BFA 201 FINANCIAL ACCOUNTING Semester 1 2016
CASE STUDY: ASSESSMENT TASK 2 (Part 1)
INDIVIDUAL ASSIGNMENT – 10%
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.
Hints on how to approach your answer to this question is available on MyLO. See ‘Answering questions in BFA201’
Important details continued over the page:
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BFA 201 FINANCIAL ACCOUNTING Semester 1 2016
DUE DATE: 9am Friday, 18th March 2016
VALUE: 10%
TITLE: Fair value
LENGTH: 500 words
The word count includes in-text references.
It does not include the reference list at the end of the document.
Formatting requirements: Double line spacing; 12pt font; Substantial direct quotes
(i.e. 30 words) to be indented & use single line spacing;
Reference list on separate page; Margins: at least 3cm left & right; 2.5cm top & bottom; Use plain A4 paper. Write in 3rd person. Use Harvard referencing style.
Final Submission
Submit 1 electronic copy by due date, 18 March, AND bring 1 hard copy to the lecture on Monday, 21 March, for peer review.
Assessment criteria LO1; LO2; & LO3 (See Rubric on MyLO – available soon)
Please note: LO3 = work independently & cooperatively, therefore failure to participate in the peer review process will result in zero marks being awarded for that criterion.
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What does it mean to ‘discuss’?
Discuss Essentially this is a written debate where you are using your skill at reasoning, backed up by carefully selected evidence to make a case for and against an argument, or point out the advantages and disadvantages of a given context. Remember to arrive at a conclusion.
Source: http://www2.le.ac.uk/offices/ld/resources/writing/writing-resources/essay-terms
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