Value Relevance of Deferred Tax

Question: Discuss about the Value Relevance of Deferred Tax. Answer: Introduction: The current essay aims to discuss the measurement of property, plant and equipment (PPE) at either revaluation model or cost. The purpose behind the revaluation of fixed assets is to bring forward in the books the fair market value of the fixed assets. This night provide the organisations with an opportunity of investing in other sectors. As pointed out by Hu, Percy Yao (2015), fair value is the amount expected from the sale of an asset or paid in transferring a liability in an arranged transaction between the participants in the market at the date of measurement. The non-current assets could be depreciated, depleted or amortised. However, the amounts of non-current assets are minimised on the balance sheet, which result in loss recognition. The following factors are necessary for an Australian organisation to take into account at the time of revaluing its assets: The Australian population is attached tightly to the belief of labour and social peace. At the time, the Aussie politicians doubt any conflict scenario that might result in retaliations in the upcoming elections; they implement measures to ensure social peace. The intensity of political cost is associated with firm size in the form of regulations and other legislation interventions as opportunity costs. The visibility of the big firms is greater in relation to existing wealth, which could draw the attention of the elected representatives concentrating more on the profit level. Due to this, the managers of big organisations might apply upward revaluations for minimising the returns on assets and equity along with the capital gains from asset sale to reduce political costs. Foreign stakeholders needs and information asymmetry: Due to the restricted size of the Australian stock market, the listed organisations have diversified their business operations on the overseas financial markets. Thus, an Australian firm involved in global activities needs to deliver information to both the domestic and foreign stakeholders. The foreign stakeholders need to transform the financial reports into local currencies; however, they lack in relevant knowledge and expertise. Thus, the Australian organisations have an incentive in improving their financial strength through minimisation of information asymmetry. In this case, the managers of the Australian firms need to conduct upward revaluation for accomplishing this objective. It has been observed that the revaluation of assets would result in greater costs related to contracts. For instance, the auditors devote greater amount of time in assessing the reported figures and discussing the same with the directors. The revaluation of fixed costs is dependent on the judgement of the appraisers, which might lead to bias. The dishonest CFOs and CEOs are probable to use fair value accounting to the efforts for manipulation of net profit. The AASB 116 states that PPE has been difficult to classify in contrast to properties of investment. In order to revalue the PPEs, the accumulated depreciation needs to be anticipated and it needs to be subtracted from the re-valued amount at the evaluation date. Thus, the audit fees are strongly associated with the asset revaluation method. When an organisation measures its assets at the revaluation model, it needs to be updated immediately prior to being categorised as held for sale (Hu, Percy Yao, 2015). The impact of such treatment is that the cost of sales would be placed in the income statement when the asset is categorised as held for sale. Examples: Two companies listed on ASX The two listed ASX organisations that gauge their PPEs with both cost and fair value constitute of Woolworths Limited and Telstra Corporation. The PPEs of Telstra constitute of buildings, communication assets and other plant and equipment. At the time of settling the deferred cash consideration, the future payable amount is discounted to existing value on the acquisition date and it is recognised as finance costs. In addition, it applies straight-line method over the economic lives of the assets. Since Telstra functions as both lesser and lessee, the measurement of leased property is recognised at lower of the fair asset value or present value of minimum lease payments in case of the latter (Telstra.com.au, 2017). In case of the former, it recognises a lease receivable by the existing value of unassured residual value estimated after the lease term termination. On the other hand, it has measured the other PPEs in historical cost method, as there has been no change in the value since the acquisition date. In case of Woolworths Limited, the PPEs comprise of development properties, freehold land, lease improvements and other plant and equipment. It has been observed that Woolworths has opted for cost basis in recording its PPE. The PPE carrying amount of the organisation less accumulated depreciation has stood at $10,062.10 million in 2016 (Woolworthsgroup.com.au, 2017). Despite such information reliability, this figure fails to depict the monetary amount expected to be received from the sale of assets. For providing users with more pertinent information, Woolworths has conducted evaluations for ascertaining the fair value related to its PPE. It has recorded an impairment loss of $203.10 million associated with significant items of continuing operations and $1,431.80 million associated with discontinued operations. The assets belonging to the latter category have been categorised for sale. This depicts that the recoverable amount is lower compared to the carrying amount. Such disclosure has delivered the users with reliable information about the net worth of the property. Conclusion: From the above discussion, it has been found that the major factors needed for asset revaluation include firm characteristics, information asymmetry, audit fees, foreign stakeholders needs and financial portfolio. The two organisations listed in ASX that use both fair value and cost in asset revaluation are Woolworths Limited and Telstra Corporation. This is mainly used to deliver the users with pertinent information about the actual value of the property. References: Hanlon, D., Navissi, F., Soepriyanto, G. (2014). The value relevance of deferred tax attributed to asset revaluations.Journal of Contemporary Accounting Economics,10(2), 87-99. Hu, F., Percy, M., Yao, D. (2015). Asset revaluations and earnings management: Evidence from Australian companies.Corporate Ownership and Control,13(1), 930-939. Telstra.com.au. (2017). Retrieved 14 April 2017, from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Report.pdf Woolworthsgroup.com.au. (2017). Retrieved 14 April 2017, from https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf