Carrying Amount Vs Fair Value


If separate financial statements of the subsidiary are prepared, the subsidiary should assess if a triggering event has occurred for an impairment test on its long-lived assets. If so, such test should be completed assuming the assets are to be held and used. That is, a recoverability test would be based on cash flows on an undiscounted basis over the remaining life of the asset group, as determined based on the group’s primary asset, not based on fair value. The purpose of this section is to establish standards and provide guidance on auditing fair value measurements and disclosures contained in financial statements. In particular, this section addresses audit considerations relating to the measurement and disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements. Fair value measurements of assets, liabilities, and components of equity may arise from both the initial recording of transactions and later changes in value.


Low-probability estimates that eliminate the need for a writedown should be reviewed carefully. The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. The process of recording the fair value adjustment will be almost identical to that noted above.

Estimates required for depreciation and amortisation calculations include the useful life of the equipment and its expected residual value at the end of that useful life. A longer useful life and higher expected residual value result in a smaller amount of annual depreciation relative to a shorter useful life and lower expected residual value. Expenditures related to long-lived assets are capitalised as part of the cost of assets if they are expected to provide future benefits, typically beyond one year.

IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities

In addition to recording the paid at fair value, the fair value of the net assets of the subsidiary at acquisition must be assessed as part of the consolidation process, in order to give an accurate picture of the goodwill arising on the acquisition. The issue of shares at market value usually results in the receipt of cash, the nominal value being taken to share capital and the excess being recorded in share premium/other components of equity. This is similar to what is happening here, but no cash is changing hands. Instead of the parent company receiving cash for the shares, they are gaining control of a subsidiary.

discontinued operations

However, if management and the board of directors control a majority of the reporting entity’s voting shares, approval by management and the board of directors is usually sufficient, as shareholder approval would be considered perfunctory. The average remaining useful life of a company’s assets can be estimated as net PPE divided by depreciation expense, although the accounting useful life may not necessarily correspond to the economic useful life. The gain or loss on the sale of long-lived assets is computed as the sales proceeds minus the carrying amount of the asset at the time of sale. In contrast with depreciation and amortisation charges, which serve to allocate the cost of a long-lived asset over its useful life, impairment charges reflect an unexpected decline in the fair value of an asset to an amount lower than its carrying amount. Under the revaluation model, carrying amounts are the fair values at the date of revaluation less any subsequent accumulated depreciation or amortisation. Included in the fair value of derivative instruments is an adjustment for nonperformance risk.

Derecognition (retirements and disposals)

The fair value of an tunnelbear extension is usually determined by the market and agreed upon by a willing buyer and seller, and it can fluctuate often. In other words, the carrying value generally reflects equity, while the fair value reflects the current market price. “Towards an Understanding of the Role of Standard Setters in Standard Setting,” points to another explanation. The study covers all the members of the Financial Accounting Standards Board, which sets standards for GAAP, from its inception, in 1973, through 2006. We investigated their backgrounds and the nature of the standards they proposed.

  • Assuming that no amounts have been recorded by the parent company, this is then included within goodwill and liabilities at the date of acquisition, with the entry being Dr Goodwill, Cr Liabilities.
  • Thorough analysis of carrying value by auditors must be performed as a company may show less depreciation in order to inflate profit.
  • Business consulting services Our business consulting services can help you improve your operational performance and productivity, adding value throughout your growth life cycle.
  • For completed in-use assets, the cash flow estimates should take into account the remaining useful life of the assets in question and should reflect their existing service potential.

IASB tentatively decided to allow inclusion of cash flows resulting from a future restructuring or enhancement in value in use calculation to align it with approved budgets and forecasts. Following this acquisition, entity A recognises well-known brand of Entity X at its fair value of $70m. Brand is determined to have indefinite useful life and it is not tax deductible. The discount rate used in this calculation amounts to 5.48% and PGR (perpetuity growth rate – estimated growth rate beyond period covered by cash flow projections) to 2%.

Therefore, discontinued operations are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. Under U.S. GAAP, the long-lived assets are recorded at the cost of less accumulated depreciation. The impairment test is only performed when there is reason to believe the recoverable amount will always be less than the carrying value. On the other hand, companies following IFRS have to test the long-lived assets for impairment annually.

Specific assumptions will vary with the characteristics of the item being valued and the valuation approach used . For example, where the discounted cash flows method is used, there will be assumptions about the level of cash flows, the period of time used in the analysis, and the discount rate. The fair value measurement may be made at a date that does not coincide with the date at which the entity is required to measure and report that information in its financial statements. In such cases, the auditor obtains evidence that management has taken into account the effect of events, transactions, and changes in circumstances occurring between the date of the fair value measurement and the reporting date. When a company recognizes an impairment loss for an asset group, it must allocate the loss to the long-lived assets in the group on a pro rata basis using their relative carrying amounts.

Fair value can refer to the agreed price between buyer and seller or the estimated worth of assets and liabilities. Let’s say company ABC bought a 3D printing machine to design prototypes of its product. The 3D printing machine costs $50,000 and has a depreciation expense of $3,000 per year over its useful life of 15 years under the straight-line basis of calculating depreciation and amortization. You can also check this excel file mentioned above for an example showing calculation of WACC for retail chain operating in UK. Fn 2 For purposes of this section, management’s assumptions include assumptions developed by management under the guidance of the board of directors and assumptions developed by a specialist engaged or employed by management.

Handbook: Fair value measurement

Under this approach, the estimated future cash flows from future sales of the inventory held at the measurement date should be excluded when estimating VIU. Where management includes inventory in its VIU calculation for practical reasons, it will include the estimated future cash flows from future sales of the inventory. An adjustment may be necessary for gross margins, where deemed significant. For items valued by the entity using a valuation model, the auditor does not function as an appraiser and is not expected to substitute his or her judgment for that of the entity’s management.

cash flow

The cost model is identical to the cost model used for property, plant, and equipment, but the fair value model differs from the revaluation model used for property, plant, and equipment. Unlike the revaluation model, under the fair value model, all changes in the fair value of investment property affect net income. IFRS require research costs be expensed but allow all development costs to be capitalised under certain conditions.

History of IAS 16

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The asset is being actively marketed for sale at a reasonable price as compared to current fair value. Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value Measurement.

It can be an operating segment, a reporting unit, a subsidiary, or just a group of assets for which identifiable cash flows are independent of other assets. This will greatly expand the possibilities for firms in deciding which operations to keep and which to dispose of. Provides guidance on the accounting for a long-lived asset if the criteria for classification as held for sale are met after the balance sheet date but before issuance of the financial statements. That guidance prohibits retroactive reclassification of the asset as held for sale at the balance sheet date.

To record this, Pratt Co must add the full fair value of the consideration of $5.6m as part of the consideration in the calculation of goodwill. $1.6m must be added to share capital in the consolidated statement of financial position, being 1.6m shares x $1 nominal value. This means that the excess of $4m is added to share premium/other components of equity in the statement of financial position. The fair value of the contingent consideration payable will be a mix of the likelihood of the event, and a reflection of the time value of money. The key here is that the fair value of the contingent consideration will be given to you in the exam. Assuming that no amounts have already been recorded by the parent company, this needs to be included in the goodwill calculation on the date of acquisition with the double entry Dr Goodwill, Cr Provision.

In either of the above two definitions, book value and carrying value are interchangeable. Their names derive from the fact that these are the values carried on a company’s books, making them independent of current economic or financial considerations. Book value can refer to several different financial figures while carrying value is used in business accounting and is typically differentiated from market value. In most contexts, book value and carrying value describe the same accounting concepts. In these cases, their difference lies primarily within the types of companies that use each one.

This is recorded in the goodwill calculation, with an equivalent liability set up within current liabilities, as the amount is payable in 12 months. Carrying the amount is a conservative way to show the value of assets in the balance sheet. If, instead of Carrying value, fair value was used, then many companies would have inflated profit by showing higher fair value for assets.

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