Q1
Alexandra Cain (2013) noted the comments made by Simon Dalgamo in relation to the application of the fair value accounting standard.
Simon Dalgarno FCA, a director of valuation at Leadenhall Corporate Advisory, supports the new standards but says there needs to be more education around how to calculate fair value. He says one problem with fair value is different ways people use the term, and has identified a number of different definitions for the term. These are: fair value as used for the purposes of accounting standards, fair market value as commonly used in the ATO's definition of market value, and finally, the term fair market value as used by courts.
‘Leaving aside the way the courts use the term fair value, in the early versions of the international accounting standards there is no reference to the market,' Dalgarno says, adding that now the term is now defined as an exit price.
From an accounting perspective, how should the shares be valued? Should they be valued at the depressed price the shares were worth on 30 June ($0.70 cents), or should they be valued at $1, the price they reached in the days preceding and subsequent to 30 June? Dalgarno says although many people say the fair value should be $1, under AASB 13 fair value is the exit price on 30 June ($0.70 cents), with no room for smoothing of the price. The principle that fair value should be the exit price on the day of the end of the accounting period has caused volatility in the valuation of assets in financial statements.
‘The effect is that bad operating results are made to look worse due to the write down in values and, in following years, if the operating results have improved, they can be made to look better by the write up in assets, which can sometimes happen. If the market doesn't understand the reason behind the volatility, the news that asset values have changed may confuse investors and cause share price fluctuations,' Dalgarno says.
He says investors can look through the accounts to the underlying profit or loss figure, but ASIC discourages this practice. Otherwise, there's a tendency for companies to choose a result that produces the lowest negative information and the greatest profit. ‘I certainly don't think the average person would understand this complexity,' he says.
Required
1. In what different ways is the term "fair value" used and which AASB seeks to resolve this and how?
2. How should the shares mentioned above be valued at 30 June and why should markets understand the reasons for doing so?
3. Can companies choose a result that produces the lowest negative information and the greatest profit? Explain how and how users of financial statements can assess such actions.
Q2 Journal entries so no word limit applies
Mergers and acquisitions are common in the business world and many accounting issues must be addressed when they occur.
On July 1st, 2015, Benson Ltd's total assets and liabilities were acquired by Hedges Ltd. Benson's great attraction for Hedges was its air filter division, which Hedges believed would complement its own. The Benson air filter division was only part of the total business acquired and is regarded as a CGU.
Hedges Ltd's acquisition price was $2 million for the net assets of Benson Ltd, of which Hedges calculated that it had acquired goodwill of $240 000. The goodwill was allocated to each of the divisions, and the assets and liabilities acquired measured at fair value at acquisition date.
At 30 June 2018, the carrying amounts of the assets of the air filter division were:
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Factory
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$250 000
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Inventories
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150 000
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Brand - 'Breathe E- Z'
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50 000
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Goodwill
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50 000
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New technology has seen a decrease in the value of the ‘Breathe E-Z" filters, which has seen Hedges Ltd revalue the air filter division down to $465 000 as at 30 June 2018.
Required
1. Prepare the journal entries to account for the impairment loss at 30 June 2018.
2. Prepare the journal entries as above but now assuming the value in use of the air filter business 30 June 2018 was determined to be $423 000. (Please show your workings.)
Q3
Explain the difference between ‘research' and ‘development' in relation to intangible assets? When can development outlays for intangible assets can be capitalised?
Q4 Journal entries and calculations so no word limit applies
Accounting for defined benefit superannuation plans
Connor Holdings Ltd (CHL) is a sports management company based in Sydney NSW, which specialises in the management of emerging golfers in Australia. CHL has a superannuation plan for its agents and uses the defined benefit model.
CHL provides the following information on the defined benefit plan.
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2017
$
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Present value of the defined benefit obligation 1 July 2016
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10 000 000
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Fair value of plan assets 1 July 2016
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9 500 000
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Current service cost
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1 150 000
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Contributions paid by CHL to the fund during the year
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1 000 000
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Benefits paid by the fund during the year
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1 200 000
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Present value of the defined benefit obligation 30 June 2017
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10 750 000
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Fair value of plan assets at 30 June 2017
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10 047 500
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Additional information
(a) No past service costs were incurred during the year ended 30 June 2017.
(b) The interest rate used to measure the present value of defined benefits at 30 June 2016 was 9%.
(c) The interest rate used to measure the present value of defined benefits at 30 June 2017 was 10%.
(d) There was an actuarial gain pertaining to the present value of the defined benefit obligation as a result of an increase in the interest rate.
(e) The only re-measurement affecting the fair value of plan assets is the return on plan assets.
(f) The asset ceiling was nil at 30 June 2016 and 30 June 2017.
(g) All contributions received by the funds were paid by CHL. Employees make no contributions.
Required
1. Calculate the surplus or deficit of CHL's defined benefit plan at 30 June 2017.
2. Calculate the net defined benefit asset or liability that should be recognised by CHL at 30 June 2017.
3. Determine the net interest for the year ended 30 June 2017.
4. Determine the actuarial gain or loss for the defined benefit obligation for the year ended 30 June 2017.
5. Calculate the return on plan assets, excluding any amount recognised in net interest, for the year ended 30 June 2017.
6. Present a reconciliation of the opening balance to the closing balance of the net defined benefit liability (asset), showing separate reconciliations for plan assets and the present value of the defined benefit obligation.
7. Prepare a summary journal entry to account for the defined benefit superannuation plan in the books of CHL for the year ended 30 June 2017.
Referencing: Harvard