This unit states that you are working as finance manager of West farmers and annual report of 2017 had to be prepared answering the following questions.
- What are the ways by which useful life determined, and meaning of residual value of an asset?
- What is fair value? Discuss whether AASB 116 set fair value as the ceiling for the carrying amount of assets and the impact of AASB 112 tax effect accounting on assets carried at fair value.
- Give brief discussion whether CEO’s argument is ethical when preparing the company’s financial statements in accordance with AASB101.
Financial Accounting and Reporting
Determination of useful life and meaning of residual value of asset
The useful life of an asset is the period of time which company tends to estimate to assess the economic feasibility of the asset. In other words, it is the duration that a particular r asset will be in service and is used to earn certain amount of revenue for the organization (AASB 112 Income Taxes, 2017). In order to estimate useful life, it is important for the organization to use past experience with similar type of asset, industry practices, statistical methods, judgemental estimates and other engineering estimates. However, there is certain typical range of useful life estimates which are taken into consideration by organization, which are mentioned below:
- Automotive equipment: 3 to 6 years
- Furniture and Fixtures: 5 to 12 years
- Machinery and equipment: 3 to 20 years (Wong and Joshi, M., 2015)
- Buildings and improvements: 10 to 50 years
Evaluation of useful life is also subjected to overall judgement of management which can also be revised during the life of fixed asset as well. Since, the figure is quite uncertain, conservative accounting practices must be followed to ensure that right type of decision has been taken by the organization.
Residual value ios also called as salvage value. It is the remaining value of a particular asset after it has already been fully depreciated. It is calculated with the help of base prices that is calculated after depreciation. It is considered to be the base price based on which that overall calculation of depreciation is initiated. In case of West farmers, the useful life of building being held by it, is 20 years to 40 years. However, in case of plant and equipment, it is 3 years to 40 years.
Meaning of fair value and its impact of AASB 116 and AASB 112
Fair value is considered to be rational and unbiased approach used to ascertain the potential market price of a good, asset or a service. There are various factors that are taken into account while assessing fair value. These factors are, acquisition or distribution cost, supply versus demand, social productive capability of the asset, characteristics of risk involved to it, cost of and return on capital and individually perceived utility (Stevenson, 2012). In other words, it can be stated that, fair value is the sales price which has been agreed by buyer and seller both. Further, on the same value, the security will be traded. It is also the representation of company’s asset and liabilities when the financial statement of subsidiary company is combined with that of parent company.
The main objective of Standard AASB 116 is to give prescribed treatment to property, plant and equipment so that people can be given accurate information with respect to entity’s investment at appropriate cost. The cost here is the amount of cash or cash equivalents paid or the fair value of other considerations that are application in acquiring the asset (Huang and Vlady, 2012). In case of West farmers as well, the company has duly considered the requirements of AASB 116, where appropriate method is used to calculate the value of plants and equipment.
The main objective of AASB 112 is to allow the reporting entity to account for income taxes. The particular emphasis is given on difference between tax law and financial reporting. The identified assets are recognized at the fair value and the tax is then charged at that value. In case of mergers and acquisition as well, fair value of the business is determined based on which, it is ascertained that what amount of tax will be chargeable. West farmers have initiate the compliance of AASB 112 where, requirements on recognition of deferred asset tax for all the unrealised loss on debt instruments that are measured at fair value.
Ethical representation in argument of CEO considering AASB 101
The main objective of AASB 101 is to provide true and fair representation of financial statements of the company. It helps in ensuring comparability of current financial period with that pf entity’s past period as well. Also, financial statements of other entities are also compared with that of the present one (Guthrie and Pang, 2013). Appropriate disclosure of the cost is one of the key requirements of being ethical. However, the step taken by the manager of West farmers Ltd. is unethical, as per the regulations of AASB 101, it is important to carry out the same method of depreciation as it was in the earlier period, if any type of special disclosure has not been made by the organization. Abruptly, not charging depreciation, can prove to be unethical perspective for West farmers Ltd.
Conclusion and Recommendation
From the above report, it can be concluded that it is important for every organization to follow the accounting standards. Not following the same can prove to be quite unethical for the company. Hence, West farmers Ltd. can be recommended that it must charge depreciation to the assets based on it was charged in the earlier period, unless any type of formal disclosure has not been made by the company.