valuation technique used in a company. As I am graduating

Different methods of asset (Property, plant and equipment)valuation technique used in a company 1. Introduction For my assignment of professional project, I will be doing my research on Different methods of asset valuation technique used in a company. As I am graduating in professional accounting from CQ University and want to see myself as an accountant in big firm and topic being related to the field of my study and will help me by providing more experience for my future.As stated in Investopedia, (2017) “Asset Valuation is the process of assessing the value of a company, real property or any other item of worth, in particular assets that produce cash flows. Asset Valuation is commonly performed prior to the purchase or sale of an asset or prior to purchasing insurance for an asset. Asset valuation can be based on cash flows, comparable valuation metrics or transaction value.” Accounting treatment for Property, Plant and Equipment is outlined by Australian Accounting Standard Board (AASB) 116 where, it is initially measured at its cost, then valued either using ‘Cost model’ or ‘Revaluation model’ and depreciation is used to know the depreciable amount that will help to allocate its useful life (Deegan,2012). Globally, valuation of property is much popular this days compare to that of plant and equipment, even though 80% of company’s total assets is contributed by plant and equipment. Enterprises in a large extent bases valuates its market on property assets are managed by firms to enhance their contribution to create value (Kamiyama, et., al 2006). In some cases, firms can use cost method on some class and fair value method on other class of PPE. 2. Research Aim and Question The key aim this research is to know and explore different methods of asset valuation specially on plant, property and equipment which will help me to explore the importance ofvaluation. This reportsplanned research question are drawn below: – RQ1- Why certain valuation technique of plant, property and equipment is used? Is there any relation between using certain technique and industry in the business firm? RQ2- How company using certain valuation method are performing in the market? 3. Research Plan As we now know that valuation of PPE is based on two models historical model or revaluation model, my focus will be on knowing why companies use different methods. For this I will be providing 2 samples. First, I will select 20 different companies from different industries listed in Australia Stock Exchange and find out what percentage of level is used either in historical method or revaluation method. Secondly,10 different banks and companies from real estate sector will be taken. Since both industries works in same field in some extend property, So this can help to know which valuation method is used in both sector. Following is the Gantt chart presented will show how I will be completing my project: – Task Name Commencing date Terminating date Time taken (days) Project’s proposal 15/07/2017 20/07/2017 6 Collection of Data 20/07/2017 04/08/2017 16 Literature Review 05/08/2017 30/08/2017 26 Data Analysis 31/08/2017 19/09/2017 20 Final submission of Report 20/09/2017 02/10/2017 13 4. Literature Review Every company prepares company’s annual report for which Property,Plant and Equipment valuation is important. PPEare specified as non-current assets and is accounted on two methods, either Historical Cost or Fair-value cost or Revaluation basis. As stated by IAS 16.6, (2017) property, plant and equipment are tangible items that should meet two criteria, properties should be owned by a company either for the use of production of goods or to supply services and for any other purpose like renting and should be used during the time frame of more than one period. History of Valuation In between 1940s to 1970sHistorical Cost accounting HCA was normally used for accounting measurement (Georgiou and Jack, 2011). As Power (2010) stated that idea of fair value came in 1980s as allocation of entry of assets values that were acquired. A huge hole was found between net book value and the market capitalization by the using cost method. Before the recession of 2007, Fair value method undoubtedly had a meaning in financial accounting(Power, 2010). AlthoughFair Value method is legitimized, time and frequently being underestimated (Georgiou and Jack, 2011). Historical Cost and Revaluation Model Deegan (2012) suggest that paragraph 30 of AASB 116 property, plant and equipment after the asset is identified, it can carry the asset cost in which accumulated depreciation and impairment losses is deducted. Similarly, AASB 116 property, plant and equipment paragraph 31 is like IFRS (International Financial Reporting Standard) principle of “true and fair view” and signifies mark to market approach. So, revaluation amount of property is carried out as its fair value is result of deducting successive accumulated depreciation and successive impairment losses (Deegan, 2012). Significantly, adequate regularity of revaluations is required to keep the value up to date. Also, sometime firm feels that the fair value method of asset valuation is not suitable for the business and they want to roll back to using historical cost method which is permitted by AASB 116 only if financial information is relevant to change. Its only possible if enough disclosures for alteration in accounting policy are provided by company (Deegan, 2012). In a study of 228 companies listed in United Kingdom and Australia it was found that companies are not tempted to use Fair value method for its investment property, plant and equipment (Cairns et al., 2011). Due to lack of incentives most companies don’t prefer fair value method over historical cost method, it has high degree of use compared to fair value method (Christensen and Nikolaey, 2013). In a similar way, Barth and Landsman (2017) states that Fair value method comprise of three values – entry value, exit value and value in use, this makes the valuation not so well defined. Value estimation errors may occur in fair value since it is necessary to estimate value in fair value method. Barth et al., (1995) suggest that unpredictability is bigger in earning based on fair value than historical cost value as a research was done in banking sectors. When taking decision on valuation of Property, Plant and Equipment maker finds fair value method is relevant (Hermann et al., 2006). Even stock prices and revaluation of Property, Plant and Equipment are inter-related that helps to predict future earnings. Also, to have timely financial information fair value method gives restored response compared to that of historical cost. Historical cost model ignores or violates some characteristics like impartiality and correctness which are we can see in fair value method because doesn’t justify the depreciation and appreciation of market rate over time (Hermann et al., 2006). In fair value method asset, can be reported in more than one time frame so it is viewed as superior from consistency point of view. Barth (1994) suggest that securities gain and loss have more measurement error under fair value method to that of historical cost method.When investing in securities it seems fair value is more dependable and applicable but securities gain and loss doesn’t seem to be reliable and related. Assets either financial, tangible and intangible in nature are value related if revalued. Value that are related are strong for revaluation of assets like property, plant and equipment even though plant and equipment are operating assets and property is non-operating asset (Barth and Clinch, 1998). After investigating all we can say that both methods of valuation have its own importance. Because of various reasons, industry follow fair value method and other use historical cost method. It can also be said that some companies might prefer adapting both valuation methods but for just some class of assets. Methodology This report is entirely based on secondary data extracted from seco
ndary sources as it is an effective method of getting valid data (Silverman, 2016). Different articles, journals, company websites and ASX website will be taken into consideration to investigate different methods of asset valuation that is used in a company. Based on the topic relevant journals and articles will be selected. Conclusion To know about different methods of assets valuation on property plant and equipment is my focus on this research and some research questions are also drawn for which I must go in depth and show some research through standard deviation of Earning Per Share (EPS) and Dividend per Share (DPS) to know market performance of a company that will be given in my final assessment. As suggested by Barley and Haddad (2003) many companies prefer Historical cost method as fair value method is costly and has less benefits as it can be reaped out. Reference Barth, M., & Landsman, W. (2017). Fundamental issues related to using fair value accounting for Financial Reporting. Accounting Horizons, 9(4). Barth, M., Landsman, W., &Wahlen, J. (1995). Fair value accounting: Effects on banks’ earnings volatility, regulatory capital, and value of contractual cash flows. Journal of Banking and Finance, 19(3). Barth, M. (1994). Fair value accounting: Evidence from investment securities and the market valuation of banks. The Accounting Review, 69(1). Barth, M., & Clinch, G. (1998). Revalued financial, tangible, and intangible assets: Associations with share prices and non-market-based value estimates. Journal of Accounting Research, 36. Cairns, D., Massoudi, D., Taplin, R., &Tarca, A. (2011). IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia. The British Accounting Review, 43(1). Christensen, H., &Nikolaev, V. (2013). Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, 18(3). Deegan, C. (2012). Australian Financial Accounting (7th ed.). Sydney: McGraw-Hill Australia Pty Ltd. Georgiou, O., & Jack, L. (2011). In pursuit of legitimacy: A history behind fair value accounting. The British Accounting Review, 43(4). Herrmann, D., Saudagaran, S., & Thomas, W. (2006). The quality of fair value measures for property, plant and equipment. In Accounting Forum, 30(1). International Accounting Standards Board (IASB) (2010). International Accounting Standards 16- property, Plant and Equipment. London IASB Retrieved on 16th August 2017 from https://www.iasplus.com/en/standards/ias/ias16 Kamiyama, S., Sheehan, J., & Martinez, C. (2006). Valuation and Exploitation of Intellectual Property. OECD Directorate for Science, Technology and Industry, STI Working Paper 2006/5. Retrieved on 18th August 2017 from https://www.oecd.org/sti/sci-tech/37031481.pdf Power, M. (2010). Fair value accounting, financial economics and the transformation of reliability. Accounting and Business Research, 40(3). Silverman, D. (Ed.). (2016). Qualitative research. Sage. Spies, F F and Wilhelm D B (2005). A critical analysis of US real estate appraisal methods when used for financial reporting according to the international Financial Reporting Standards (IFRS). Conference paper presented at 11th Annual Conference of the PRRES 2005 Retrieved on 20th August 2017 from http://www.prres.net/Proceedings/..%5CPapers%5CSpies_A_Critical_Analysis_Of_Us_Real_Estate.Pdf

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