Reference no: EM131002952 , Length: 500 Words
Case study
The following is an extract from Cain (2013), Fair value continues to captivate. Charter July 2013.
Anne Lockwood FCA, audit partner with accounting firm Crowe Horwath, says one of the main problems with fair value is that too much judgement is involved in its use.
‘Lots of judgement goes into determining fair value. The volatile global economy causes fair value to continually move. So it’s very confusing to report against,’ says Lockwood.
The way fair value requires unrealised gains and losses to be treated does not necessarily reflect what an asset means to a business. ‘Financial institutions use fair value to value financial instruments as part of everyday business. But when it comes to valuing property, plant and equipment, you get swings and roundabouts and changing valuations. On top of this there are inconsistencies in the way individual businesses use fair value to account for plant and equipment, which is a problem,’ she adds.
Lockwood explains that AASB 13 directs financial account preparers to use the market price of an asset, taking into account the highest and best use of an asset to determine fair value. But this poses problems for not-for-profit groups.
‘If you take the example of an aged care home, if you knocked it down to build a block of flats, which might be the highest and best use, you are going to get an inflated figure because no-one’s going to knock it down because it’s being used for altruistic purposes. So you might carry a value of $10 million for the asset in the accounts, but this value isn’t realistic to the entity or the users of the financial statements because there is no intention by the organisation to realise the value of the asset determined under a highest and best use scenario.’ The problem is this inflation of asset valuations, especially for not-for-profits, makes valuations more complex and requires accountants to use too much judgement when applying fair value.
Required
Discuss the highest and best use principle and the relevance of the information provided by its application to the aged care home.
BFA 201 FINANCIAL ACCOUNTING
LENGTH: 500 words The word count includes in-text references. It does not include the reference list at the end of the document.
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: Discuss the highest and best use principle and the relevance of the information provided by its application to the aged care home.
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