Mechanisms of Corporate Governance †Free Samples to Students

Question: Discuss about the Mechanisms of Corporate Governance. Answer: Introduction: Revaluation of the fixed asset is required for stating the actual value of the capital assets that are owned by the company. The revaluation is different from providing the depreciation on assets where the asset value is declined based on the useful life of the asset. The main objective of revaluation is to reveal the asset in the financial report of the company at the fair value of the market. This assists the company regarding the decision of whether to invest the fund in any other business or not. Further, at the time of sell the negotiation for sell is based on the revalued amount only (Christensen Nikolaev, 2013). Directors motivation behind behind the decision of not revaluating the equipment, plant and property Finding out the motivation of the directors behind non-revaluating the assets is a tough job. One reason may be that the sale of asset under various market conditions may results into lower amount as compared to the value suggested by revaluation aspect management. Further, the directors may be in the view that for the purpose of accounting, retaining the cost model will be more efficient. If the assets are not revalued, the value of the assets will be understated in the balance sheet as compared to the actual values and therefore, the expenses related to depreciation will also be lower that will lead to higher amount of profits. Further, the profit on sale will also be higher. Therefore, possible motivation may also be that non-revaluation will lead to higher amount of profits. Further, the lower base of asset and higher amount of profit will lead to improvement in return to asset ratio of the company (Goh et al., 2015). Moreover, the reasons behind non-revaluation of assets by the directors may be as follows Simplicity as per the directors view it may be more efficient and simple with respect to the financial measurement to evaluate the asset as per cost model rather than changing the value of the asset as per regular market change. Further, the calculation of depreciation under cost model will be simpler as compared to revaluation as there will be no continuous alterations in the value. Consistency as per some directors the cost model is more relevant with respect to reveal and records the assets in the financial report of the company. The financial report are important to the directors, partners and executives of the business in the way that it analyse financial performance of the company and based on the performance, it forecasts the future growth of the company. Objectivity the historical cost of the asset shown under the financial statement can be verified with the related documents like receipt, voucher, statement and invoice. Further, where the directors are required to manipulate the amount of profit and reveal it at higher amount, the revaluation method sometimes do not allow the company to manipulate the figures. Due to all these reasons the directors may not be motivated to revalue the amount of property, equipment and plant (Jack, 2015). Impact of non-revaluation on the financial statement The main objective of revaluation method is to present the assets in the financial statement at the value that is influenced by market condition and valuation. Therefore, the asset that is valued as per the revaluation method presents the asset more fairly. Further, as the revaluation is involved more with presenting the true value of the asset and less with the earning capacity, not considering the revalued figures will misrepresent the statement. Further, under the cost approach the real value of the asset will not be revealed and the company will not take into consideration the market value changes of the asset (Liang Riedl, 2013). Moreover, the actual profit under income statement will not be revealed as the asset in the balance sheet will be recorded as per the historical value whereas the sale will be carried out as per the revalued amount (Small, Yaseen Schmidt, 2016). The additional amount or the surplus amount generated from revaluation may be added up to the value of retained earnings while the asset is derecognized. Further, the difference between the depreciation amount on historical cost of the asset and the depreciation amount of revalued amount of asset may charge against the retained earnings during the useful life of the asset. As per AASB 116, the amount arise from the revaluation management may be distributed among the investors. However, there is no clear indication that whether the surpluses is to be allocate or not but if the company wants to distribute this profit, it may do that on its own discretion. In the same way, if the company wants, it may poses restriction on allocation of surplus amount (Hu, Percy Yao, 2015). To resolve this issue, as per the accounting standards, the company can shift the difference between the depreciation amount on historical cost of the asset and the depreciation amount of revalued amount of asset may charge against the retained earnings for each accounting period during the useful life of the asset. Therefore, non-revaluation of the asset or recording the asset as per the cost model under the financial statement will have large impact on the financial statement f any company. Adverse impact of non-revaluation on the wealth of shareholder The main reason behind the adoption of valuation for the assets is to assure that the assets are shown under the financial statement at the market values that is the fair values. Various reasons are there to revalue the asset. These reasons may be to increase the companys borrowing capacity, increasing the companys growth opportunities, bonus share issue and liquidity maintenance. The stakeholders of the company make important decisions for the investment based on the performance and the amount of various items in the balance sheet through analysing the companys future growth prospect. Therefore, to present the assets with its actual value as per the market value, it shall be revalued on regular periodic basis otherwise the figures will misguide the investors as well as the other users of the financial statement (Amcor.com, 2017). Other reasons behind the revaluation may b expressed as follows Appropriate assessment for internal and external reconstruction It states actual amount of employed capital and return rate Te company y will be able to analyse the actual amount for bargaining under the acquisition by any other organization or merger with any other organization It will assist in assessing the market value of the available asset under sales and leaseback contracts. The depreciation is generally provided on the asset to accumulate the fund to replace the asset after the useful life of the asset gets over. Therefore, if the depreciation is provided on the historical value of the asset, it may not be sufficient to replace the asset as the replacement will be on market value of the asset and thereby it will put extra burden on the shareholder for replacement If the depreciation is provided at lesser amount, it will lead to higher amount of profit and thereby higher amount of dividend. This will lead to adverse effect on the shareholders as the profit will be wrongly stated. Further, it is implied condition of AASB 136 that the users of the financial statement shall be assured for true figures of the items included in the statement as various important decisions based on the financial statement information. Thus, the revalued figure of plant, equipment and property will show more accurate and appropriate information which in turn will have a significant impact on the share value of the company. On the contrary, the share value measured on the historical value will definitely mislead the investors as the true value will not be revealed (Zakaria et al., 2014). Thus, if the directors decide not to revalue the assets will adversely affect the shareholders wealth as they will invest without knowing the assets true value and companys actual performance. Analysis of equipment, property and plant Amcor Limited Amcor Limited is engaged in providing packaging materials, paper and plastics for metals and these products are used for bags, plastic tubes, solid fibre containers, wrapping of the papers, cans and plastic rigid containers. While going through the financial statement of Amcor Limited for the closing of the year dated 30th June 2016, it was recognized that the amount of equipment, property and plant was USD 2690 million under the balance sheet. The company recognize their asset valued at the cost value less the accumulated depreciation and the amount of any impairment losses. The company provides the depreciation on the basis of straight-line approach. Further, the purchase cost is inclusive of the cost of purchase, repairing cost and the any other cost spend to bring the asset in usable state. The assets are derecognized on sale or under the condition where it is probable that the asset is not able to generate further economic benefit (Wali, 2015). For leasehold determination or leasehold assets the depreciation ion that asset is spread over the lease period or the assets useful life, whichever less. The leased assets value is calculated on PV of MLP and fair value, whichever is lower. As per conceptual framework of AASB the financial statement shall be presented with the faithful representation and the reports shall further be complete, concise and neutral from all aspects and shall be free from intentional or unintentional error, fraud or material misstatement. Further, as per the conceptual framework and interpretation issued by AASB and IFRS, the financial statement shall be faithfully represented along with the fundamental quality to make the report useful and transparent. It has been identified from the annual report of Amcor Limited that the equipment, plant and property under the financial statement of the company is stated under the revaluation method and therefore, it can be assessed that the financial statement are faithfully represented. Further, the revaluation approach will reveal the real position of the company y which in turn will enable the investors, creditors and borrowers to take important decisions. Thus, it can be stated that the companys rev aluation approach to measure and state the value of equipment, property and plant in the financial statement of the company, that is for Amcor Limited is appropriate and can be regarded as per the requirement of AASB and IFRS framework. References Amcor.com. (2017). Reports. [online] Available at: https://www.amcor.com/investor-centre/company-performance-news/reports [Accessed 11 Sept. 2017]. Christensen, H. B., Nikolaev, V. V. (2013). 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