Reference no: EM131210014

Assignment

This assessment item assesses the following learning outcomes:

Higher Order Thinking Skills (HO)

2.1 Critically investigate real world business issues and problems drawing on analysis, evaluation and synthesis of discipline knowledge, including theory and practice.

2.2 Exercise creativity and intellectual independence and make informed decisions and judgements in planning, designing, and executing strategic and research-based responses to address real world issues and problems.

Professional Communication (PC)

3.1 Use information literacy skills and communicate effectively and professionally in written forms and using media appropriate for diverse purposes, contexts and audiences.

Social, Ethical & Global Understanding (SE)

5.1 Demonstrate and apply knowledge of ethical and legal principles and practices of business in critically analysing and effectively responding to complex business issues.

5.2 Demonstrate and apply knowledge of socially responsible behaviour in analysing and addressing business issues and critically reflect on the responsibilities and impacts of organisations in national and international business contexts.

Late assessment policy

We will not mark assessment submitted after the due date and time without a preapproved extension i.e. will receive a mark of zero. If special circumstances prevent you from meeting the assessment submission deadline, you can apply for an extension. If you don't have an approved extension you should submit the work you have completed by the submission deadline and it will be marked against the assessment criteria.

Research Paper Background Information

Given the growing complexity of the economic world and the development and globalisation of financial markets, accounting standard setters have gradually extended the use of fair value accounting. Since the adoption of International Accounting Standards, the concept of fair value has become more predominant in the two key accounting standard setting bodies (FASB and IASB). There has been a heated debate on the merits of fair value. Moreover, since the global financial crisis, the controversy has intensified. Managers of banks and insurance firms, along with credit rating agencies and hedge funds, have asserted that the use of fair value accounting may have had a procyclical effect which caused or exaggerated the global financial crisis.

An example of the adoption of fair value accounting is AASB 116 Property, Plant and Equipment. In Australia, the manager of a firm has discretion whether or not to revalue non- current assets. Asset revaluation refers to the act of recognising a reassessment of the carrying amount of a non-current asset to its fair value as at a particular date. According to AASB 116, revaluations of non-current assets can be made on the basis of valuations made by directors or by independent valuers. Based on the accounting rules for asset revaluations listed above, managers are not indifferent to how and when they revalue their firms' assets.

In financial year 2013 and 2014 the QLD Nickel Group reported losses and declining net assets. In financial year 2015, Clive Palmer returned his Nickel business to profitability and a much stronger asset position. The auditors (EY) issued a clean audit opinion, however the financial statements were for use of management (SPFS). On 18 January 2016 administrators were appointed pursuant to Section 436A of the Corporations Act 2001. The Queensland Nickel Group financial statements disclose the following:

The net asset position of the Group has been reported to significantly improve in 30 June 2015 to $1.95M from $0.56M from 30 June 2014. The material changes between these periods relate to the following Balance Sheet movements:

Revaluation of the Joint Venture Group property, plant and equipment from a ‘cost model' to a ‘revaluation model', where the assets were recorded at their ‘fair value' based on a discounted cash flow model (both allowed under Australian Accounting Standards Board (AASB) 116). The result of this adjustment for financial year 2015 is that the value of property, plant and equipment (net of accumulated depreciation) increased from $0.5M to $2.15B and the Joint Venture recorded an increase in pre-tax profits by $0.6M, whilst the remainder was recorded in the Joint Venture's revaluation reserve (an equity account).

Instructions and requirements:

Provide a comprehensive analysis of accounting issues for QLD Nickel Group. Your research report MUST cover the three questions below. Use references to support your arguments.

Part A: Review and discuss the existing accounting literature on the arguments for and against the use of fair value accounting. Hint: Consider whether the qualitative characteristics of financial reporting such as relevance, reliability, verifiability, timeliness and comparability might be applied to require or permit (or, possibly, to prohibit) fair value measurement.

Part B: Discuss possible motivations of QLD Nickel Group for the change of policy from the cost model to the revaluation model. You should apply appropriate theories (for example, agency theory or efficient contracting theory) to justify your discussions. Research findings from the literature must also be included to support your arguments.

Part C: Do you believe that fair value accounting plays an important role in the recent financial crisis? Also, do you agree that there are the implementation problems with fair value accounting standards?