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Is the Fair value of assets required to altered every year (depending upon the changing market value at the end of the year) or is Fair Value Used only at the time of recording the asset in the Books.
Ex: A company Buys a Plant for 10Lakhs on 31/3/2016 , The Transaction price is hence 10 Lakhs .Assuming the Fair value on the date of purchase is also the same. Now , at what value will the asset be recorded at on 31/3/2016? Also What will be the value recorded in books on 31/3/2016 if the fair value as on date of purchase was 13Lakhs?
After a Year ,(31/3/2017) the same asset has a market value of 15 Lakhs..Then what will the value of asset be on 31/3/2017 ( Is it 15 Lakhs or the Same 10 Lakhs ,assuming no depriciation)?
“Now , at what value will the asset be recorded at on 31/3/2016?”
You’ve just told me that it cost 10 Lakhs on this date so why would we value it any differently?
“What will be the value recorded in books on 31/3/2016 if the fair value as on date of purchase was 13Lakhs?”
But you’ve just paid 10 Lakhs for this asset so how can you value it at 13 Lakhs? That really IS creative accounting! And what will you do with the “profit” that you’ve just recognised? Pay it out as a dividend?
IAS 16 tells us all we need to know about the valuation of property, plant and equipment and specifically identifies 2 methods for the valuation of these assets subsequent to purchase
The cost model and the revaluation model
The cost model is obvious – value the asset at cost less accumulated depreciation and impairments
The revaluation model … here’s an extract from the IAS
“The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]
If an item is revalued, the entire class of assets to which that asset belongs should be revalued.[IAS 16.36]
Revalued assets are depreciated in the same way as under the cost model”
There is more, of course, but I think that this answers your question
OK?
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