The balance sheet non-current assets at the balance sheet date, that value will provide the users of the financial statement with a “true and fair view” of these assets on that date. Refer to “HKSAR Companies Ordinance all Limited Company in Hong Kong must be provide Accounts and Annual Report of each financial year, to give a true and fair view of the state and listed company must be audited and the auditor must make a written report thereon the corporation. (2006 )
Why HKSAR regulations all company to provide the financial statement in true and fair view? True means the data reported is realistic and appropriate for account standard with audited and verify this is reasonable. Fair means the accounting report will concern all user interest and balance all their needs so reported the statement fairly. Why is reasonable is not correct due to auditor cannot 100% checking the transaction in financial statement. They just used the audit standard method to testing this without material error or mistake. The financial statement with a “true and fair view” that can to be decided the company true financial status to calculated the fair profit tax or tax return and the listed company must be audited and the auditor must make a written report to protect the shareholder and potential investor like share holder and security analysts (e.g. JP Morgan, Moody), the investor to making the right decision due to financial statement in true and fair view. If the HKSAR without the ordinance with international financial standard to control the financial statement of company, the invertors may lose confidence to invest the share market and the stock market without honor in the international stock market. The people without account skill, they also used the true and value view financial statement to ensure that they are getting a good return on their invested. If the financial statement is not with “true and fair” view they making a wrong decision on invested to suffer of loss. The manager will used the financial statement to making a mission statement and strategy and carrying out policies for control the expenses. If the financial statement is not with “true and fair” view that all the decision will loss to influence the future business. The staff expects the company to have a profit for give a bonus and increase salary. The suppliers and customers carrying out the financial statue to estimated credit term, goods supply similar to banks loan companies. Banks have standard evaluation procedures that information relating to liquidity, profitability, leverage, and so on be considered when determining the amount of the loan, interest rate and the security to be requested. If the company provides the financial statement is not in “true and fair” view, banker may mark wrong decision to determining the amount of the loan limit and interest rate.
The financial statement is included balance sheet, income statement and cash flow statement to provide information for financial status. The balance sheet shows the financial position of a company by including assets, liabilities and capital. (Asset = capital + Liabilities) The balance sheet has provided the non-current assets value for part of tangible assets and intangible assets.
The tangible assets are physical from such as building, machine and land. refer to “IAS 16 use in the production or supply of goods and services, for rental to others, or administrative purposes, and expected to used during more than one period, and should be recognized as asset when it is probable that the future economic benefits associated with the asset will flow to the enterprise and the cost of the asset can be measured reliably. Cathay Pacific Airways is a major provided international service based in Hong Kong that is established in 1946 and has a total of over 23000 people and own more than 100 aircraft. For example of bought an aircraft in oversea, the assets cost included the aircraft cost, delivery cost, set up charge, import duties and some computer software charge. If they want the repair some part, that can be divided to a part of aircraft cost. The long term investment like building, the law charge, agent charge and rates of stamp duty is not included the building asset cost. (Appendix 2-8)
According to “IAS 38 the intangible asset an identifiable no monetary asset without physical substance for items as in process research and development, and technology. As well as intellectual property such as patents trademark copyright, goodwill and recognition is all divided intangible asset” Refer to Cathay Pacific the intangible assets comprise goodwill and expenditure on computer system development. The company system development for gives rise economic benefits in a part of intangible and use the straight-line method for constant useful live of 4 years. The development of computer system may need to space a lot of money and time to repair or produce the system making of company to improve the service more effective to attract more customers. (Appendix 2)
Net Book Value (NBV) in non-current assets on balance sheet that means is the provision for depreciation and impairment must be deducted from cost. (Net Book Value = Cost – Accumulated depreciation – Impairment). More assets as inventories, equipment and goodwill can only be sold under big-discount the assets have poor-liquidity. The market value is equal to the buyer can pay a seller for any price of assets. This is determined by the market demand and supply. The NBV is the company estimated the deprecation and impairment deduct for the assets cost to calculate the NBV of assets at the balance date. If the estimated the deprecation and impairment used the wrong method for calculated the result will impact the NBV directly. The assets value is over or low value to infect the company or apply bank loan or attach more investor.
The depreciation and impairment is important element of asset valuation that can be influence to net book value directly. The depreciation calculation in common uses has many different methods for the straight-line method for constant over useful live of assets, accelerated methods for high during early years and low in later years, and Years’- Digits Method, One-off method, valuation method and Units method. This method can be calculated the assets valuation and estimate the depreciation and impairment on the balance sheet of the financial year. The assts using the difference method may as diff result. Comparison with above depreciation method the fully reserved asset that have zero in NBV or that may ever be from the record. The accumulated amount has different that can be influence to NBV in balance sheet on financial year (Appendix 1).
How craftily NBV equals fair market value (FMV). FMV is means that to estimated the buyer can pay a seller for any price of assets. The accumulated depreciation and impairment deduct from the assets is fair?
Cathay Pacific calculated depreciation of fixed asset on a straight line method basis to write down cost over anticipated useful live to estimated residual value. (Appendix 2-4) For example passenger aircraft, freighter aircraft and other equipment to estimated difference useful live to calculated depreciation. The most of equipment has a limited useful live due to deterioration and obsolescence. Actual economic live may differ from the estimated useful live. That could result change in the future period for adjustment or disposal. If the asset fully depreciated on books and in use with NBV equal to zero. The assets due in use to produce future economic benefits or the secondhand and used of assets can be selling out on the market, that world not are NBV equal FMV? If the NBV is over the FMV that estimated accumulated depreciation is fair? For example Cathay Pacific depreciation of Passenger aircraft model A is calculated on a straight line basis to write down cost over anticipated useful lives to estimated residual value as 20 years the accumulated depreciation to equalize deduct on balance financial year. If the supplier provides a new model B into market the some functions is high and effective than the model A. The Model A has decided to slash FMV. The FMV compares with NBV which is more true and fair view or using the method in NRV.
Net Realizable Value (NRV) is equal to final expected sale value less further cost in selling or distribution. This commonly used method of evaluating an asset in inventory accounting, which applies to not overstate or understate the value for the non-current assets in balance sheet.
For example MTR Corporation Limited, the MTR Railway most important elements of Hong Kong’s transportation network. The main business of Corporation is Property. (Appendix 9-13) They are development existing railway land assets on new railway. The investment properties assets cost is different than to complete the new railway due to the transportation network to change more conveniently, the properties assets valuation will increase. The actual market value of the properties assets may differ from the estimated NBV. That could result change in fair value in the financial year on balance sheet. They also to show the details of this change in fair value figure in account notes, the adjustment of change in fair value at open market value and independent firm of surveyors. (Appendix 12 – 17 fixed assets B). Hong Kong property value was decrease around 30-40% in 1997. Some companies the property assets value may not change in the actual market value. The assets value at balance sheet date will low than market value. This amount is very important element of banker to estimated calculation the loan limit and interest rate. If the company loan limit decreases that impact the future business. Nowadays the land or properties assets may increase the assets value 300%, if the company bought a land or properties assets in the 1970 years, the company due using the purchases value on the balance sheet. The land or properties assets may not near the market value and effect the users of financial statement to marking the right decision. For example Cathay Pacific the model C is small size and not effective than a new model the market value is very low. But that model can to continue produce the future benefit. In this case used the NRV method or using the value in use method is near to true and fair.
“Value in use (VIU) is the present value of the future cash flows expected to be derived from an asset or cash-generating unit. ( 36 )” The VIU is base of the future cash flow, the foreign currency and discount rate to calculated future cash flow to the affect the VIU. The estimates of the future cash flows and reflected is calculation and expert to assets value, the expectations about the timing of those future cash flow, time vale of money and possible variation is represented by current market risk-free rate of price for bearing the uncertainty inherent in the asset, that market participants may relent the pricing the future cash flow to expect the assets value. This method to calculation the true and fair value complicated for the accountant. That was included are many element of estimated figure. The account and can not estimated this many element to calculation the assets list all the VIU.
Therefore in conclusion, although auditors adoption suitable accounting standards, and give a “true and fair view” opinion on the financial statement. Many methods can calculate the asset value at the balance sheet date for example like straight-line method for constant over useful live of assets, the net realizable value (NRV) is equal to final expected sale value less fess future cost and selling or distribution and value in use (VIU) is estimated many future figure to calculate the estimate assets value in the balance.
Many companies using the straight-line to calculate the accumulated depreciation on PPE to reflect the asset “true and fair view” at the balance sheet date. That is stable depreciation expenses on the financial year and the user can be easy to estimate the future assets value. The auditors can easy using the audit standard method to testing this depreciation method without material error or mistake.
Many methods can calculate the asset value in “true and fair view”, the assets value at the balance sheet date using which depreciation method or base on what estimated cost to estimate just depends on which companies and industry related what assets. The differ depreciation to result on diff value for positive & negative infect. The account must using a professional skill to judgment which asset using what method to be close to “ true and fair view” The Company must be shown the depreciation method or details calculation on the accounts notes to giving fair view for user of financial statement. They can understand company using what depreciation method to calculate the net book value for assets, using for what policy to calculate the impairment of asset valuation and how many useful live to estimated residual value. The auditor just used the audit standard method to testing this without material error or mistake and the asset valuation method must be under the accounting standing the asset valuation is “true and fair view”.
Reference and Bibliography
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