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  • Explain the principles of valuation and impairment of assets as prescribed by the IASB with particular focus on valuation of intangible assets and those assets that do not have established market values. Examine the application DCF techniques in valuation

Explain the principles of valuation and impairment of assets as prescribed by the IASB with particular focus on valuation of intangible assets and those assets that do not have established market values. Examine the application DCF techniques in valuation Essay Example

Assets are measured by its fair value as stipulated by current AASB 13 issued after amendment from previous standard that recognize value of the asset to be an arm length transaction. Fair value valuation involve measurement of asset as per time taking into consideration all factors affecting the asset. The purpose of the standard put in place for valuation of asset is to define fair value, provide guideline in valuation and requirement for full disclosure for the assumption and consideration taken in arriving at the fair value of the asset valued (Paton, W.A. and Littleton, A.C. 1940).

Four steps AASB 13 recognized in determination of fair value of the assets

  • Determination of the asset that wants to be measured

They are two types of assets that is tangible asset that include business buildings, machinery and vehicles and intangible assets which include trademark, goodwill and patent. This assets require different modes of valuation and therefore, it is necessary to distinguish and determine all the factors that is associated to the asset determined before carrying out any valuation since each category requires its own special treatments (Geoffrey Whittington.2008).

  • Gathering evidence to be used in valuation of the asset

Fair value of the assets can be determined in two ways that is when combined with other assets and liabilities in order to gauge overall effect of the assets though it is sold as an individual asset it is necessary to determine its effects on the overall company performance when used with other assets and liabilities in order to arrive at a suitable value so as to avoid duplication of resources or contingencies that will reduce performance capacity of the valued asset. Secondly, assets can be valued alone without taking consideration of the effects that might have on existing asset of the market participant, this method is favorable when the asset is independent. This step is crucial to market player since it avoid issues overvaluation or undervaluation of the asset in the market which is one of the weakness of the previous standard. (Geoffrey Whittington.2008).

  • Determination of the best market value of the asset

This involves determination of the cost benefit of the asset and it takes into consideration the principal market value of the asset with respect to expected cash flow to be derived from purchase of such asset. Secondly, the company will take into consideration other factors that are attached to the acquisition of the asset in order to benefit from purchase this factors include after sale services such as transportation, legal cost and installation cost. The above is taken into consideration in arriving at the best fair value of valuation of an asset (Geoffrey Whittington.2008).

  • Determination of valuation technique

This involves arriving at the monetary value of the asset at prevailing market condition, they are three approaches and each approach is suitable to a given category of asset. This approaches includes, Market based approach where fair value of the asset is arrived at by basing prices with that of companies in the industry it is best measure of valuing owner equity or sell of shares and rights in the company. Secondly, cost approach where the company determines the price of the asset by determination of the cost incurred in production or maintenance. Thirdly, income approach where fair value is based on the company net income this approach favors valuation of company shares, goodwill and patent rights of the company. Market approach and income approach plays a great role in determination of intangible assets and those asset that don’t have established market value since the fair value of the asset is determined by basing the value on other factors that are closely related (Geoffrey Whittington.2008).

According to IASB38(24, 118), intangible asset are measured on its cost as per the date of acquisition and the inflows are adjusted using a probability distribution due to its uncertainty in order to determine cost-effectiveness of acquisition before purchase, the standard guide in both separate acquisition and business combination. It also requirement to disclose all the data related to the asset (Geoffrey Whittington.2008).

IFRS3 (59, 61) standard was put in place to guide companies in combination where it is a requirement for the acquirer to disclose all the information concerning the asset both during reporting and current financial year stating the nature and effect attached to the asset. Consequently, contingencies must be disclosed and adjusted appropriately before acquisition to avoid transfer of risk to acquirer without his consent (Paton, W.A. and Littleton, A.C. 1940).

Application of DCF techniques

The model presumes that to come up with true value that reflects present value of the expected cash flow we discount estimated cash inflows and compare it proposed price of the asset and do necessary adjustments to arrive at suitable fair value of the asset. Discounted cash flow is calculated as follows,

DCF =
Explain the principles of valuation and impairment of assets as prescribed by the IASB with particular focus on valuation of intangible assets and those assets that do not have established market values. Examine the application DCF techniques in valuation

The above model is important in determination of impairment of the asset (Carrying amount > Recoverable amount) as stipulated by AASB 136 since company can evaluate the benefit of the asset periodically and dispose it the time where cash flow is uneconomical due to obsolescence due to technological advancement, reduction of demand and changes in interest rate. Therefore, enabling the company to shield itself from holding asset with high operating cost than cash inflows that might affect valuation of other intangible assets.Impairment of the goodwill or any other intangible asset is required to be recorded in the income statement as per the period incurred according to IASB 136 (Holthausen, B. and Watts, R .2001).

The above standard does not solve controversial issues of the goodwill since most of the organizations use different accounting policies which result to dissimilar goodwill values thus one will take advantage over another. Secondly, determination of the asset value is much based on the management therefore, computation of goodwill using weighed average cost will be a reflection of the mangers competence and intentions but not true value (Pashang, H. and Fihn, G. 2010).

REFERENCE

Pashang, H. and Fihn, G. 2010. Towards a Valuation Theory of Intangible Assets. Journal of International Management Studies.

Holthausen, B. and Watts, R .2001. The Relevance of Value Relevance and Disclosure for Financial Accounting Standard Setting. Journal of Accounting and Economics.

Seetharaman, A., Balachandran, M. and Saravanan, A.S. 2004. Accounting treatment of goodwill: yesterday, today and tomorrow. Journal of Intellectual Capital

Paton, W.A. and Littleton, A.C. 1940. An Introduction to Corporate Accounting Standards, American Accounting Association.Riahi-Belkaoui.

Geoffrey Whittington.2008. Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View http://ritholtz.com/blog/wp-content/uploads/2009/01/whittington-two-world-views-2008.pdfRetrieved 18 April 2014.