Valuation of Fixed Assets for Financial Statements
There are 2 types of IFRS valuation – for the purpose of transition to accounting for IFRS and for the purpose of revaluation of fixed assets for accounting, which is carried out in accordance with IFRS.
Let’s focus on the situation when the assessment is carried out for the purpose of transition of accounting, which was conducted under UAS to IFRS 1 – First-time recodnition for Financial Statements.
In the case of a decision to keep records in accordance with IFRS, the company must decide on the accounting policy for fixed assets and make the appropriate decision.
Fair value measurement is performed by an independent valuer. To do this, you must enter into an agreement with the appraiser, who has sufficient experience and the right to perform appraisal not only of tangible assets, but also of business and intangible assets. The minimum list of such specialties includes: 1.1, 1.2, 1.3, 1.4, 1.7, 2.1, 2.2. These specialties are listed in the certificate of the licensed appraisal company, issued by the State Property Fund of Ukraine.
It is desirable that the experience of IFRS assessments is confirmed by similar agreements with other customers, copies of contracts can always be requested from the contractor.
IFRS valuation always has 2 objectives: to determine the fair value of each inventory item and to determine the residual useful life.
Determining the Fair Value of Each Item.
It should be understood that the assessment of fixed assets in accordance with IFRS always requires a reassessment of each inventory item using its technical characteristics and phisical condition. Technical characteristics refer to the area or volume of buildings / real estate, their structural elements that affect their value, the type of land rights, as well as the physical condition of buildings, structures and transmission devices. For equipment, it is necessary to have data on the serial characteristics of the universal equipment, their model / brand, the main technical parameters of load capacity or electrical capacity, as well as the condition of this equipment, such as excellent or satisfactory or in need of repair.
Appraisers compile questionnaires on this data and present them in Excel format tables, and the company’s specialists enter this data in the table.
It should be keep in mind that for 1-st recodnition there is need to revalue ALL items of property, plant and equipment. In the next revoluations it is sufficient to select the most significant groups. However, keep in mind that in the event of a revaluation of one or more positions in a group, all group positions are subject to evaluation.
As usual, the largest groups at industrial enterprises are groups of buildings, structures and transmission devices, as well as technological and auxiliary equipment. Also, it makes no sense to estimate furniture and office equipment, and sometimes even vehicles, but there are always exceptions and it is necessary to carefully analyze the groups, based on the principle of materiality.
Usually, assets are valued on the basis of DRC – the depriciated replacement cost for each asset; in this case, first the replacement cost of a new similar asset is determined, and then all types of depreciation are deducted from the value of the new one: physical, functional and external (economic).
To determine the external (economic) impairment, it is necessary to build a model using income approach in order to compare their sum of DRC and the result of income approach. If the DRC is less than the value obtained by the income approach, economic depreciation is determined. Which have to be accounted in each asset.
Determining the Residual Useful Life
Residual useful life of asset is the period of time during which that item can actually be used as an asset. It is determined on the basis of the usual time that kind of assets can be used or based consultations with employees, that exploit the asset. Also the phisical condition of the asset at the valuation date has to be taken into considiration and the accounting policy adopted by the company on the useful life of assets. Based on that data, the accounting depreciation or amortization can be calculated as fair value divided by the residual useful life.