Problem
Based on the below given information calculate the fair value, unrealised gain/(loss) of each asset and the relevant accounting entries for the unrealised profit/(loss) in the financial statement. Clearly state any assumptions you make about the preferred measurement basis.
The directors of FV ltd, a newly established company, have decided to comply with IFRS 13 Fair Value Measurement in preparing financial statements for the financial year ending 31 December 2019. The following extract from its records shows a list of assets that needs to be reported at their fair values:
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Asset name
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Book values at 31 December 2019
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Machine
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£2,200,000
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Long-term investments
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£750,000
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Trading investments
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£208,000
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Intangible assets
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£15,000
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The company's finance director has presented the following additional information that could be used to estimate fair values of the assets:
A. The machine was bought on 10 January 2019 for £2,600,000. The machine is depreciated on a straight-line basis over its useful economic life, which was estimated to be six years at the date of its purchase. The machine is expected to generate £500,000 cash flows each year during the remaining period of its useful life. It is estimated that at the end of its useful life the machine will have a residual value of £200,000. The company's cost of capital is 10% per annum. Currently, there is no active market for used (second-hand) machines but the company was able to obtain useful information about the market prices of similar machines from other active markets at £2,000,000.
B. Long-term investments relate to the acquisition cost of the company's investment in HCA plc. The company acquired 50% ordinary shares in HCA plc at the beginning of its accounting period. HCA plc has 1 million shares in issue in total and the remaining shares were being traded in an open market at £1.25 each on 31 December 2019. The company has no intention selling them in the near future.
C. Trading investments consist of 4000 shares of CFA plc. These were purchased on 30 July 2019 for £52 per share. The shares were classified as trading securities. They were being traded in an open market at £60 each at 31 December 2019.
D. Intangible assets consist of specialised computer software. No market price information was available, as there is no active market for such software. However, there is an active market for comparable products with similar characteristics. Using quoted prices for such analogous products, the company estimated that the software had a replacement cost of £12,000 at 31 December 2019.