acct19062 - term 3, 2014

This is prepared by Sazzad Hossain, MBA, CSCA™

[email protected]

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Table of Contents

Executive Summary...................................................................................................................2

Answer to Requirement 1 ..........................................................................................................3





Conclusion and Suggestions ....................................................................................................12

References:...............................................................................................................................13

Appendix A..............................................................................................................................14

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Executive Summary

The financial reports are the mirror of the organisation. It reflects the true condition of the

organisation. To fulfil that vary purpose, accounting standards have been evolved and

Australian Accounting Standards Board does that job very well. It adopts the International

Financial Reporting Standards and then customises them to the Australian contexts. In this

report mainly the practice of fair value reporting has been discussed from different perspectives

and finally the analysis of Altium Limited’s Annual Report 2014 has given the opportunity to

match the theory into practice.

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Answer to Requirement 1

Purpose of issuing Australian equivalent IFRS 13: Fitting to local requirements

The Australian Accounting Board has issued AASB 13: Fair Value Measure as the equivalent

IFRS 13 to keep consistencies with the International Accounting Standards and practices.

Along with that, to customise the reporting standard as to represent fairly and faithfully, AASB

13 has been issued. The IFRS 13 has been mainly issued reminding the reporting necessities

of for profit organisations, but it hardly specifies clearly for the not for profit organisation

requirements (IFRS, 2013). Incorporating some additional requirements, adding additional

regulations, reducing mandatory requirements by the IFRSs and addressing specific

requirements by the Corporations Act 2001. This basically fits in with Australian reporting

necessaries. The basic purpose is that along with the not for profit organisations, which in

regular reporting standards have to depart from the IFRS, and for profit organisations,

incorporate local demands and practices in the Australian accounting standards as if following

the AASB, companies can claim that they have complied with the IFRS. Aus4.1 to Aus4.6

gives evidences of this fact (AASB, 2014; paras Aus4.1 -Aus4.6).

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Codified universal and universal high quality standard on fair value presentation

The Financial Accounting Standard Board (FASB) and the International Financial Reporting

Standards Foundation (IFRS), formerly known as International Accounting Standard Board

(IASB), has taken the joint initiative to converge the major dissimilarities between them

(Whittington, 2008). The FASB and the IFRS both emphasises on the fair value presentation

as this gives truthful presentation of the financial statements. The fair value measurement,

disclosures and other issues have been debated over to make a proper harmony between them.

The both boards have the courageous role to set out a unified code for presentation purpose

(Landsman, 2007). The FASB and the IASB have consented on the on the definition of the

term “fair value”. The convergent effort to converge the both accounting standards as to report

the fair value has been updated so much. The convergent standard focuses on the application

of the standard rather than just describing what is fair value and it measurement and reporting

(Barlev & Haddad, 2007; Tyson, 2011). As a result, high quality accounting standard has been

created on the issue of the fair value measurement.

The both boards sit and discuss of the disparities and then they set out the rules and make

uniform reporting standards.

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Fair value concept at application

The AASB 13 Fair Value Measurement entails that adopting it would subsequently impact all

types of physical non-current assets to be revalued at the fair value approach following their

initial recognition. They are to be reported on the retrospective way. The AASB 13 has defined

and set out the scope of the fair value measurement. Accordingly the standard applies

immediately to AASB 116 Property, Plant and Equipment. The measurement of the property,

plant and equipment are to be done under the valuation methods of fair value unless and until

it is required to be measured and reported by another standard. Under the AASB 13, assets are

to be both measured under cost model or revaluation model and as such reported in the financial

statements (AASB 16, 2014). The TI954 - Revaluation of Non-Current Physical Assets

(Instruction of Treasurer) has set out that land and buildings are to be measured at their fair

value following the revaluation method after their initial recognition. The basis for such

revaluation is that, when property, plant and equipment can be measured reliably and cost

effectively, they would be measured under fair value approach.

The AASB 7 Financial Instruments: Disclosures dictates that each class of financial assets

would be disclosed at their fair values as well as financial liabilities. These financial assets are

financial liabilities are to be presented in a group format and would be presented by offsetting

to net worth (AASB 7, para 26). Other related information as per as the materiality is concerned

is to be disclosed in the financial statements.

The AASB 138 Intangible Assets states that the assets are to be measured either at cost model

or at revaluation following the fair value measurement policies (AASB 138, para 72). The

assets are to be measured by their classes. They are to be reported by their group nature and

disclosed materially any such changes in their values and rest of the economic expected life to

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be carried at. The impairments of the assets are necessary when active market of the value of

them carrying at have been subsequently fallen down so far. To reflect the scenario impairment

losses are recognised (IASB 138, paras 81-82).

The AASB 140 Investment Property has been taken as to be applied one of its valuation as the

method of fair value. Para 30 dictates that the measurement after the initial recognition point

would be held at the fair value. All the assets are to be measured under the fair value method

once it has taken the fair value model (para 33). As per the para 34, when operating leases are

classified as assets, they are to be measured at fair value. The profit and losses from the fair

value measurement would be recognised in the financial statements (para 35). The basis for the

valuation, valuation method details, profit and losses arising from the fair value recognitions –

all are to be disclosed (para 75).

The AASB 141: Agriculture suggests that the biological assets or products are to be recognises

and measured when their fair value can be measured reliably (para 10). However, when the fair

value cannot be obtained and measured reliably, it is to be recognised at the cost to the creation

of such asset (para 12). The gains or losses are to be recognised in the financial statements

(paras 26 – 29). In terms of disclosure, the assets are to be classified and grouped to represent

fairly.

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Fair value reporting – lag behind in future terms

The fair value practices to measure, report and recognise the assets and liabilities in the

financial statements have been very recent concepts. In the past, the fair value practices would

be seen only in few classes of assets and liabilities like inventories, accounts payables, accounts

receivables and other cash and cash equivalents classes of assets and such type of liabilities

settlement. The scope of the practice was very limited in the past. However, the benefits it has

in financial reporting and faithful presentation, has made it more widespread over the past few

years. The definition of the fair value goes as that the price of settlement as of within two or

more willing parties at the arm’s length transaction. To date we see that many AASB’s are

following the fair value approach, namely: AASB 2 Share-based Payment, AASB 3 Business

Combinations, AASB 16 Property, Plant and Equipment; AASB 137 Provisions, Contingent

Liabilities and Contingent Assets; AASB 138 Impairment of Assets; AASB 139 Financial

Instruments; AASB 140 Investment Properties; AASB 141 Agriculture.

The concept of relevance is highly appropriate in the case of fair value measurement and

presentation of the data in the financial statements of the organisation. The critics say that, in

the favour of the fair value technique, the fair value gives the most recent and on the go market

value and readily available information to the users of the financial statements. The users of

the financial statements can have a good idea about what the actual worth is their organisation

to date (Fortin, 2005). However, this notion has been very much criticised. For the sake of

future, the fair value measurement and reporting on that basis has not been considered as

reliable. The major reason for that notion is that, the fair value measurement is based on the

current market value all the time. But the market is always on move. It goes up and it goes

down. Too much volatility is there. Moreover, biasness is also there. Another major reason and

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strong point of arguments, by the critics who are not in the favour of the fair value practice say,

is that when the asset is no more in the market or cannot be replaced but the utility is available

to the organisation, what is to be done then. This situation has not been addressed in the fair

value measurements of the financial statement reporting of the organisation in reporting its

assets and liabilities to the users of the financial statements (Shortridge, et al., 2006). The

indications found in the AASB’s it is obvious that, in the absence of such reliable measurement

situation, cost basis is to be used to report the assets and liabilities of the entity to the users of

the financial statements.

In the future to report reliably a solid basis is needed which is not found in the fair value

practice. The historical cost basis has that criteria to be fulfilled in this respect. As we see that

the measurement is to be free from bias, the historical costing approach gives best in this

measurement scale. But the fair value measurement does not. It is full of biasness. So in terms

of reliability the fair value measurement approach is lagging behind (Bies, 2005). In the Enron,

HIH they misused the fair value as it is arbitrary in nature. That caused the failure of these

many companies.

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Fair Fair value Practice at Altium Limited

To analyse the index of fair value presentation the Altium Limited’s 2014 Annual Report has

been taken. The following is the chart applicable to the index measurement:

Sl No. Description Complied (Y/N)

1 Disclosure Explanation Y

2 Subsidiary measurement Y

3 Revenue Recognition Y

4 Cost estimation Y

5 Multiple Contracts Y

6 Single Long term contract N

7 Receivables Y

8 Payables Y

9 Leases Y

10 Intangible Assets Y

11 Impairment of non-financial assets Y

12 Share-based payments (option) Y

13 Share-based payments (Shares) Y

14 Financial Instruments Y

15 Sensitivity Analysis Y

16 Consolidation Y

To assess the index the following formula is used:

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Now,

DI = (15/16) = 0.9375

So the disclosure index is 0.9375 for Altium Limited.

The Altium Limited in its Annual Report 2014, they have considered the fair value

measurement approach in their reporting. Along with the historical costing system, they have

used the fair value to measure the intangible assets, short-term assets and liabilities, investment

properties, property, plant and equipment. The company has stated all the policies and

principles, estimates in its notes to the accounts’ significance accounting policies section in

details. The consolidation of the subsidiaries have been made using the fair value measurement.

The leased assets have been considered at the fair value. The intangible assets have been shown

in the fair value less any amendments and losses to the date. Impairment of non-financial assets

have been shown at the fair value to date. The share-based payment in option and shares – both

have been measured and reported at the fair value. The financial instruments have been reported

at the fair value. The annual improvement cycle costs have been reported at their fair values.

The multiple element contracts have been reported by the use of fair value. Current assets and

liabilities have been reported to net using the fair value.

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The company is a software company. The examination of their notes, policies, measurement

and disclosure have revealed that the company has a good practice of fair value reporting. The

company is also in the top chart in the ASX 300.

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Conclusion and Suggestions

The fair value represents the to date, that is, true present scenario to the users of the financial

statements. The investors and other stakeholders can make prompt decisions on the fair value

reports. However, in the long-term decision this creates reliability problem. The analysis and

the standards readings, the one suggestion could be made as both the historical and fair value

presentation are needed. If this could be in the place then the reliability facility and the

relevance – both can be obtained simultaneously. Moreover, discounting and to date inflation

adjustments could be another way to get better results for better decision making.

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References:

AASB, 2014. AASB 116 Property, Plant and Equipment. s.l.:Australian AccountingStandards Board (AASB).

AASB, 2014. AASB 13 FAIR VALUE MEASUREMENT. s.l.:Australian AccountingStandards Board.

AASB, 2014. AASB 138: Intangible Assets. s.l.:Australian Accounting Standards Board(AASB).

AASB, 2014. AASB 140 Investment Property. s.l.:Australian Accounting Standards Board(AASB).

AASB, 2014. AASB 140 Investment Property. s.l.:Australian Accounting Standards Board(AASB).

AASB, 2014. AASB 141: Agriculture. s.l.:Australian Accounting Standards Board (AASB).

AASB, 2014. AASB 7: Financial Instruments: Disclosures. s.l.:Australian AccountingStandards Board (AASB).

Altium Limited, 2014. Annual Report, s.l.: Altium Limited.

Barlev, B. & Haddad, J. R., 2007. Harmonization, comparability, and fair value accounting.Journal of Accounting, Auditing & Finance , 22(3), pp. 493-509.

Bies, S. S., 2005. Fair value accounting. Fed. Res. Bull., Volume 91, p. 26.

Fortin, S., 2005. Relevant and reliable. CA Magazine. Toronto, 138(2).

IFRS, 2013. IFRS 13 Fair Value Measurement. s.l.:International Financial ReportingStandards Foundation.

Landsman, W. R., 2007. Is fair value accounting information relevant and reliable? Evidencefrom capital market research. Accounting and Business Research, 37(sup1), pp. 19-30.

Shortridge, R. T., Amanda, S. & Wagoner, E., 2006. Fair Value Accounting. The CPAJournal, 76(4).

Tyson, T., 2011. The convergence of IFRS and US GAAP. The CPA Journal, 81(6), pp. 26-31.

Whittington, G., 2008. Harmonisation or discord? The critical role of the IASB conceptualframework review. ournal of Accounting and Public Policy, 27(6), pp. 495-502.

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Appendix A

Relevant Notes to the Accounts of Altium Limited 2014 Annual Report

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Question

ACCT19062 - Term 3, 2014Assessment 2: Assignment Template and Guidelines

Student name ………………… ID………………

Components of the report GuidelinesExecutive summary Introduce the purpose of this report here

State the methods/steps (how you proceeded)Indicate key findingsNo need for separate introduction after exc summary

Response to req 1 Give a title. Refer to relevant accountingstandards:IFRS/AASB 13

Response to req 2 Give a title. Visit web sites of AASB, FASB and IASBSearch journal articles

Response to req 3 Give a title. Refer to AASB 13 and the relevantaccounting standards (eg., a/standards forintangibles, financial instruments, and Property, plant& equipment)Search journal articles

Response to req 4 Give a title. See what were the fair value practices inthe collapse companies like Enron, HIH, etc.Search journal articlesDemonstrate your critical thinking

Response to req 5 Give a title. Download an annual report (financialstatements) from ASX 300 (Annual report as on 31Dec 2013 or as on any date in 2014)Examine fair value reporting practicesPrepare in index of FV measurement & disclosurepracticesSee general accounting principles and those forintangibles, financial instruments, and Property, plant& equipmentProvide your opinion as to FV practices

Conclusions and suggestions Provide what was the purpose, what did you find indetails and what you would like to recommend orsuggest

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References Provide a list of references hereInclude references to at least four academic refereedjournal articlesInclude references to the accounting standards Donot include any reference that has not been used inthe text of the reportFollow Harvard referencing guidelines – link isavailable on moodle

Appendix Attach relevant pages from financial statements(notes to the accounts) of the selected company.

Note:This assignment requires lots of reading and critical thinking. If you wait for the last twoweeks to read and write this assignment, you may not be able to write a quality report.

acct19062 - term 3, 2014

Economy & Finance

inregular reporting

australian equivalent

profit organisations

australian contexts

reporting necessitiesof

paras aus4

fact aasb

followingthe aasb