Week04_Practice_Question_Solutions - Week 4 Practice...

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Week 4 Practice Questions 9.2 How do we measure an asset’s recoverable amount under AASB 136? Under AASB 136 recoverable amount of an asset or cash generating unit is defined as: … the higher of its fair value, less costs, to sell and its value in use. Where value in use (ViU) and fair value less costs to sell (net FV) are defined respectively as: … the present value of the future cash flows expected to be derived from an asset or cash-generating unit. … the amount obtainable from the sale of an asset or cash-generating unit in an arms length transaction between knowledgeable, willing parties, less the costs of disposal. Thus we do not always use the same measure for recoverable amount. In most cases it is likely to be the ViU, as it will usually be greater than net FV. 9.3 Explain the difference between determining a non-current asset’s recoverable amount under AASB 136 and an asset revaluation under AASB 116. Under AASB 116 non-current assets comprising property, plant and equipment are initially recognised at their cost (AASB 116.7). Subsequently they are recognised by adopting either the cost model or the revaluation model; this selection is made on a class-by-class basis. An asset revaluation under AASB 116 When the revaluation model is adopted for a class of property, plant and equipment, the carrying amount (CA) of each asset within the class must not be materially different from its reporting date FV. If the CA of an asset is materially different from its FV, then it and all other assets in the class must be remeasured and reported at its FV; thus reporting date FV = reporting date CA. As we explain on pages 199–200, FV is an exit value (exit values are discussed in chapter 3). The subsequently withdrawn Australian implementation guidance (former AASB 116.G1 to G5) on obtaining a measure of FV is still, in our view, relevant to the determination of FV amounts. 1 The amount reflects an orderly sale after adequate 1 On page 199 we observed that the Australian guidance was removed to implement the decision (unfortunate, in our view) by the AASB to remove differences (other than those due to Australian regulatory framework
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marketing, and must reflect the assets’ ‘highest and best use’. An active and liquid market provides the best measure of FV; if there is no such market for a particular asset we can look to prices of assets that are ‘similar in use, type or condition’. If a reliable exit value cannot be determined, the best estimate of FV will be the market buying price, the best indicator of which is ‘depreciated replacement cost or an income approach’ (see AASB 116.33 and former G5).’ No indication is given of what the income approach is; we suspect it involves some form of NPV calculation. IASB ED 2009-9: Fair Value Measurement, issued in May 2009 proposes detailed guidance on how fair values are to be determined. While considerably more detailed, it is consistent with the now withdrawn Australian guidance.
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This note was uploaded on 10/25/2011 for the course ACCT 5942 taught by Professor Diane during the Three '11 term at University of New South Wales.

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Week04_Practice_Question_Solutions - Week 4 Practice...

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