waqas_m
May 10, 2010, 02:57 AM
Stars (Pvt.) Ltd. Recorded its assets on historical cost basis. It has never practiced to
revalue its assets at current market price. The boards of directors (BODs) are shy whether they should adopt the policy of recording their assets on revaluation basis or not.
According to IAS-16 (Property, Plant and Equipment), they are anxious that this
standard has ‘all or nothing’ approach which might impose a duty on them to maintain
up-to-date valuations in the balance sheet for all property into the indefinite future. They
are also anxious that the introduction of current value basis will make the accounting
ratios (base on the company’s balance sheet and income statement) less attractive to
stockholders and other users of the financial statements. The BODs have commissioned
for an independent valuation of the property at June 30th, 2009. After in depth analysis,
the commission summarized the following information in the report:
Property Cost Value Rs. Depreciation to Valuation Rs.
Date Rs.
In Million In Million In Million
Building A 250 70 160
Comments: This building is in good health but it is located in the area of depressed market price conditions.
Building B 150 60 120
Comments: Building B is located in the area where Stars (Pvt.) Ltd. Can get benefit due to economic prosperity.
Building C 134 48 40
Comments: Building C is badly maintained for several periods and market valuation of building C reveals the wear and tear that arises because of this.
Note: Depreciation is charged on 2% p.a on each kind of building.
Requirements:
a. You are required to mention why IAS-16 requires the revaluation of non-current
assets in the relevant classes of each asset and why the revaluation of assets must
be kept up to date once it is implemented.
b. Calculate the figures that would appear in Star’s financial statements in respect of
property if the company selects to show the buildings at their valuation basis. You
are required to point out where these kind of financial information would appear
in financial statements; only relevant calculations are required without preparing
any detail notes.
revalue its assets at current market price. The boards of directors (BODs) are shy whether they should adopt the policy of recording their assets on revaluation basis or not.
According to IAS-16 (Property, Plant and Equipment), they are anxious that this
standard has ‘all or nothing’ approach which might impose a duty on them to maintain
up-to-date valuations in the balance sheet for all property into the indefinite future. They
are also anxious that the introduction of current value basis will make the accounting
ratios (base on the company’s balance sheet and income statement) less attractive to
stockholders and other users of the financial statements. The BODs have commissioned
for an independent valuation of the property at June 30th, 2009. After in depth analysis,
the commission summarized the following information in the report:
Property Cost Value Rs. Depreciation to Valuation Rs.
Date Rs.
In Million In Million In Million
Building A 250 70 160
Comments: This building is in good health but it is located in the area of depressed market price conditions.
Building B 150 60 120
Comments: Building B is located in the area where Stars (Pvt.) Ltd. Can get benefit due to economic prosperity.
Building C 134 48 40
Comments: Building C is badly maintained for several periods and market valuation of building C reveals the wear and tear that arises because of this.
Note: Depreciation is charged on 2% p.a on each kind of building.
Requirements:
a. You are required to mention why IAS-16 requires the revaluation of non-current
assets in the relevant classes of each asset and why the revaluation of assets must
be kept up to date once it is implemented.
b. Calculate the figures that would appear in Star’s financial statements in respect of
property if the company selects to show the buildings at their valuation basis. You
are required to point out where these kind of financial information would appear
in financial statements; only relevant calculations are required without preparing
any detail notes.