Introduction

In order to derive the picture of overall financial performance of a company at certain point of time, the financial report plays pivotal role.  The existence of financial report further depends on the process of financial accounting. In the financial accounting, process financial data of any related business are gathered, recorded, summarized and reported. The time of report can be current time or over a certain time. The finance report is the ultimate result of the financial accounting process and it possesses various explanations and statements in form of notes that depict the operative t financial condition of any business organization. The statements of the report are consisted of balance sheets, cash slow statement and income statement (Miller & Power, 2013). The financial statements are presented in the explanatory notes that focus on clarification of issues related to use of inventory, change of equity of the owner, contingencies in liability and other material aspects related to business.

This report focuses on the impacts exerted by cost accounting approach of financial reporting that induces a behavioural pattern of avoiding revaluation of the underlying asset and liabilities of any business on its financial performances. The factors that drive such motivation of the directors of the organization are also indentified and discussed further presenting analysis of PPE reporting in financial report of Adairs, an Australian home & furnishing retailer company with evaluation.

Factors hindering revaluation of plant, property and equity:

Financial accounting of any business operation includes various measure to estimate the value of the underlying assets and equipments. These estimations can be done adopting fair value approach, cost model approach revaluation approach and so on. The fair value financial accounting incorporates the current market value of any in terms of prices, income and cost to assess the intrinsic value of assets of the organization (Argyres & Zenger, 2012).  Under this assets and liabilities of firm are re-estimated that reflects the change in their over time values. One of the string features of this approach is the scope of revaluation over time capturing the correct revised value with increasing time.

Cost model on the other hand deals with the process of delivering financial accounting from the perspective of cost that is cost related facts and data are manipulated in order to asses and report the value of the assets and liabilities. Analysis, summarization and evaluation of all types of involved cost in nay business is undertaken in the cost accounting method. This is one of the component devised to provide advice to management regarding proper actions that follows cost efficient and capable strategies.

Since most of the firm adopt cost model over fair value approach, there is general tendency regarding avoiding revaluation of the assets and liabilities. What factors drive their such motivation can be interpreted by the gain they receive in terms cot saving and earning more profit by showing lesser value of underlying asset in the financial report (Kulikova, Sokolov, Ivanovskaya & Akhmedzyanova, 2015).. Lesser revaluation leads to lower value of assets over time and lower measure of other factors as revealed in the report. This allows the firm to suppress the status of capacity full utilization of the resources. Higher utilization of the resources demands greater productive outcome and greater revenue generated from the sales. Higher the revenue, higher is the revealed income of the firms which require higher payments of taxes related to income, profession and business. So tax avoidance and cost saving in order to capture higher profit out of generated revenue is one of the motives driving behind such decision of avoiding revaluation. Another motive can be revealing lower value of asset intentionally in order avoid or reduce the dividend payment. Lesser value of dividend and lesser return made to shareholders actually let the company capture higher capital gain under their possession that might be utilized in various other purposes such as investment for expansion or innovation.

Effect of avoiding revaluation:            

The problems emanating from application of cost accounting approach in financial accounting is that first of all cost recording capture only the past performances whereas the decisions which are made from the are of future by the management. Cost are ever changing and no cost of last year would remain same that of with this year so cost data are of volatile nature hence not that reliable to be incorporated in the management model (Pinto, Henry, Robinson  & Stowe, 2015). Costs are reflection of capacity utilization Suppression of utilization status or underutilized resources can have greater impact on the cost results hence changing the cost structure.

Cost approach is not always reflection of true operations taking place, as various expenses of financial characters are not included in the accounting system. Here prices and values of asset may not capture the true reflection of the prices and market condition in local and global areas. This process incorporates absorption of cost at rates determined earlier which further leads to over or under absorption of the overheads. Cost accounting requires installation of many records of costing and also their maintenance (Christensen, Glover & Wood, 2012). This incurs higher expenditure that is detrimental to the profit of the business. All the information emanating from this approach helps in taking important decisions of the management. Delays in the receiving information hamper the decisional quality of the management team. The system is also inflicted with rigidity in the operations.

Since the firm avoids revaluation of assets it calls for various disadvantages that avoiding revaluation exerts on the business proceedings.  The greater benefit of using revaluation is authentic information about current market valuation and operations can be derived which are essential for the business to know in order to construct business strategies undertake planning (Henderson, Peirson, Herbohn & Howieson, 2015). . Revaluation approach deals with fair value compared to cost model that make considerations of cost undertaken at the inception of the project. Difference in the valuation of assets and liability leads to ambiguity regarding what funding is to be maintained to meet the cost of them, which might result into failed inefficient management decision.

Adoption of fair value in the revaluation stops manipulation of the companies in the reported net incomes. Due to lack of revaluation firm may purposely arrange some asset disposal to decrease operational net income intentionally or to show such in the report in order to avoid liabilities of higher income. If more liabilities are shown with lesser asset understating the capacity utilization and valuation of underlying operative assets then the business in turn creates problem for its own which hampers its managerial performance and growth overall.

Impact of avoiding revaluation on wealth of shareholders:

The revaluation keeps track of the present valuation as per the market condition and operation. With time market scenario changes with changed indicators like price level, cost and so on. If these overtime changes are not detected, analysed and utilized in form of information the company is running inefficiently. Firms avoiding revaluation approach for assessing financial performance aim to hide the real income level of the company (Blankespoor, Linsmeier,  Petroni & Shakespeare, 2013). The motive behind suppression or hiding lies in the desire of the firm to reduce payment of dividend to the shareholders. The shareholders who have invested in the company and earns profit based on the annual performance of the company in terms of growth of revenue and profit generation, gets affected if the income of the company is tampered. Less income stem from less asset valuation and greater liability reported in the financial statement. This results in reporting of lesser profit generation and hence lesser value net asset backing per of the shareholders. This discards the amount of their profit. As per the financial term, profit accumulation leads to capital and wealth building which gets hampered consequently.

Examination of PPE reporting in Financial Statement of Adairs:

Adairs, an Australian home & furnishing retailer company has been chosen to discuss the components of the financial statement. The company evaluates the equipments and plants following historical approach of cost. The depreciation are accumulated and losses due to impairment are subtracted from it. Calculation of depreciation is done based on the straight line approach applied on the life of the asset and its usefulness. At each reporting date, the residual values, methods regarding depreciation and utility of the life of assets are estimated and reported.

 Derecognition plays important role and disposal is conducted following derecognition. Components of property are derecognised and disposed when there is no scope of economic benefit or utility arises in the future from their further use or to get rid of it. The profit or losses emanating from the process of derecognition are calculated through a taking out the difference between the intrinsic value the assets have and net proceedings of the disposal. All figure related to the gain or loss are recorded and stated in the annual income report of the company.

The company faces liability of making payment to the equity holders and the mode of distribution follows cash and cashless. The distribution has to be authorised and excluded from the judgement of the company. In equity corresponding value is recognised. Distributions excluding cash are measured following fair value measurement techniques applied on the assets valuation. Fair value measurement is recognised and reported quite evidently in the equity. Difference between carrying value of the liability and asset out of the distribution of non-cash assets are stated as gain or loss in the statement of finance.

The retail firm adopts the measurement to be conducted at fair value in order to make valuation of assets and liabilities. The group mostly measures the instruments are derivatives calculated in fair value on each date of reporting. Disclosure for financial instruments is done in fair value. Even for the non-financial assets, the fair value measurements are applied and disclosure is stated and summarised in the following notes. Fair value refers to the price that sells or transfer of any asset or liability would generate and subsequently be received by the parties involved in the transaction at the date of measurement. The underlying assumption playing in the fair value measurement is subject to the fact that the transaction regarding assets or liabilities occurs at particular market primarily advantageous for them and that should definitely be accessible to the group.

The fair value measurement  is done based on the assumption that the price of the assets and liabilities are accessed and adopted following the best economic interest they might gain (Edwards, 2013) .

To incorporate fair value measurement of assets excluding financial value, crucial underlying assumption is that participants in market have ability to create economic benefit by using or selling the asset in its maximum level to any other party who further would make best use of it. The valuation techniques used by the group are the suitable for the situations where data are available in sufficient manner so that fair value can be applied since this maximizes the use of relevant inputs which are observable while minimising the use of inputs which are unobservable. All assets and liabilities regarding the plant and equipments for which fair value is measured are recorded in the financial report. They are categorised in a hierarchy of the fair value. At the first level, there lies the current market prices of identical assets or liabilities and they are not adjusted. In the next level deals with the methods regarding valuation of the lower level inputs which are observable too. In the last level valuation methods are discussed about the inputs which are unobservable.

The estimation f the assets or the liabilities conducted at fair a=value and recorded in finance report helps the Group determine the existence of transfers within the level in hierarchy. At the end of report every time, reassessment of category analysis is done. To disclose the fair value, the firm indentifies the classes regarding the liabilities or assets depending upon the nature they possess evident through the characteristics and also analysing the associated risk in the levels of the hierarchy in fair value.

Conclusion

From the above discussion, it can be said that cost approach of valuing assets and liabilities of a firm is attractive to the business bodies since it allows them to suppress the real valuation at current market price which revaluation definitely has forced them. Taking the cost model the firm focus on the expenditures incurred and its overtime growth. More cost help it show lesser profit and that further implies lesser dividend payment. More cost and lesser income of the firm leads to reduction of tax payment also. All of these allow the firm to create greater fund for its future expansion or other business plans. The Australian firm Adairs have been found to be following revaluation model as it applies fair value measurement to its underlying assets and liability

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