Seminar Group 1 Project Team 1

Gary Chong
Michelle Tan
Brenda Kwong
Yeoh Keong Yee
Chua Yan Ting


2
AAA Ltd purchased 2 equipment items on 1 January 20x1.
Equipment 1 has a 2-year useful life (salvage value is zero with
zero disposal cost) and will generate cash flows of $500 at the
end of each year.
Equipment 2 has a 5-year useful life and will generate cash flows
of $250 each at the end of each of the last 4 years.
AAA Ltd operates in ideal conditions under certainty.
The interest rate is constant at 5% per annum
All cash flows from operations in one period are paid out as
dividend on the first day of the following period (assuming that
dividends can be paid of share capital as well)
3
Value of Equipment 1:
500
1.05
+
500
1.05
2
= $929.7052

Value of Equipment 2:
250
1.05
2
+
250
1.05
3
+
250
1.05
4
+
250
1.05
5

= $844.2739

20x1 20x2 20x3 20x4 20x5
Equipment 1 $500 $500
Equipment 2 $250 $250 $250
$250

I=5%
4
Total Value:
Value of Equipment 1 + Value of Equipment 2
= $929.7052 + $844.2739
= $1,773.9791
= $1,774 (Nearest Dollar)

5
Recall that Economic Depreciation
= Value of Asset at START of the year Value of Asset
at END of the year

Total Value of Equipment 1 & 2 at start of 20x1
= $1,773.9791

6





Total Value of Equipment 1 & 2 at end of 20x1
=
500
1.05
+
250
1.05
+
250
1.05
2
+
250
1.05
3
+
250
1.05
4


= $1,362.6781

20x1 20x2 20x3 20x4 20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
7





Economic Depreciation
= $1,773.9791 - $1,362.6781
= $411.3010
= $411 (Nearest Dollar)

20x1 20x2 20x3 20x4 20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
8
Approach #1




Economic Income
= Revenue Economic Depreciation

Economic Depreciation
= $1,362.6781 ( + + )
= $1,362.6781 - $680.8120
= $681.8661


9
20x1 20x2 20x3 20x4
20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
Approach #1




Economic Income
= Revenue Economic Depreciation
= $750 $681.8661
= $68.1339
= $68 (Nearest Dollar)



20x1 20x2 20x3 20x4 20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
10
Approach #2
Hicks definition of Economic Income:
PV of the firm at the end of the year PV of the firm at the start
of the year





PV of the firm at the start of 20x2
= Cash + Value of Machine
= 0 + + + +
= $1,362.6781


20x1 20x2 20x3 20x4 20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
11
Approach #2





PV of the firm at the end of 20x2
= Cash + Value of Machine
= $750 +
250
1.05
+
250
1.05
2
+
250
1.05
3

= $1,430.8120

20x1 20x2 20x3 20x4
20x5
Equipment 1 $500
Equipment 2 $250 $250 $250 $250

I=5%
12
Approach #2

Total Economic Income
= $1,430.8120 - $1,362.6781
= $68.1339
= $68 (Nearest Dollar)
13
Approach #3

Total Economic Income
= Interest Rate * PV of the net asset at the start of the
year
= 0.05 x $1,362.6781
= $68.1339
= $68 (Nearest Dollar)
14


If dividends are not given out, interest on cash
generated by machine will be earned.
15
There will be no changes to Question 1.

The interest earned from the cash flow will not
affect the valuation of the two equipment.
There will be no changes to Question 2.

No interest is earned yet at December 20x1
because cash is only first generated at
December 20x1.

There will be changes to Question 3.

Interest will be earned at December 20x2 from
the cash flow of $500 generated from
Equipment 1.

Hicks definition of Economic Income:
PV of the firm at the end of the year PV of the firm at the start of the
year

Approach #1
PV of the firm at the start of 20x2
= Cash + Value of Machine


= $1,362.6781

PV of the firm at the end of 20x2
= Cash + Value of Machine


= $1,455.8120


Total Economic Income
= $1,455.8120 - $1,362.6781
= $93.1339
= $93 (Nearest Dollar)
20
Approach #2

Total Economic Income
= $68 + (0.05 x $500)
= $68 + $25
= $93
21
22
True
A piece of financial information can be said to have
predictive value if it allows users to predict future
outcomes, so as to make good financial decisions or
evaluate future events.
Financial information need not be a prediction or
forecast itself to have predictive value. Users employ
financial information with predictive value as a tool in
making their own predictions.

23
True
Information with confirmatory value should be such
that it confirms or changes previous evaluations,
therefore being capable of making a difference in its
users decisions.
E.g. A piece of information that allows users to confirm
a previously estimated outcome has confirmatory
value.

24
True
A piece of information is neutral when it is not biasedly
selected or presented in order to increase the
probability that it will be received more favourably or
unfavourably by users.
Such information can still be relevant and useful in
influencing users decisions.

25
True
Faithful representation = Complete, neutral, free from
error
Free from error Completely accurate
Free from error = No errors or omissions in the
description of the phenomenon, and process to
produce reported information has been selected and
applied with no errors

26
Estimate of an unobservable price/value cannot
be determined to be accurate or inaccurate.
However, the information would be free from error
and faithfully represented as long as
- it is specified clearly and accurately that it is an
estimate
- the nature and limitations of the estimation
process are explained
- no errors have been made in selecting and
applying the process for coming up with the
estimate

27
False
Verification of data can be done by direct or indirect
means
Direct means/observation
Verifying an amount or other representation through
direct observation.
E.g. Counting cash
28
Indirect means/observation
Checking inputs to a model, formula or other
technique and recalculating the outputs using the
same methodology.
e.g. Verifying the carrying amount of inventory by
checking the inputs and recalculating the ending
inventory using the same cost flow assumption
29
30
CCC Ltd owns an asset that can be
traded in five differently located markets.
CCC Ltd does not have access to the
market at location 3.
What is the fair value of the asset?

31
Market at
location
1 2 3 4 5
Number of
trades
38 35 34 33 30
Price of the
asset
$30 $28 $27 $25 $32
Transport
Cost
$3 $4 $1 $1 $2
Transaction
Cost
$4 $3 $2 $3 $2
32
fair value as the price that would be
received to sell an asset or paid to transfer a
liability in an orderly transaction between
market participants at the measurement date.
(FRS 113 para 9)
33
A fair value measurement is for a particular asset or
liabilitytake into account the characteristics of
the asset or liability if market participants would take
those characteristics into account when pricing the
asset or liability at the measurement date. Such
characteristics include, for example, the following:
(a) the condition and location of the asset; and
(b) restrictions, if any, on the sale or use of the asset
(FRS 113 para 11)

34
A fair value measurement assumes that the
transaction to sell the asset or transfer the liability
takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most
advantageous market for the asset or liability.
(FRS 113 para 16)
35
The entity must have access to the principal (or most
advantageous) market at the measurement date.
(FRS 113 para 19)
Since CCC Ltd does not have access to the market at
Location 3, we do not consider location 3 when
determining Principal/Most Advantageous market.


36
The market with the greatest volume and level of
activity for the asset or liability.
(FRS 113 Appendix A)




37
Market at
location
1 2 3 4 5
Number of
trades
38 35 34 33 30
Price of the
asset
$30 $28 $27 $25 $32
Transport
Cost
($3) ($4) ($1) ($1) ($2)
Possible
Fair Value
$27 $24 $24 $30
Transaction
Cost
$4 $3 $2 $3 $2
38
Market at Location 1 has the highest number of
trades Principal Market
Location is a characteristic of the asset
Fair value of the asset would be measured using the
price that would be received in that market, after
taking into account transport costs

Fair Value = Price of asset Transport cost
= $30 - $3
= $27
39
No adjustment for transaction costs of $4
Transaction costs are not a characteristic of an asset
or a liability; rather, they are specific to a transaction
and will differ depending on how an entity enters into a
transaction for the asset or liability
(FRS 113 para 25)

40
The market that maximises the amount that would
be received to sell the asset or minimises the
amount that would be paid to transfer the liability, after
taking into account transaction costs and
transport costs
(FRS 113 Appendix A)




41
Market at
location
1 2 3 4 5
Number of trades 38 35 34 33 30
Price of the asset $30 $28 $27 $25 $32
Transport Cost ($3) ($4) ($1) ($1) ($2)
Possible Fair
Value
$27 $24 $24 $30
Transaction Cost ($4) ($3) ($2) ($3) ($2)
Net Proceeds $23 $21 $21 $28
42
Market at Location 5 has the highest net proceeds
Most Advantageous Market
Fair Value = Price of asset Transport cost
= $32 - $2
= $30

Price adjusted for transport cost but not transaction
costs

43
However, since CCC Ltd has access to
principal market (Market at Location 1),
fair value measurement would be for the
transaction taking place at principal
market.
Thus, Fair Value of Asset = $27
44
45

False
FRS 113: 28 The highest and best use of a non-
financial asset
E.g. PPE have multiple uses and need to determine
highest and best use for FV
FRS 113 also applicable to Financial Assets, but FV
already reflected in the financial market, no need to
determine Highest and Best use.


46
True
47
FRS 113: 11 :A fair value measurement is for a
particular asset or liability. Therefore, when measuring
fair value an entity shall take into account the
characteristics of the asset or liability if market
participants would take those characteristics into
account when pricing the asset or liability at the
measurement date. Such characteristics include, for
example, the following:
(a) the condition and location of the asset; and
(b) restrictions, if any, on the sale or use of the asset.

48
E.g. If the asset is located at a remote part, more cost
would be incurred to bring from the current location to
the market.
49

True
50
FRS 113:76 : Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities that the entity can access at the
measurement date.

i.e. It is the most reliable evidence of fair value and
thus should go unadjusted, except for conditions
fulfilled in Para 79.
51

True
52
FRS 113: 91(b) for recurring fair value measurements
using significant unobservable inputs (Level 3), the
effect of the measurements on profit or loss or other
comprehensive income for the period.
Eg. May have too many unrealized gains, resulting in
suspicions for it, thus need to disclose effects of it to
users in the P/L and OCI.


53
True

54
The paper mainly emphasizes banks Amortized cost
model for financial instruments.
Also slow to recognize impairment losses because it
will effect their bottom-line (P/L).
Thus severely overstated the value
Increased exposure to credit & interest rate risk
affected their economic viability
55
56
Asian Market European Market
Australasian
Market
Volume of market - units 4,000,000 2,000,000 1,000,000
Price $19 $16 $22
Costs of entering market ($2) ($2) -
Possible Fair Value $17 $14 $22
Transaction costs ($1) ($2) ($2)
Net Proceeds $16 $12 $20
57
Asian Market European Market
Australasian
Market
Volume of market - units 4,000,000 2,000,000 1,000,000
Price $19 $16 $22
Costs of entering market ($2) ($2) -
Possible Fair Value $17 $14 $22
Transaction costs ($1) ($2) ($2)
Net Proceeds $16 $12 $20
58
Note: For Ankara,
there is no need to
adjust for costs of
entering the market
as they are already
trading in the
market.
A fair value measurement of a non-financial asset takes into
account by using the asset in its highest and best use or by
selling it to another market participant that would use the asset in
its highest and best use

Highest and best use:
Principal Market VS Most Advantageous Market
59
Asian Market European Market
Australasian
Market
Volume of market - units 4,000,000 2,000,000 1,000,000
Price $19 $16 $22
Costs of entering market ($2) ($2) -
Possible Fair Value $17 $14 $22
Transaction costs ($1) ($2) ($2)
Net Proceeds $16 $12 $20
Note: Price is
adjusted for
transportation
costs, but not
transaction costs.
Hence Fair Value is
$17.
60
Principal Market in this case will clearly be the Asian market, with
the highest volume and activity level at 4,000,000 units, which in
the case, would make the fair value of the asset $17.

Note that it is only in the absence of a principal market then do we
consider the most advantageous market, i.e. gives the most net
proceeds [Australasian market]
61
However, it is to be noted that if Asian market does indeed have
the highest volume and activity level, why is Ankara not trading in
that market already?
Do they not have access to the Asian market?
If so, Asian market cannot be considered a principal market
[FRS113:19]

We would then have to consider the next market, and so forth. In
considering the Fair Value of this asset, there has to be much
consideration as to what markets Ankara has access to.
62
Input Amount
Labour and material cost $2 million
Overhead 30% of labour and material cost
Third party mark-up industry
average
20%
Annual inflation rate 5%
Risk adjustment uncertainty
relating to cash flows
6%
Risk-free rate of government
bonds
4%
Entitys non-performance risk 2%
63
Entity has legal obligation to remove the mine
On the basis of paragraphs B23B30 of FRS 113,
Ankara should use the expected present value
technique to measure the fair value of the
decommissioning liability
You can refer to FRS 113 Illustrative Example 37 [@
ASC]
64
Expected Cash Flows
(31 Dec 2013/ 1 Jan
2014)
$
Labour and material cost 2,000,000
Overhead (0.3 2,000,000) 600,000
Third party mark-up
(0.2 (2,000,000 + 600,000))

520,000
Expected cash flows before inflation
adjustment

3,120,000
Inflation factor (5% over 3 yrs) (1.05
3
) 1.157625
Expected cash flows adjusted for
inflation
3,611,790
65
Expected Cash Flows
(31 Dec 2013/ 1 Jan 2014)
$
Expected cash flows adjusted for
inflation
3,611,790
Uncertainty relating to cash flows
(0.06 3,611,790)

216,707.40
Expected cash flows adjusted for
market risk

3,828,497.40
Expected present value using
discount rate of 6% for 3 years

3,214,480.24
66
Risk-free rate of interest for a 3-year maturity on 1
January 2014 is 4%
Entity adjusts that rate by 2% to reflect its non-
performance risk (i.e. the risk that it will not fulfill the
obligation)
Discount rate used to compute present value of cash
flows is 4% + 2% = 6%
67