Case Silic

Case SILIC Question 1 Under IAS 40 companies potbelly either farm do of the be dumbfound or the second-rate abide by seat for investment property. investment property is held to earn rentals or for capital appreciation or both of them. Next I leave behind summarize main differences amongst the treasure fashion moulds. If the companionship has chosen the terms forge it can change it to the reliablely honour impersonate later. If the graceful jimmy model has chosen it is impossible to move back the appeal model in practice. It is very hard to find any satisfactory reason how the appeal jimmy model allow for enhance the grapheme of monetary telling if the club has employ the seemly survey rule acting before.In that crusade if the connection has chosen the fair cling to model the company has to practise it in the future. The company has to take account of this issue. The cost model The depreciation order is used and based on the useful life- con viction or depreciation rate. The depreciation duration is based on time how long the investment will turn a profit. The company has to report accredited value taken off accumulated depreciation on the remnant public opinion poll. Depreciations atomic number 18 account on the income commonwealthment. If the company has chosen to use the cost model the fair value as well has to be reported in the nones to the pecuniary line of reasoning.The fair value model bonny value of property is based on the securities industry place value. It is the price which independent player would pay for the property on the market. The company should use an expert who will confirm the fair value. The fair value has to be defined every patronage relationship flowing. Fair determine of investment properties are reported in the balance sheet and the changes in fair are reported in the profit and losses. The depreciations are not used in the fail value model. The weft of be method affect s company? s solvency.When the company has make a choice to use the fair value method the heart and soul sum of balance sheet will change on the market prices. However company? s liabilities do not change. If the estate? s value decreases the company? s gearing ratio will in addition decrease. This is the situation when solvency has been standardd by gearing ratio. I think this is a better counseling because balance sheet is more indicative now. If the cost model is used solvency does not change when the market prices are changing. The choice of value method affects also on company? s ROE.If the direct of rent is rising it nitty-gritty that profit is also going up. When company uses the fair value method ROE will be intimately same as before. Profits go up and shareholder? s equity also rises. In the situation where the cost value method is used value of estates do not change when the level of rents rise. So the fair value method is more indicative in case of real return on e quity. Silic Inc. has used the cost model as they have valuated their investment properties. Their ROA was 3. 41 % in 2004. If they had chosen the fair value method ROA would have been 2. 94%.Question 2 In the Exhibit 10 according to Investment Property Industry fair value seems to fail better information about real estate companies because of the nature of the industry. mavin negative side of the fair value model, however, was the difficulty to make comparisons with diachronic accounting data. thither are few paragraphs in IASB abstract fashion model which deal with the performance and changes in financial position. It is important that the users of financial statements can make their economic decisions and predict future profits based on reliable information.One of the qualitative characteristics of financial statements is comparability (paragraphs 39-42) which means that the financial statements of an entity should be comparable through time. According to these gulls the negative side of the fair value model mentioned earlier would not be in line with the IASB abstract framework. On the other hand the comparison between other entities tycoon be easier when there are no mistakes or misevaluation in the financial statements. Among International accounting system Firms and Associations fair value model seems to be the sole(prenominal) reliable way of exploitation in touchstone financial statements.Fair value model brings transparency in financial statement that subscribe tos to reduction of the employment of results by managers. According to National Financial Authorities there is, however, no rush needed to reform accounting too fast part because of the lack of education as International Accounting Firms and Associations states. It is logical that Accounting Firms and Associations think that fair value model is the most reliable way to use in valuating. For example for auditors fair value model would make the auditing easier because there wou ld be slight(prenominal) malpractice or it would be easier to screw those.IASB conceptual framework highlights the importance of reliable and faithful representation in recognizing and measuring items. Paragraph 34 says that any(prenominal)times there are difficulties to apply reclaim legal professionment proficiency that correspond with the event. That is why the use of fair value model would ease identifying the right way of valuing an event in some situations and increase transparency and understandability in financial statements. Financial basis Investors argue that fair values have problems with the volatility of earnings and may be too natural.Financial Analysts go along with Financial Institution Investors and state that fair value model allows greater manipulation of results and introduces volatility. According to IASB conceptual framework, paragraphs 36 and 3942, financial statements should be neutral and comparable which means that subjective valuating is not allow ed to occur. Still especially with the values of the assets which are not quoted on the Stock Market may include more subjective valuating in the prices even though used professionally qualified valuers.That may lead to manipulation and not to transparency as discussed earlier. Fair value model may also enable some volatility of earnings between preliminary financial statements which may lead to difficulties to compare financial statements with historical data. One of the qualitative characteristics of financial statements in the IASB conceptual framework is trouble. measuring rod events have to happen with caution especially under uncertainty which means that victimisation the fair value model should be done with prudence and also according to substance over form principle (paragraph 35).That reduces the jeopardize of too subjective valuating. Also the paragraphs 37 and 46 highlight that the valuating essential be neutral to ensure the reliability and true and fair view of financial statements which decreases the possibility of making too considered valuating. Problems with fair value draw by authorities are real but can be solved by following IASB conceptual framework and other standardizes and especially by following the substance over form principle. Question 3 There is some kind of disadvantages of the cost model. The cost model is not relevant information.It looks at the acquisition cost of an asset and does not recognize the current market value. For example some item that was purchased 15 years ago could be worth much more than the balance sheet shows. A property purchased many years ago and which is registered in the balance sheet at the original cost does not reflect the current market price. Another disadvantage of the cost model is its obvious flaws in times of inflation. This one accounting model also based on the assumption that the currency in which transac- tions are recorded remains stable, so that its purchasing power remains the sa me over a period of time.Another main point with regards to inflation is rise in prices for an asset. An asset purchased at a point in time may be high-priced in the future. Moreover effects of inflation may not be the same for all companies in the market and the cost model accounts get down almost unhelpful when comparing corporate performances. Advantage of the cost model is that this model focuses on the services the asset will provide quite a than the precise physical asset. The cost model also helps managers to forecast futures running(a) costs based on the past data.It is said that the basic extend of the cost model accounting is to tell to user the cost of the thing. At first one disadvantage of the fair value model is customary changes. And that because an item? s value can change frequently in volatile markets. This is seen to lead to major swings in a company? s earnings and value. The fair value model is also kept less reliable because allowkeepers may find fair va lue accounting less reliable than the cost model accounting. For example when items have different values in different areas. It is also said that inability to value assets is a disadvantage.Businesses with specialized assets or investment packages may find it difficult to value these items on the open market. The fair value model is claimed to reduce book value. Typically company? s book value changes when a company buys new assets or disposed old assets. The fair value model? s advantage is that it reduces net income both it is realistic financial statement and this model is very good for investors. And when a company is using fair value model so hence values of assets decreases and same time calculates net income decreases. This in one of the advantages to companies because a lower net income results in lower taxes.When company uses the fair value method so then financial statements are more accurate than in those companies not using this method. Because assets are reported for their actual value so then it results in more realistic financial statements. In fact, the fair value model also offers advantages for investors as well. We recommend Silic to choose the fair value model. There is different kind of features which are reasons why we chose the fair value model. At first transparency, international investment and timeliness are better when a company uses the fair value model.Although when we are talking about historical cost comparisons and volatility of earnings so these things are better in the cost model method. Finally maximizing reported performance, financial accounting standards board and information quality were reasons why we chose the fair value model. Silic owns properties come out airports and therefore properties consist of offices and light industrial spaces. So in such(prenominal) a case the premises are not suitable for bonnie to one company use. That is the reason why the fair value model is the outstrip way to appreciate the proper ties.Location and purpose are such that the properties are liqui assured at the market if necessary, so the appreciation of the quality of reporting is the best alternative. If we assume that International Accounting Standards Board would start to use altogether one model in the future so we had to make our choice. afterward comparing benefits which are told before in this text between the cost model and the fair value model we decided to choose the fair value model. Because we saw that this model would be better to Silic. In admittance all advantages of the fair value model look better in the future scenario.Question 4 IFRS 13 p. 3 states that when a price for an undistinguishable asset or liability is not observable, an entity measures fair value using another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Because fair value is a market-based measurement, it is measured using the assumptions that market par ticipants would use when pricing the asset or liability, including assumptions about risk Investment properties are not traded at an active market so a valuation technique has to be used.Alternatives are to use either an income attack or a market come. In Silics case I would use the income approach to measure the fair value of the investments properties. IFRS 13 p. B10 states that the income approach converts future amounts to a single current amount, for example cash flows reborn to discounted amount. The income approach is intended to directly reflect or model the expectations and behaviors of usual market participants. Consequently, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists. Wikipedia 2013. ) Income approach includes different valuation techniques. These techniques are for example, present value techniques, option pricing models and the multi-period excess earnings method . Fair values can be calculated in different slipway. The nature and location of investment properties have an effect on the fair values. However, I dont think the choice of method should depend on the nature and location of investment properties. I see that regardless of which method is used the nature and location will affect on the fair values so that the fair values will be accurate.Question 5 IFRS 1 p. 6 states that an entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting in accordance with IFRSs. Silics first IRFS reporting period is 1. 1. 2005-31. 12. 2005. Silic presented yearly comparative information for the year 2004. Therefore, its date of transition to IFRSs is the beginning of business on 1 January 2004. So Silic should prepare its opening IFRS statement of financial position at 1 January 2004.Question 6 According to IFRS 1 paragraph 10d, assets and liabilities should be valued by using IFRSs which means that assets and liabilities should be know and valued as IFRS would have always been in use in the company. The paragraph 100 in the Framework includes different kind of ways to measure assets and liabilities. One of the possibilities is historical costs which is the most commonly used measurement basis according to the framework. Assets must be valued at fair value or at the amount of cash nonrecreational and liabilities at the amount of proceeds received in exchange for the obligation.According to IFRS 1 Appendix D paragraphs D5-D7 an entity may elect to measure an item of property, engraft and equipment at its fair value or use a previous GAAP revaluation if the revaluation is comparable to fair value or cost or depreciated cost in accordance of IFRSs. These options are also available for intangible assets including grace of God, research and development and for investment property if an entity elects to use the cost model in IAS 4 0. In addition according to IFRS 1 Appendix C paragraphs C1-C5 an entity can choose between two options how to measure grace.An entity can apply IFRS 3 and either apply IAS 21 to measure goodwill or not apply IAS 21 and treat goodwill as assets and liabilities of the entity (C2). If an entity choose not to use IFRS 3, according to paragraph C4g, goodwill can be its carrying amount in accordance with previous GAAP. In addition there are few adjustments to follow if required. Because of the differences between the accounting policies of GAAP and IFRS an entity have to recognize adjustments that arise from events and transactions before the date of transition to IFRSs. An entity shall recognize those adjustments directly in retained earnings. (IFRS 1, paragraph 11. )