Posted: June 27th, 2015

The International Accounting and Standards Board require that the asset value in the balance sheet should have a correlation with the market value.

Controversies Surrounding Fair Value

Introduction

The International Accounting and Standards Board require that the asset value in the balance sheet should have a correlation with the market value. The term-impaired asset- is used to refer to an asset whose value in the market is less compared to the value listed in the company’s records. Such an asset must be written down to its market value. All asset accounts are susceptible to write downs, however, goodwill account, long-term assets account, and accounts receivables account are the most susceptible to write-downs (Gilman 2002). Asset impairment refers to a decline in the value of a company’s assets. The decline in a company’s assets may be because of technological obsolescence, physical damage to the asset or when the rules and regulations change that render such an asset irrelevant (Hill 1996). When an asset gets impaired, there are procedures followed to record the impairment in the books of account. These procedures vary from region to region. However, the IASB has a standard that explains the procedure to be followed while recognizing asset impairment in the books of account (Jones 2001). These procedures are made in conjunction with national accounting bodies such as the Australian Securities and Investment Commission (ASIC).

The share price of the company is determined by many factors. Such factors include the goodwill of the company, profitability, and the value of company’s assets and the level of government intervention in the securities market (Littleton 2007). As such asset impairment has an immense and usually negative effect on the share price of a company. In most cases, asset impairment reduces the value of assets. However, if the process of asset impairment is handled carefully and professionally, asset impairment cause an increase in the asset value (Hayes 1997). The market capitalization of a company is the product of a company’s share price with the number of shares offered. This determines the company’s value in securities markets. The share price of a company’s stocks is very important to any investor as it determines the value of his or her investment in that company. The market capitalization of the company across year 2009 to 2010 is compared with the value of their assets over the same period. The five companies under analysis are Qantas, Billabong, BlueScope Steel, Harvey Norman and Channel 10. Their end year reports for the years 2009 and 2009 will be used in order to give a better understanding of the term asset impairment. The standard that deals primarily with asset impairment will also be analyzed to great lengths in order to understand the topic fully.

Requirement 1:

Table 1: Book value/net asset value for Qantas, Billabong, BlueScope Steel, Harvey Norman and Channel 10 from beginning of 2009 to end of 2010

Company	End of 2008-2009	Middle of 2009-2010 year	End of 2009-10 year	Middle of 2010-2011	End of 2010-2011
Qantas	19,700	19,910	20,055	20,858	21,382
Billabong	1,020,781	1,109,078	1,181,180	1,495,161	1,514,196
BlueScope Steel	6, 184.9	6,468.5	6,711.1	7,793	7,600.9
Harvey Norman	2,858,748	3,065,970	3,103,125	3,178,829	3,593,211
Channel 10	1,086,907	1,304, 274	1,595,171	1,663,842	1,679,277

 

Figure 1: Book value/net asset value for Qantas, Billabong, BlueScope Steel, Harvey Norman and Channel 10 from beginning of 2009 to end of 2010

Table 2: Percentage change in the book value/net asset value for Qantas, Billabong, BlueScope Steel, Harvey Norman and Channel 10 from beginning of 2009 to end of 2010

Company	End of 2008-2009	Middle of 2009-2010 year	End of 2009-10 year	Middle of 2010-2011	End of 2010-2011
Qantas	–	1.05%	0.72%	3.85%	2.45%
Billabong	–	7.96%	6.10%	21.00%	1.26%
BlueScope Steel	–	4.38%	3.61%	13.88%	-2.53%
Harvey Norman	–	6.76%	1.20%	2.38%	11.54%
Channel 10	–	16.67%	18.24%%	4.13%	0.92%

 

Figure 2: Percentage change in the book value/net asset value for Qantas, Billabong, BlueScope Steel, Harvey Norman and Channel 10 from beginning of 2009 to end of 2010

From the above data and graphs, it is evident that Channel 10 has the highest rate of fluctuation. BlueScope Steel has the lowest level of fluctuation. The performance of Qantas, Billabong, BlueScope Steel and Harvey Norman increased over the years. Channel 10 experienced a decline in the middle of 2009-2010.

ANALYSIS SHARE MOVEMENTS AND MARKET CAPITALIZATION

Qantas is the leading airline in Australia with a fleet of more than five hundred planes. It is one of the blue-chip companies in the country (Jones 2010).

Number of floated shares = 2.265 M

Average share Price in 2009 =$1.0066

Average Share Price in 2010 = $1.072

Percentage change in share prices = 6.49%

Market capitalization in 2009= $2.28 Billion

Market capitalization in 2010= $2.43 Billion

Percentage change in capitalization= Cap in 2010 – Cap in 2009 / Cap in 2009 *100%

=2.43 – 2.28/2.28

=6.58%

Balance sheet fair value of assets 2009= AUD 20,049

Balance Sheet fair value of assets 2010= AUD 19,910

From the analysis of the Qantas assets, there was an asset impairment of AUD 71.23 in the year 2009 and asset impairment of AUD 68.42 in the year 2010. From the above figures of asset revaluation, it is clear that there was a reduction in the impairment of assets. As such, there was an average increase in the value of shares, and hence, an increase in the market capitalization.

Billabong

Billabong is a sportswear manufacturing company that focuses on sea sports. The company produces surf ware for skate and surf markets. The products are mainly for the people involved in the sport, but also sells to people who just want to be identified with the brand (InvestSmart).

Number of floated shares = 411 M

Average share Price in 2009 =$1.216

Average Share Price in 2010 = $1. 294

Percentage change in share prices = 6.44%

Market capitalization in 2009= $500 Million

Market capitalization in 2010= $532 Million

Percentage change in capitalization= Cap in 2010 – Cap in 2009 / Cap in 2009 *100%

=532 – 500/500

=6.4%

Balance sheet fair value of assets 2009= AUD 2221

Balance Sheet fair value of assets 2010= AUD 2210

Fair value change = 0.49%

There is a decline of a 0.49% in the asset value of Billabong International Limited. This change can be attributed to a lack of asset reevaluation between the two years under consideration. The movement in the share prices cannot be linked directly asset value. Other factors apart from this must have contributed to difference in prices of the assets.

BlueScope Steel

As the name suggests, this company concentrates on provision of steel products. It is based in New Zealand, America and in Australia. The company provides steel building products, flat steel products, and metallic coated steel products. The company enjoys more than 80% of the steel market in both Australia and New Zealand, and as such her performance in the securities market is of interest to many people (InvestSmart).

Number of floated shares = 3,339 M

Average share Price in 2009 =$.2458

Average Share Price in 2010 = $. 2365

Percentage change in share prices = 3.74%

Market capitalization in 2009= $821 Million

Market capitalization in 2010= $790 Million

Percentage change in capitalization= Cap in 2010 – Cap in 2009 / Cap in 2009 *100%

=790 – 821/821

=3.77%

Balance sheet fair value of assets 2009= AUD 8865

Balance Sheet fair value of assets 2010= AUD 8998

Percentage change in value = 1.5%

Asset value increased by almost two percent in the two years. Before the announcements of the 2010 financial statements, it was announced that BlueScope Steel reevaluated assets upwards, the opposite of asset impairment. This announcement led to a rise in the market price of its shares, culminating in the changes in market capitalization.

Harvey Norman Limited

The company has coordinated businesses in several industries. The company engages in retail business, franchising business, and property development. In the mother country, Australia, the company operates wholly as a Franchise Business. However, in overseas the company has both wholly-owned and controlled stores.

Number of floated shares = 1,062 M

Average share Price in 2009 =$1.98

Average Share Price in 2010 = $1.89

Percentage change in share prices = 4.45%

Market capitalization in 2009= $2,103 Million

Market capitalization in 2010= $2,009 Million

Percentage change in capitalization= Cap in 2010 – Cap in 2009 / Cap in 2009 *100%

=2009 – 2103/2103

=4.52%

Balance sheet fair value of assets 2009= AUD 3656

Balance Sheet fair value of assets 2010= AUD 3705

Change in value = 1.36%

In the year 2010, there was an asset impairment of fixed assets of Harvey Limited to the tune of $32 Million. This value was not disclosed to the shareholders of the company. When the details of the proposed move came out, there were panic buys and sales in the securities market. This move destabilized the share prices of the company. This is evidenced by the fall in both the market capitalization value of the company’s assets

 

Channel 10

This company is commonly known as Ten Holdings Limited. This is a media company in Australia that concentrates on provision of television services in the country. The company is limited by shares, and is wholly domiciled in Australia (Invest Smart).

Number of floated shares = 1,009 M

Average share Price in 2009 =$.968

Average Share Price in 2010 = $.965

Percentage change in share prices = .4%

Market capitalization in 2009= $970 Million

Market capitalization in 2010= $967 Million

Percentage change in capitalization= Cap in 2010 – Cap in 2009 / Cap in 2009 *100%

=970 – 967/967

=.31%

Balance sheet fair value of assets 2009= AUD 1456

Balance Sheet fair value of assets 2010= AUD 1439

Change in value = 0.24%

Among the five companies examined, this company shows constant reports between the two years. The movements in the share prices are minimal. We can assume that the share price is a constant, leading to the almost constant market capitalization across the two years. Asset value in the balance sheet is also a constant as evidenced by the almost nil percentage change in fair prices (InvestSmart, 2012).

Requirement B

The standard that covers impairment of assets is IAS 36- Impairment of assets. The standard has been effective since April 1998, and has had several amendments over the course of its existence. Specifically, the standard was amended in April 2004 and in April 2009. The objective of the standard is to ensure that no asset is recognized above its recoverable amount. The standard also gives the guidelines for calculations of the recoverable amount. The asset applies to all assets except the following assets: inventory, deferred tax, construction contracts assets, employee benefits assets, financial assets, investment and agricultural properties carries at fair value, assets arising from insurance contracts and non-current. These assets are covered by the following standards IAS, IAS 11, IAS 12, IAS 19, IAS 39, IAS 40, IAS 41, IFRS 4, and IFRS5.

Therefore, the standard caters for the following assets among others: buildings, land, equipment, machinery, goodwill, intangible assets, and investment property at cost, investment in subsidiaries, joint ventures, associates and assets carried at revalued figures. Under the standard, the following definitions are given. An impaired asset refers to one that is carried above its recoverable amount. Recoverable amount refers to the higher of the assets sale price less selling cost and the value for its use. Carrying amount is the balance sheet value of an asset less accumulated impairment and depreciation charges. Fair value of an asset refers to the amount recovered after selling assets in a transaction with willing buyers. Value in use is the discounted future cash flows that may result from continued asset use or the disposal vale at the end of its useful life. The useful life of an asset is the number of years the asset will be of service to the owner.

The standard has established both internal and external indicators of impairment. It is the duty of the accountant to review that all assets to ensure that no asset is impaired. If impaired, the accountant has to determine the recoverable amount of the asset, and impair it afterwards. However, some categories of assets must be reviewed annually irrespective of whether there are indications of impairment or not (Staubus 1975). This includes intangible assets with indefinite lifespan, intangible asset that is yet to be availed for use and goodwill from business combinations.

External indicators includes a decline in market value, changes in technology, laws and the economy, increase in interest rates, fall in company stock value. Internal indicators may include physical damage; the asset performs poorly than expected and if the asset is up for disposal. The standard also highlights the various ways of calculating the recoverable amount. Some of these methods are mentioned in the definition of recoverable amount above (Jones 2001). The standard gives the ways of applying these methods. However, this is not the purpose of this paper and a mention will do. Owing to the difficulties in calculation of goodwill, the standard specifically gives the procedures to follow while calculating goodwill (Delloite 2012). The standard also gives the procedures to follow while recognizing impaired assets in the books of account of the company. An impairment loss should always be recognized if the recoverable amount is below the carry value. Impairment loss is an expense item in the income statement.

Requirement 3:

Qantas limited impaired her assets of $71M in 2009 and 68M in 2010. The company recognized an impairment loss in the income statement, which is responsible for the decline in the share prices. The classes of assets that were impaired include buildings and equipment. There is no impairment of Billabong’s assets. As such there is no impairment loss that is recorded in their income statement. The assets were reevaluated upwards, some form of an impairment profit that is not recognized anywhere in the books of account. BlueScope Limited does not recognize any impairment loss. In fact, the value of its recorded depreciation is very small. This is because the company deals with steel products that are durable and resistant to damage.

Harvey Norman accounts indicate high instances of asset impairment. Harvey Norman operates in the service provision industry, and as such susceptible to changes in technology. With the changes in technology, assets such as computers are rendered useless for operations every year. The value of the impairment loss recorded in the income statement is an indicator of how much the company is affected by technological changes.

Requirement 4:

A look at the valuation procedure across the five companies shows a clear correlation in terms of how the companies value their assets. Different methods are adopted for various classes of assets. Most of the fixed assets are valued at their historical values. The companies then subtract the value depreciation from the net book value to arrive at the balance sheet vale (Paton 1995). Harvey Norman, owing to the moving nature of its current assets especially stock, uses the net book value approach. The stocks recorded as current assets are up to one month before the balance sheet date. Movements of stocks in the last month of the balance sheet date are not recorded. Harvey Norman also constantly acquires new businesses into the franchise, and therefore calculates the value of their goodwill annually.

Most of the companies have not impaired the assets, most of which are still recorded at their historical cost. Billabong, BlueScope and Channel 10 do not review their assets for impairment. This is a cause of concern for Australian Securities and Investment Commission. Their assets should be written down to reflect the recoverable amount and not the historical value. As these three companies have not done so on the past, the value of impairment loss is likely to be massive which would lead to a massive fall in the share prices of the company. These three companies must calculate the recoverable amount of their assets. As they are a going concern, they cannot sell their assets to determine their value. The companies should calculate the value in use by discounting future cash flows.

Requirement 5:

It is clear that a host of companies across Australia do not impair their assets. This is a concern to ASIC. The commission believes that lack of impairment misleads investors, who are duped into believing a bloated figure of the company’s value. It is the objective of the ASIC to ensure that all companies that are publicly traded are valued at their correct amount.

One of the best ways to ensure adherence to the standard is by deregistering companies from their list of companies. What this means is that their shares will not be traded publicly or privately in any securities market across Australia. In other words, the commission removes their shares from trading. Such a move or even a threat of such a move, may force company executives to adhere to the standard. The companies might lose probable investors and a major source of capital if they are deregistered. However, the companies might still give the wrong figure of their assets. The commission has to work with company auditors to ensure that the companies disclose the right amount. Auditors have a legal and ethical obligation to report the correct value of the companies’ accounts (Gilman 2002). Auditors, therefore, are the best shot the commission has to ensure adherence to the standard.

Conclusion

There are many controversies between ASIC and International Accounting and Standards. There has been a conflict in the valuation of assets and other accounting variables when applying the ASIC. There controversies need to be solved to ensure that all companies in Australia adhere to the international accounting standards.

 

 

 

References

Delloite, 2012, IAS 36 — Impairment of Assets, viewed 29 July 2012 <http://www.iasplus.com/en/standards/standard35 Retrieved on 27 July 2012>

Gilman, S 2002, Accounting Concepts of Profit, The Rolland Press Co., New York

Hayes, H V 1998, “Original Cost versus Replacement Cost as a Basis for Rate Regulation”, Quarterly Journal of Economics, vol. 27, pp. 616-629.

Hill, P 1996, Inflation Accounting: A Manual on National Accounting under Conditions of High Inflation, OECD, Paris.

InvestSmart, 2012, managed funds, shares, property and more… viewed 29, July 2012 http://www.investsmart.com.au/ retrieved on 27 July 2012

Jones, R C 2001, “Financial Statements and the Uncertain Dollar”, The Journal of Accountancy, vol. 40, pp. 171-197.

Littleton, T 2007, An Introduction to Corporate Accounting Standards, American Accounting Association, Chicago.

Jones, P 2010, Intermediate accounting (11th ed. ed.), South-Western/Cengage Learning, Australia.

Paton, WA 1995, “Depreciation, Appreciation and Productive Capacity”, The Journal of Accountancy, vol. 30, p.1-11.

Staubus, G J 1975, A Theory of Accounting to Investors, University of California Press. Berkeley