“Valuing tangible non-current assets is subjective and complex and can therefore result in different companies valuing similar assets very differently”
Financial reporting attempts to measure the worth of assets, a concept that is inherently subjective and arbitrary. We can never know the true value of an asset, and rather than being an objective truth, valuations are always biased. Financial reporting is used for different purposes by different users and so each different way might be appropriate in different circumstances and values are affected by the purpose of measurement. Property, plant and equipment are the main non-current assets that a company holds. Similar assets can be valued ...view middle of the document...
A company should be consistent in its approaches to valuation but this is not always the case.
The main problem with this method of valuation is that by their very nature historical costs of assets are always out-of-date, and can provide no guide to an entity’s current financial position. There are often large differences between the historical cost of a non-current asset and its fair value, which is defined as “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” This particularly applies to property held by companies, and to deal with this many undergo regular revaluation to determine their fair value. Property is often compared to the current market price and revalued accordingly. While this may be a better indication of the asset’s worth at a particular point in time, market prices are very volatile and fluctuate regularly.
In the question Enigma had its property revalued in line with recent increases in market values. An independent surveyor was used so that the valuation was unbiased, however the value of property is still very subjective, and could change due to a large number of factors.
The fair value of assets can be determined in other ways, such as finding out its current replacement value for the company, what a third party would charge for the asset, or by simply estimating the value. It cannot be determined which one of these is the ‘true value’, each will be correct for the basis that has been used. These different methods would give different results and the best method to use depends heavily on who the financial information is for.
Enigma manufactured its own item of plant for its own use, which is valued at the cost to the company of making and bringing the item of plant into use. The realisable value of the item of plant is likely to be lower than what it cost Enigma to produce and its value to Enigma. This is due to the fact that non-current assets that have been made within the company are typically very particular to that business. They are of limited use and value to other companies, unless those parties buy the business.
Subsequent expenditure can be added to the cost of the asset if it will produce economic benefits beyond its originally assessed performance. Determining whether something adds value to the asset is subjective and the benefit can only be estimated.
Depreciation is the systematic expensing of the cost of an asset over the period which benefits from its use. There are two methods of depreciation allowed under International Accounting Standards: straight-line depreciation – where depreciation is spread evenly over the entire useful life of the asset, and reducing balance depreciation, where depreciation is charged more heavily in earlier years and levels out to the residual value. Choice is a question of judgement. The difference between the acquisition cost and the disposal revenue is the depreciable amount.(2)...