Cost model and revaluation model , Financial Econometrics


AASB 116 Property, Plant and Equipment allows entities to choose between the cost model and revaluation model for measuring and accounting for non-current assets subsequent to the initial recognition. This assignment requires students to analyse the effects of various requirements of AASB 116 on the relevance and reliability of financial reports.

Requirement 1 Maximum 1000words

(a) Briefly outline the factors likely to influence an entity in its choice between the revaluation model and cost model for measuring and accounting for non-current assets.

(b) Discuss AASB 116's rationale for offering entities a choice in measurement models, and analyse the pros and cons of this choice in terms of its potential effects on the relevance and reliability of financial reports.

Requirement 2 Maximum 1000 words

For firms that choose to measure non-current assets using the revaluation model, AASB 116 requires that fair values should be applied to items of property, plant and equipment on a class-by-class basis.

However, AASB 116 requires that accounting for revaluation increments and decrements are done on an individual or item-by-item basis within a class of assets. This inconsistency has been the subject of some debate.

(a) Briefly outline the issues in the debate between accounting practitioners and standard setters regarding the above-mentioned inconsistency about the measurement and accounting for revaluation increments and decrements under the revaluation model.

(b) What effects, if any, could accounting for revaluation increments and decrements on a classby- classbasis (rather than item-by-item basis as is required by AASB116) have on the relevance and reliability of financial reports? For each effect stated, provide reasons to justify your viewpoints.

Requirement 3 Maximum 500 words

Following Australia's adoption of IAS 16 that required firms to keep fair values continuously current, a study by Ernst & Young (2002) found that 40 % of firms surveyed reported a change in the measurement basis for one or more classes of assets. All firms that reported a change switched their measurement basis from fair value basis to cost basis, with none of the firms reporting a change from cost basis to a fair value basis.

(a) Briefly analyse factors that in your view explain the low adoption of the revaluation model for measurement by entities. Discuss (i) changes in AASB 116 that have been made since the Ernst and Young (2002) study and (ii) additional changes that could be made to increase the level of adoption of the revaluation model by entities.

Posted Date: 2/21/2013 2:24:14 AM | Location : United States

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