Part 1
What valuation methods have been used by Metcash Limited to value their different Current and Non-Current Assets shown in the Balance Sheet on 30th April, 2013 ?
Valuation methods of Current and Non-Current Assets
This section addresses valuation methods used by Metcash Limited which need further clarification. In fact, the measurement basis on which an entity applies in financial statements can significantly affect users’ analysis and decision. Therefore, it is important to explore different valuation methods of different classes of assets in the statement of financial position. According to notes to the financial statements in Metcash Limited annual report, the statement of financial position has been prepared using historical cost method, fair value method, the lower of cost and net realisable value method.
Most kinds of assets in the financial statement are evaluated on historical cost basis. The term, historical cost, is defined as ‘the cost incurred by the individual or entity in acquiring an item-measured at the time of the originating transaction’ (Bazley, Hancock & Porter 2010) and is subject to Australian Accounting Standards: ‘Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition’ (AASB 2009). Such assets are: 1) cash and cash equivalents-$50.3 million; 2) disposal groups and assets held for sale-$47.6 million, which are measured at the lower of their carrying amount and fair value less costs to sell; 3) income tax receivable-$24.4million; 4) prepayments and other assets-$5.7 million; 5) investments in associates-$91.3 million, which are ‘carried in the statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value’(Ernst & Young 2013); 6) other financial assets-$0.3 million; 7) property, plant and equipment-$278.5 million, all classes of which are ‘measured at cost less accumulated depreciation and any accumulated impairment losses’ (Ernst & Young 2013); 8) net deferred tax assets-$61.8 million and 9) intangible assets and goodwill-$1708.0 million. In particular, Intangible assets acquired separately or in a business combination have been initially measured at cost, to which cost model is employed after initial recognition. As for goodwill acquired in a business combination, it is initially measured at cost less any accumulated impairment losses, being ‘the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirer's identifiable assets, liabilities and contingent liabilities’ (Ernst & Young 2013).
Two types of assets, derivative financial instruments as well as trade and other receivables, have been measured at fair value which means ‘the amount that a willing buyer and seller are prepared to exchange for an item in an arm’s length transaction’ (Bazley, Hancock & Porter 2010). It is clear that fair value is applied for most kinds of financial assets and Metcash Limited has financial assets that share one or more risks, for example, forward currency contracts and interest rate swaps. So such derivative financial instruments (current and non-current) - $38.3 million, ‘Should be managed and evaluated on a fair value basis’ (AASB 2013). Indeed, initially recognised at fair value when a derivative contract is entered into, they are subsequently remeasured to fair value (Ernst & Young 2013). Referring to derivative contracts, the fair value of them is determined by reference to market values for similar instruments. When their fair value is positive, derivatives are certainly carried as assets. Accordingly, ‘the fair values of forward currency contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles’ (Ernst & Young 2013). As for interest rate swaps in the financial statement, they are measured on the base of cash flows discounted to present value by using current market interest rates. Besides, trade and other receivables (current and non-current)-$1073.3 million, another type of assets valued at fair value, are recognised and carried at original invoice amount subtract a provision for any uncollectable debt.