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Asset Revaluations And Earnings Management

  0 Downloads   |   6 Pages 1,276 Words   |   Published Date: 28/12/2017

Question:

Discuss about the Asset Revaluations and Earnings Management.
 
 

Answer:

Introduction:

The revaluations of the fixed assets are done to depict the true value of the assets and the company decides to revalue their non-current assets because they provide relevant information to the users of the financial statements. The company revaluing their assets needs to ensure that the revaluation is been done with sufficient regularity so that there is not nay material difference between the carrying value and the fair value. The company considers the frequency of changes in the fair value of the non-current assets when deciding to revalue those (Cho et al., 2015). If there is a volatile change in the fair value of the non-current assets then the revaluation is done on the annual basis.

Several other factors forms the basis of the revaluation is when the non-current assets have appreciated considerably and is shown the fair market value of the assets. The company needs to revalue its non-current assets when it is planning to take loan from the financial institution by mortgaging them. The company is able to solve the difficulties of generating cash flows by revaluating the assets. The company seeking the capital does the true rate of return on the capital generated by revaluing the assets and this and this information would be vital to the investors (Derun, 2013). In addition to this, the company is able to negotiate the true and fair value of the non-current assets in the case of merger or acquisitions by revaluation.  The two organizations selected form the ASX is the BHP Billiton and Rio Tinto Limited.

The BHP Billiton Ltd revalues its non-current assets after carrying out formal impairment tests for all the assets that is non-current and this is done when there is an indication of such impairment. The company monitors several external factors before revaluing the assets. The factors such as the changes in the expected future prices, market factors and other related costs are monitored in order to assess the indication of the revaluation. The company conducts the internal reviews of the assets annually. The information generated by this is used to assess the revaluation of the assets. The recoverable amount is asset is estimated if there is an existence of such indications. If there is an existence of any existence of the revaluation of the assets then the recoverable amount of assets is calculated and this is calculated by taking the higher of the fair value and the then deducting the direct cost of disposal and the value of asset in use. If the recoverable amount of assets is more than the value of the asset in use, then the assets are revalued. If there is any loss arising from the revaluation then that is charged in the income of statement so that the carrying amount is reduced to the recoverable amount to be treated in the balance sheet (Hu, et al., 2015).

The assessments of the revaluation of the non-current assets are based on assumptions and few ranges of estimates. There is an estimate of the future production and the basis of the future production is based on the probable and proved reserves, expansion of any projects, and estimates of the resources. The commodity prices are estimated on the basis of the contract prices and the forward market and estimates of the price protocol of the longer term. The revaluation is also based on the discount rate to be estimated from the cost of capital which is adjusted to the resources and on the exchange rates that is base on the forward and the current market exchange rates (Wali, 2015).

The company determines the fair value of the assets by estimating the amount of the sale of the assets. The mineral assets of the company are determined by estimating the present value of the future cash flow that would arise from the continuous use of the assets. This would involve any disposal of assets, prospects of the future expansion. The company arrives at the net present value of the assets by discounting at the appropriate rate. When the calculations for the revaluation of the assets are performed then the assets are referred to as the cash generating units and are considered as the collective groups. These units, which generate cash, are the identifiable group of liabilities, assets and it also include goodwill that would generate the cash flows, and these are independent of any other group of assets (BHP Billiton.com, 2016).

 

The revaluation of the non-current assets of the Rio Tinto limited is independent from the cash generated from any other current assets. The company revalues its goodwill and other intangible assets regardless of any need of being revalued. If the company has an indication that the carrying value or the amount of the non-current assets such as plant and equipment are not recoverable then the internal review of the value of these assets are conducted which acts as a source of information for the revaluation of these assets (Annual report 2015 - Rio Tinto, 2016).

The company when revaluing the assets considers several other factors. The market price of the mineral assets, costs and the future price of the commodities are considered so as to monitor the need for impairment. The forecasting of the price of the ore reserves is generally consistent with the forecasting done for the assessment of the revaluation. The observable input is used to measure the recoverable amount. The mine plan of the company takes into account all the characteristics of the ore body such as haul distances, waste to ore ratios, chemical properties of ore, which would affect the process of the amount to be recovered. The long term plan of production and the life of mine would form the basis of the forecasting of the prices which is also one of the factors leading to the revaluation of the non-current assets (Yao et al., 2015).

The two companies have based their revaluation of their non-current assets using several factors, which are internal as well as external to their operation. The internal factors indicating the need of revaluation comes from the reviewing of the need for the impairment. The review of the value of the non-current assets are done annually and this is used as the information source to revalue. However, the factors which are external to the company and indicating the need for revaluation is assessed by forecasting about the future prices and by considering the costs and the market factors. All the external factors are analyzed by the company which form the basis of revaluation

 

Reference:

Bhpbilliton.com. (2016).  Retrieved 11 September 2016, from http://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.
 
Annual report 2015 - Rio Tinto. (2016).Riotinto.com. Retrieved 11 September 2016, from http://www.riotinto.com/investors/annual-report-2015-16577.aspx

Cho, H., Chung, J. R., & Kim, Y. J. (2015). Asset Revaluation and External Financing: Evidence from Australia. Available at SSRN 2557978.

Choi, T. H., Pae, J., Park, S., & Song, Y. (2013). Asset revaluations: motives and choice of items to revalue. Asia-Pacific Journal of Accounting & Economics, 20(2), 144-171.

Derun, I. (2013). Ways for Accounting Policy Improvement of Non-current Assets at Industrial Enterprises (by Ferroconcrete Structures Plant Example). Accounting and Finance, (4), 24-31.

Hu, F., Percy, M., & Yao, D. (2015). Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), 930-939.

Wali, S. (2015). Mechanisms fixed asset revaluation. International Journal of Accounting and Finance, 5(1), 82-97.

Yao, D. F. T., Percy, M., & Hu, F. (2015). Fair value accounting for non-current assets and audit fees: evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), 31-45.

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