Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
to trade the rights attached. (The schemes are often referred to as ‘cap and trade’).
Some of the key issues are:
• Should an asset be recognised?
An asset should be recognised when the rights were received, and it should
be classified as an intangible asset.
• What value should be ascribed to the asset?
The asset should initially be recognised at cost where there was a cost or at
fair value where there was no initial cost.
• Should the asset be revalued?
Initially the IASB’s thinking was that the asset should not be subsequently
remeasured at fair value; however they noted the staff’s concerns around
potential mismatches between recording the asset at cost and remeasuring to
fair value at each reporting date any emission liabilities recognised under
IAS 37; in early 2004 the IASB’s IFRIC committee decided that emission
rights and liabilities should be measured at fair value, with changes in value
recognised in profit and loss.
• If an asset is recorded what would the other entry be?
When an asset is recognised, a liability should be recognised in the amount
of the minimum obligation assumed by accepting the asset.
• Will such a value always be the same as the asset value above?
If not how will it balance? These two amounts (from last point above) would
differ in each situation, and consequently the asset and liability would not
necessarily be recognised initially at the same value. To the extent the initial
values of the asset and liability differed, IFRIC believed the remaining credit
should be treated as deferred income under IAS 20, Accounting for
Government Grants and Disclosure of Government Assistance (i.e. treated as
a government grant).
2. Resource extraction companies
2.1 Selling fixed assets: creative destruction
Although we are going to concentrate on oil, all resource extraction companies
present the same accounting and valuation challenges. To be accurate, it is the
upstream, exploration and production, end of oil companies that represent the
challenges. The downstream, refining and marketing, businesses are very similar
to other cyclical companies, so we shall ignore them here, and concentrate on an
exploration and production company.
Put in a nutshell, what is odd about resource extraction companies is that they sell
their fixed assets. Most companies do not. They employ fixed assets to add value
to raw materials, and what is sold is a finished product or service. But what a
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