[go: up one dir, main page]
Scribd
Upload
138 views2 pages

Lecture 1 Case Study Suggested Solutions

The document provides information about two properties - Property A and Property B - owned by a company. It discusses the original and current costs and values of the properties, as well as estimates of potential future sale prices. For each property, the qualitative characteristics of faithful representation, relevance, verifiability, comparability, and understandability are considered in selecting the most appropriate cost or value measure. For Property A intended for sale, current fair value is most relevant. For Property B aimed at long-term cash flows, present value is most relevant but original cost is also relevant. Verifiability is highest for original costs but lower for estimates of current and future values.

Uploaded by

Ahmer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
138 views2 pages

Lecture 1 Case Study Suggested Solutions

The document provides information about two properties - Property A and Property B - owned by a company. It discusses the original and current costs and values of the properties, as well as estimates of potential future sale prices. For each property, the qualitative characteristics of faithful representation, relevance, verifiability, comparability, and understandability are considered in selecting the most appropriate cost or value measure. For Property A intended for sale, current fair value is most relevant. For Property B aimed at long-term cash flows, present value is most relevant but original cost is also relevant. Verifiability is highest for original costs but lower for estimates of current and future values.

Uploaded by

Ahmer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Lecture 1 case study suggested

solutions:

Source: Rankin, Ferlauto, McGowan and Stanton, Contemporary issues in accounting 2nd
edition, John Wiley & Sons Australia, Ltd 2018

2.22 The following information is provided for two items of property for a company.
Property A was purchased five years ago for $400 000. It was intended to be used
to build another factory but the company has now reorganised its original
factory and it is no longer required. The company now intends to sell it. The
current property market has dropped but is expected to rise when interest rates
fall. If sold now the property is expected to realise $360 000.

Real estate experts have predicted that if the company waits for the property
market to recover, it could realise $450 000.

Property B is the current factory. It was purchased ten years ago for $200 000. If
sold now, it would be expected to realise $380 000 (and $500 000 if the property
market recovers). The company has various estimates about its contribution to
the profit of the company. Using current interest rates and various assumptions
about future sales and costs, the property is calculated to have a present value (in
terms of future cash flows) of $900 000. It is insured for $600 000 because this is
the cost required to rebuild it.

The company has always recorded property using the historic cost basis. Other
companies in the same industry have traditionally used the same basis, although
about 40 per cent now use the fair value basis.

For each of the properties, identify which cost or value would best meet each of
the following qualitative characteristics (consider each separately):
- Faithful representation
- Relevance
- Verifiability
- Comparability
- Understandability
Suggested Solution:
Part (a) covered in Lecture:
(a)
Faithful representation: requires representation to faithfully present what it purports to
represent and to be complete, neutral and free from error. Hence:
 Cost for both is a faithful representation (normally adjust cost via depreciation which
involves estimates).
 Current and future fair values would be a faithful representation provided the nature
and limitations of the estimating process are explained and clearly explained as an
estimate. (refer QC15).
 Present values could be a faithful representation providing the nature and limitations
of the estimating process are explained and that assumptions etc. made to achieve this
estimate were clearly outlined.

Relevance: will vary depending on the user’s perspective and the decision being made.
For Property A: most relevant measure: fair value (intended for sale).
For Property B from shareholders perspective (interested in long term cash flows), present
value appears most relevant, although cost also relevant.
For other users, current fair value may be most relevant.

Verifiability: the original costs verified from documentation.


The verifiability of current fair value: problematic
Future fair values less verifiable, relies on assumptions about the property market in the
future,
The verifiability of present value for Property B requires estimates of future events and is
also influenced by choices about interest rates used. The insurance amount generally
verifiable (part of a contract).

Comparability: cost assists in comparison across time.

Understandability: original costs, fair values and insurance easily understood.

Other arguments can be valid and if you have something different, send through to unit email:
ayb311@qut.edu.au for feedback.

You might also like