Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
risks and rewards of an asset pass to another party. This is very much a
judgement call by the auditor, decided on a case by case basis.
2. Recognition of the proceeds of sale: this will either be in the form of cash
(straightforward) or an exchange of assets (use fair value for assets
received).
3. Recognition of a profit/loss on disposal.
– The calculation of a profit/loss on disposal is required unless an asset is
sold for precisely its book value. Given that assets are valued at cost (or
revalued amount) less cumulative depreciation, which is based on
judgemental decisions and estimates, it would be most unusual if this
(selling at precisely book value) were to happen. It is important to remember
that the objective of depreciation is not to establish an accurate valuation of
an asset in the balance sheet. Instead it is to charge the entity for the
opportunity cost of using the asset rather than disposal. The extensive use of
historical cost accounting limits the efficacy of the implementation but does
not detract from the soundness of the principle.
– Typically a profit or loss on disposal is treated as a non-recurring item in
the income statement. Again we must be careful here. If we see a continuous
stream of profits/losses on disposals could it be argued that these are a
normalised part of the business? There is some validity to this argument,
especially if disposals are of operating assets such as aircraft or retail stores.
The management of a large pool of operating assets via judicious subleasing,
disposal and exchange is surely a part of on-going activities. On the
other hand the disposal of the head office building in central Paris is unlikely
to be an ongoing event. Therefore, consideration should be given to treating
the disposal of operating assets as recurring items to some degree. However,
careful analysis of these numbers would be necessary to make informed
decisions.
– Disposals may also offer an insight into the adequacy, or otherwise, of a
company’s depreciation policy. A company with consistently high profits on
disposals may be overdepreciating its assets whereas one reporting losses
may not be charging a sufficient level. It is up to the analyst to consider
whether the deviations from an appropriate ‘economic’ depreciation charge
are sufficient to warrant adjustments to a more normalised number.
4. Any accumulated depreciation on the derecognised asset must be
reversed out. The asset is no longer owned and the company must ensure
that the accumulated depreciation recognised on a balance sheet relates to
the assets in hand.
Some complications arise where the asset has been revalued. Note that
revaluations are permitted under IFRS but not under US GAAP. In this case the
profit on disposal is based on a comparison between the sales proceeds and the
depreciated revalued amount. This means that ceteris paribus assets that have
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