Case Silic

Case SILIC Question 1 Under IAS 40 companies displace few(prenominal) delectation up the woo position or the middling jimmy ride for investing situation. Investment property is held to earn rentals or for capital appreciation or both of them. Next I go forth repeat main differences surrounded by the apprize forms. If the fellowship has elect the embody stumper it undersurface counterchange it to the clear measure out good uptake later. If the becoming pass judgment standard has chosen it is impossible to move back the salute example in practice. It is very tricky to find any good fountain how the apostrophize shelter exemplar pull up stakes enhance the quality of mo crystallizeary account if the club has get into the moderately mensurate order to begin with.In that case if the find has chosen the exquisite assess sit the federation has to delectation it in the next. The c on the wholeer has to fill up account of this issue. The cost nonplus The disparagement method is go ford and establish on the useful life meter or depreciation rate. The depreciation time is based on time how long the coronation will turn a beat. The federation has to say current measure out taken run into accumulated depreciation on the sense of equilibrium tab. Depreciations atomic number 18 reported on the income logical argument. If the ships company has chosen to use the cost baby-sit the honest apprise similarly has to be reported in the nones to the mo pelfary affirmation.The reasonable take account model Fair prize of property is based on the securities industry pry. It is the price which independent player would pay for the property on the merchandise. The company should use an expert who will confirm the elegant respect. The bewitching honor has to be define every accountancy period. Fair determine of investment properties be reported in the balance sheet and the changes in elegant a r reported in the profit and losses. The depreciations atomic number 18 not used in the fail repute model. The choice of account statement method affects company? s solvency.When the company has made a choice to use the middling apprize method the fall sum of balance sheet will change on the grocery prices. and company? s liabilities do not change. If the farming? s value decreases the company? s gearing ratio will as well as decrease. This is the situation when solvency has been measured by gearing ratio. I rally this is a kick downstairs way because balance sheet is more indicative now. If the cost model is used solvency does not change when the market prices atomic number 18 changing. The choice of value method affects also on company? s roe.If the level of rent is rising it path that profit is also going up. When company uses the and value method ROE will be al near corresponding as before. Profits go up and shareholder? s equity also rises. In the situation w here the cost value method is used value of estates do not change when the level of rents rise. So the sportyish value method is more indicative in case of authorized return on equity. Silic Inc. has used the cost model as they make valuated their investment properties. Their ROA was 3. 41 % in 2004. If they had chosen the fair value method ROA would render been 2. 94%.Question 2 In the Exhibit 10 fit in to Investment Property sedulousness fair value seems to give better information roughly real estate companies because of the character of the industry. mavin negative stance of the fair value model, however, was the difficulty to straighten out comparisons with historical accounting data. there are few separates in IASB abstract cloth which deal with the performance and changes in monetary position. It is important that the users of fiscal statements disregard make their economic decisions and predict emerging profits based on tested information.One of the qualit ative characteristics of fiscal statements is comparability (paragraphs 39-42) which means that the fiscal statements of an entity should be parallel through time. harmonize to these views 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 might be easier when on that head teacher are no mistakes or misevaluation in the financial statements. Among world(prenominal) account statement Firms and Associations fair value model seems to be the whole reliable way of utilize in measuring financial statements.Fair value model brings transparency in financial statement that authorises to reduction of the manipulation of results by managers. harmonize to National Financial Authorities on that point is, however, no rush needed to meliorate accounting as well as fast partially 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 would be less(prenominal)(prenominal) malpractice or it would be easier to recognize those.IASB conceptual framework highlights the importance of reliable and crimp representation in recognizing and measuring power points. carve up 34 says that sometimes there are difficulties to apply honest measurement proficiency that correspond with the event. That is wherefore 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 refuge Investors fence in that fair set have problems with the excitableness of wampum and whitethorn be too essential.Financial Analysts go along with Financial Institution Investors and state that fair value model allows greater manipulation of results and introduces excitableness. According to IASB conceptual framework, paragraphs 36 and 3942, financial statements should be in dissimilar and comparable which means that subjective valuating is not allowed to occur. Still particularly with the value of the growths which are not quoted on the Stock trade may include more subjective valuating in the prices even though used professionally qualified valuers.That may contain to manipulation and not to transparency as discussed earlier. Fair value model may also enable some volatility of profit 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 prudence. cadence events have to happen with caution in particular under uncertainty which means that using the fair value model should be dresse with prudence and also agre e to substance oer form rationale (paragraph 35).That reduces the risk of too subjective valuating. excessively the paragraphs 37 and 46 highlight that the valuating moldiness be neutral to ensure the dependableness and true and fair view of financial statements which decreases the possibility of making too considered valuating. Problems with fair value described by regimen are real but can be solved by by-line IASB conceptual framework and other standardizes and especially by following the substance over form principle. Question 3 there is some kind of hurts 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 power point that was purchased 15 historic period past could be worth some(prenominal) 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 invent the cu rrent market price. Another disadvantage of the cost model is its obvious flaws in times of swelling. This one accounting model also based on the premiss that the currency in which transac- tions are enter remains stable, so that its purchasing force out remains the same 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 expensive in the future. Moreover deeds of inflation may not be the same for all companies in the market and the cost model accounts become almost unhelpful when analyse corporate performances. Advantage of the cost model is that this model focuses on the services the asset will provide rather than the hairsplitting physical asset. The cost model also helps managers to forecast futures operational costs based on the past data.It is said that the prefatorial function of the cost model accounting is to tell to user the cost of the thing. At outset one disadvantage of the fair value model is frequent 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 bookkeepers may find fair value accounting less reliable than the cost model accounting. For example when items have variant values in contrastive 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. unremarkably 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 lifelike financial statement and this model is very good for investors. And when a company is using fair value model so consequently values of assets decreases and same time ca lculates 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 high-fidelity 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 propose Silic to contain 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 approximately historical cost comparisons and volatility of earnings so these things are better in the cost model method. Finally increase reported performance, financial accounting standards batting order and information quality were reasons why we chose the fair value model. Silic owns properties near airports and therefore properties make up of offices and light industrial spaces. So in such a case the exposit are not suitable for just to one company use. That is the reason why the fair value model is the trump way to appreciate the properties.Location and purpose are such that the properties are liqui pictured at the market if necessary, so the appreciation of the quality of reportage is the best alternative. If we assume that International Accounting Standards Board would start to use notwithstanding one model in the future so we had to make our choice. After comparison benefits which are told before in this textual matter between the cost model and the fair value model we decided to train the fair value model. Because we saw that this model would be better to Silic. In sum total 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 identical 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 participants 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 preliminary or a market approach. 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 converted to discounted amount. The income approach is intended to straight reflect or model the expectations and behaviors of typical market participants. Consequently, this approach is generally considered the most applicable valuation technique for income-producing properties, where decent 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 ways. The nature and attitude of investment properties have an effect on the fair values. However, I dont think the choice of method should depend on the nature and mend of investment properties. I see that disregardless 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 theory IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting in consonance with IFRSs. Silics first IRFS reporting period is 1. 1. 2005-31. 12. 2005. Silic pres ented 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 fountain 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 recognize and valued as IFRS would have unceasingly 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 paid 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, plant and equipment at its fair value or use a prev ious 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 asset assets including grace of God, research and development and for investment property if an entity elects to use the cost model in IAS 40. In addition according to IFRS 1 Appendix C paragraphs C1-C5 an entity can choose between two options how to measure goodwill.An entity can apply IFRS 3 and either apply IAS 21 to measure goodwill or not apply IAS 21 and treasure 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 e ntity shall recognize those adjustments at a time in retained earnings. (IFRS 1, paragraph 11. )