Introduction to Valuing Assets
Valuing assets were described earlier that, while ready the statement of financial position, the historic cost convention is generally applied for the reporting of assets. Though, this point needs further elaboration like in practice, it is not just a matter of recording every asset on the statement of financial position at its original cost. We shall observe that things are a little more difficult than this. Before describing the valuation rules in detail, though, we should indicate that these rules are based on international accounting standards that are rules that are usually accepted throughout much of the world.
Tangible non-current assets (property, plant and equipment)
Tangible non-current assets generally contain property, plant and equipment. We shall consider to them in this way from now on. This is a broad term that involves items like land and buildings, motor vehicles and fixtures and fittings. Basically, all of these items are the 'tools' employed through the business to produce wealth, i.e. they are employed to generate or supply goods and services or for administration reasons. They are apt to be held for the longer term that means for more than one accounting period. Primarily these items are recorded at their historic cost that will involve any amounts spent on getting them prepared for use. Though, they will generally be employed over time as a result of wear and tear, obsolescence and so on. The amount that is used up, which is considered as depreciation, must be calculated for each accounting period for which the assets are held. The total depreciation which has accumulated over the period ever since the asset was obtained must be deducted from its cost. This net figure (i.e. the cost of the asset less the total depreciation to date) is considered as the carrying amount, net book value, or written down value. The technique just explained is not really a contravention of the historic cost convention. It is just recognition of the fact that a proportion of the historic cost of the non-current asset has been consumed in the process of generating advantages for the business.
Even though by using historic cost (less any depreciation) is the 'benchmark treatment' for recording these assets, a substitute is allowed. Property, plant and equipment can be recorded by using fair values given that these values can be measured reliably. In this case, the fair values are the current market values (i.e. the exchange values in an arm's-length transaction). The employ of fair values, than depreciated cost figures, can give users with more up-to-date information that might well be more appropriate to their needs. It might also place the business in a better light, as assets like property might have get increased considerably in value over time. Certainly, increasing the statement of financial position value of an asset does not compose that asset more useful.
Though, perceptions of the business might be altered through such a move. One result of revaluing non-current assets is that the depreciation charge will be raised. This is as the depreciation charge is based on the raised value of the asset.
Intangible non-current assets
Once again for these assets the 'benchmark treatment' is that they are measured primarily at historic cost. Though what follows will rely on whether the asset has a finite or an infinite useful life. (Purchased goodwill is an instance of an asset that could have a much helpful life, although the life of purchased goodwill can be limited.)
In which the asset has a finite life, any amortisation that has arisen because it was obtained will be deducted from its cost. Though, in which the asset has an infinite life, it will not be amortised. In its place, it will be tested yearly to see whether there has been any fall in value. Again, the substitute of revaluing intangible assets using fair values is presented. Though, this can only be employed where an active market exists that permits fair values to be properly determined. Actually, this is a rare occurrence.
The impairment of non-current assets
There is all the time a risk that both of the two types of non-current asset (tangible and intangible) might suffer a considerable fall in value. This may be because of factors like changes in technological obsolescence, market conditions, and so on. In several cases, this fall in value might lead to the carrying amount, or net book value, of the asset being greater than the amount that could be recovered from the asset by its continued use or by its sale. While this takes place, the asset value is said to be impaired and the general rule is to decrease the value on the statement of financial position to the recoverable amount. Except this is done, the asset value will be overstated. This kind of impairment in value should not be confused with routine depreciation that are arising from, say, wear and tear because of normal usage.
It is not only non-current assets which run the risk of a considerable fall in value. The inventories of a business could also undergo this fate that could be caused through the factors like reduced selling prices, deterioration, obsolescence, damage and so on. In which a fall in value means that the amount probable to be recovered from the sale of the inventories will be lesser than their cost, this loss must be imitated in the statement of financial position. So, if the net realisable value (i.e., selling price less any selling costs) falls lower the historic cost of inventories held, the former should be emplyed as the basis of valuation. Once again, this imitates the affect of the prudence convention on the statement of financial position.
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