alternatives accounting principles and methods. The flexibility in choosing from alternatives is required because different companies or entities operate in different environments. A company while choosing among alternatives applies the criteria of decision usefulness and cost -benefit analysis of the method. In this context accounting standards provide two methods of revaluating fixed assets of an entity. The present essay aims to evaluate these methods and provide recommendation for a medium sized listed company in Australia. The purpose of Revaluation of fixed assets is to increase or decrease the carrying values of fixed assets if the fair market value of these assets has been changed due to some reasons. According to International Financial Reporting Standards (IFRS) the fixed assets should initially be recorded on cost and then later on for subsequent accounting two models, the cost model and revaluation model can be used.

Critical analysis of the methods

Cost Model

In cost model the fixed assets are recorded and carried at the historical costs less depreciation and impairment loss if any. In this model the fixed assets are not valued at upward side

Example of cost model is as follows :

ABC Ltd bought a machine for $ 100,000 on April 1,2011. In cost model the company records machinery as following journal entry :

Machinery A/c Dr. $100,000

To Cash A/c $ 100,000

The machine's useful life is 10 years. Now if the company uses straight line depreciation method of depreciation estimation then yearly depreciation is $100000/10 = 10,000. Hence the value of machine on March 31, 2012 is $ 100000-10000 = $90,000 and on March 31, 2013 it will be $90,000-10,000= $80,000.

Thus the machine's value is moving downward due to depreciation but there is no upward adjustment in machine's value and the machine remains at its recorded or historical cost (Barth,2000).

Revaluation Model

In revaluation method the fixed assets are initially recorded at historical costs and for subsequent accounting their value or carrying amount is increased if there is an appreciation in their value due to some reasons. Thus it allows both upward and downward adjustments, whereas, cost model allows only downward adjustment ( Black et al,1998)

Example of Revaluation Model is as follows:

Suppose ABC Ltd. bought machine worth $100,000 and it recorded the machine on historical cost. Now on 31st March 2012 it wants to switch from cost model to revaluation model. From the above example in cost model we know the carrying amount of the machine is $90,000 on 31st March 2012. Now on 1st April 2012 the company revalued the machine and the revalued amount is $95,000.Thus an upward adjustment of $ 5000 is required to machinery account. The surplus or upward adjustment is recorded in the flowing journal entry :

Machinery a/c ...