Potential Issues in Valuation of Plant, Equipment, and Property

Describe about the Accounting Theory and Current Issues. 

The potential issues that may arise is the agreement on which method or the methods that the accountants and the auditors in the company may use to value the plant, equipment and the property in the organization (Mehta et al, 2012 p193). This may arise from the fact that the different valuation methods may give different values making it hard to arrive at a conclusive amount. The management may also have a say in the valuation process making it hard to arrive at the correct amount in valuation. Risks associated with such misrepresentation are the lack of a true and fair representation of the true value of the assets that belong to the company. For instance, in case they were to take a loan and they over valued or undervalued the value of their assets; such will affect their accessibility to the funds. A false value in the financial statements affects the balancing of the statements as they do not reflect the true value of all assets in the company.   

KGC has the responsibility of revaluing their assets to the market value at the current standing despite the challenges and the cases in court. This is because the fixed assets held by an enterprise for other purposes other than the reselling decrease in value and should be valued an entity. The main purpose and justification for the revaluation of the assets of an organization is to bring the value to the books the fair market value of the fixed assets. This helps in making decisions on whether to resell the assets or to invest in other type of businesses depending on the value at hand (Kaeb, 2007 p237).

Other reasons for revaluing the assets is that it enables the company show the true rate of returns from the capital invested. KGC will also determine the value of the plant, property and equipment as some increase in value while others decrease in values with time. The period between the purchase and the correct price may have a considerable difference. On the other hand, the company should revalue the PP& E as they make the necessary plans on the replacement after their useful lives (Miller, 2006 p75). The provisions for the depreciation of the assets are based on the historic costs which indicate the inflated profits.

The major principles in accounting and the provision for fixed assets dictate that the assets should be revalued at the end of each financial year as reflected in the financial statements. Principles from the International Accounting Standards (IAS) provide the guidelines of what an organization should consider as an asset which will bring forth the economic benefits to the entity (Houy et al, 2010 p627). The measurement of the PP&E are based on the purchase price, the costs that are directly attributed to the asset as well as the costs incurred with the dismantling and the removal of the item at the restoring the site on which the plant, equipment or the property were located. 

Revaluation Process and Its Benefits

It has two options from where to choose from in the principles to apply when revaluing the asset (Goldthau & Sovacool, 2012 p233). The first is either the revalued amount which is the fair value as at the date of the revaluation less any subsequent accumulated amount in depreciation and the accumulated losses attached. The other option is the valuation of the cost minus any accumulated depreciation and any accumulated impairment losses.

Annual depreciation= NBV / remaining useful life                              

16.5 billion/ 3years = 5.5 billion  

KGC LTD

PP & E Movement schedule

Cost/ valuation: AUD (billions)

NBV 16.5

Additions: 12.0  

Reclassification:(20.5)

As at the end of year:8.5

Depreciation

As at the beginning:5.5

NETBOOK VALUE

8.5 – 5.5 = 3billion AUD

The “true” and “fair” Netbook value of KGC LTD is 3 billion AUD its assets are not fully depreciated hence there was no need of revaluation. Therefore, the original cost of the PP & E and annual depreciation should be disclosed in the books as the assets are used to generate income. On the other hand, the useful life of an asset was revised since the contract could be renewed up to 10 years in addition of the current 7 years.

KGC Ltd has many merits within the area that it operates as it has tremendously helped to improve the life and the living standards of the people within the area, either directly or indirectly through provision of employment opportunities. Many of the employees in the organization are from the local areas and it has enabled invention of the major social amenities like the hospitals and schools within which the local people attend for medical attention and for the thirst of education for their children respectively (Godfrey et al, 2010 p1000). The triple bottom line is an accounting framework which touches on three parts that is the social, the ecological and the financial aspect of the community within which the organization operates. It also helps in creating a greater value in the business. This is also the bottom line of the effect the organization has on the environment and the introduction of the full cost accounting.

The triple bottom line or the TBL as commonly known argues that the existence of an organization within an environment and the effect of the same on the environment hence affecting the quality and the life of the people around. In this case, KGC Ltd affects the community negatively through the waste products it emits to the environment and to the water bodies. Such actions risk the life of people health wise. The sludge that it deposited in the village has affected the two local villages (Muduli, et al, 2013 p335). Such has caught the attention of the Australian environmentalist who argues that the company is environmentally irresponsible due to their lack of proper disposal of their waste (Froyd & Willis, 2008 p1723). This makes the organization get exposed at a risk of losing out in their existence within the local community due to the remarks from the management on the role that KGC plays on the community around, such remarks are an attempt to justify their reckless behavior. In as much that the KGC Ltd has helped in uplifting the people of the area, they do not have the mandate to have irresponsible ways of disposal of waste products. 

The Principles of Accounting and Provision for Fixed Assets

The TBL issue also helps in measuring the profits and the returns on investment of each organization. In the recent past, it has incorporated the issue of the environment and the social dimensions which makes it important for the company to have an important tool within which they can support their goals while at the same time managing their environment dimensions. The major concern that KGC Ltd should have even as they engage in their mining activities is the profits, the planet, and the people (Muske et al, 2007 p45). In order to succeed and maintain the healthy relationship between the organization and the environment, it should put measures in place within which to calculate a common ground for mutual benefit.

The risks that the company faces are the possibility of having the legally recognized environmentalists take over the organization and the management of the organization. The social movements may not take it kindly that the company disregards their welfare despite the many benefits that they get from the existence of the organization within their locality. The government may step in and put harsh measures that will affect the proper management of the organization which may affect the profitability of the organization and other areas streaming down to the local people. The management should make plans on how to deal with the risks that affect them before they develop in adverse results.

KGC Ltd has the legal responsibility of maintaining a legitimacy in the eyes of the traditional land owners as it has to pay the dues that it owes to the land owners. This makes it possible for the land owners to enjoy the maximum benefit they can possibly acquire from the organization. The importance of maintaining the legitimacy is that it gives the respect in matters of land ownership hence making it possible for other people on land tenure-ship to give forth the dues they owe other land owners (Fernie & Sparks, 2009 p129). Such will help in improving the living conditions of the people in the local area as the impact has on the less fortunate people in the society.

The ownership of land by the original owners gives them the power of asking for the dues that belong to them as part of the compensation for the amount that they owed. This depends on the rate at which they agreed from the beginning and the increasing number of rates as time goes. In essence, the rate appreciates depending on the new timing and the increase in the number of years (Esteves & Vanclay, 2009 p137). Depending on the agreement of the lease, the organization should continue paying the rates to the land owner to honor the agreement and reduce the risk of conflicts arising.

The Triple Bottom Line and Its Impact on the Environment

The government of PNG deserves some form of legitimacy in terms of the revenue that it will collect from the company as it is one of the main areas that it gets the resources to conduct public matters. Such depends on the category that the KGC Ltd falls in terms of remitting the tax returns (Donoghue, 2004 p284). They should file the tax returns at the right time to avoid the issues with the government hence enable the government provide the services that it should to the public. On the other hand, the government should ensure that their laws and regulations should not affect the normal operations of the organization through imposing new taxation requirements that the organization should pay. 

Such new regulations may push the company in refusing to remit the required resources hence creating more conflicts with the government and the organization. The government requires that all organizations operating within their jurisdiction should pay the relevant and required revenues as long as they make profit (Boston, 2006. p96). The tenure policies in regards to land ownership will ensure that the government does not have to get involved in court cases between the organization and the land owners which will make it a lengthy process. Such will ensure that there is legal and social legitimacy in ensuring that all dues were paid by all organizations including the KGC Ltd.

The issue of legitimacy on the people of Australia is also another issue that the organization should consider. The people of Australia expect some form of respect to the land ownership issues making the KGC organization pay the dues that it respects. Their maintenance of the legitimacy will act as a communication or message to other organizations that they should respect the boundaries when it comes to land ownership (Boehm, 2005 p144). Other organizations operating within Australia may use the example of KGC Ltd if they failed to honor their rules which may make other organizations follow suit crumbling the whole economy of the country. The far end results are more important that the face value of the maintenance of the legitimacy.

The legitimacy of the company is at a high risk due to the current court cases that are facing the company brought forth through their irresponsible actions. Their remarks further aggravate the situation as they feel they are justified to put the lives of the locals at a risk as a result of the many developments that they have helped the PNG people. In order to reduce the risks that they face, they should take actions and rectify the problems they have created which will instill the confidence that the people have on the company (Baskin, 2006 p29). The rare sludge spill may lead to loss of lives of both human and animals due to the reckless actions of the organization. However, in the bigger picture, the closure of the company may affect the lives of many people as most of its employees are from the area.

Risks Faced by the Company

The royalties it owes to the traditional owners of the land within where they mine may further aggravate their position in the land. The taxes to the government and the help they have extended to the community within which they operate do not justify their failure to perform their obligations to the community, the land owners, and the government. Their creditors may come up together to make their demands for the money owed (Azapagic, 2004 p639). There are many other risks that the company may have of which it takes advantage as it is the only monopoly in the organization hence enjoying all the benefits. The government may open another mine that will act as competition to the KGC Ltd PNG Company.

There are many consequences that the organization may suffer and face in a position they were to lose the legitimacy. First, their end of tenure in the land may land them in an expected trouble as the landowners may kick them out of their property (Arya & Zhang, 2009 p1089). Such an action may affect them in that they may have no other option to do their mining as the place has higher returns although they have not paid the dues that they owe to the others. The dragging of court cases may have further negative effects as they have to pay the court fees and processing fees against the government, the landowners, and the environmentalists.

The loss may also affect their future projections as the management has the hope that within some few years to come, there would be large deposits of large deposits of silver and lead ores which may attract a large profit for the company. Such actions may have negative effects on the management and performance of the organization (Solomon et al, 2008 p148). The presence of ores in the land or the adjacent lands may necessitate the need to operate and engage in more mining activities extending to the part of the land. Loss of their legitimacy may make them lose on both opportunities. A consequence on the organization translates to effects on the people in the area. It is evident that the loves of the people around are directly related to the performance of the organization. The risks they face are directly felt by the people within the PNG area.

There is hope for the company in restoration of their legitimacy and they can continue their normal operations and the way they conduct business. This may happen through taking the right steps towards rectifying the mistakes and cases that face the company at the courts. The stakeholders may approach the bank and asking for an extension through which they can request for more time within which they can repay the duties and royalties that they owe to all their creditors (Scott, 2014 p45). This may restore the confidence of the people within the area as they will have more trust in the organization.

Legal Responsibility of KGC Ltd

First and foremost, they should revoke their comments in the court as such comments provoked the environmentalists and other social justice groups. They should take the quickest steps in ensuring that they pay the land owners what they owe them. They may also act on the sludge that they have released to the water bodies that the communities depend on. Since it may be impossible to retrieve the sludge in the water, they could start by purchasing water treatment options and treat the water due to the harmful things they have put in the water for planting and usage by the locals. This will help in creating some form of confidence in the people around (Amanatidou et al 2012 p208). 

|They could also help in bringing tapped water to the locals as a safer method of source of water if it is impossible to treat the water. Engaging in other activities that benefit the community will also put the ratings of the organization within the mind of the community and other stakeholders in the right aspect making it enjoy the same profits as it in the beginning.

It may also restore the legitimacy through engaging the lawyers through whom the organization will solve the cases in the courts. The restoration may have effects of benefit to those related to the organization directly or indirectly. For instance, the employees are the immediate beneficial (Riahi, 2004 p67). Other stakeholder who may benefit from the restoration of the legitimacy of the organization is the major investors on the company. This will ensure that they get their regular incomes in term of the returns on their investments. This ensures that the organization can expand its activities due to the future projections that signify that there may be other ores that may have silver and lead making it expands its activities on the positive side. On the other hand, the government gets the biggest benefit from the legitimacy as the expansion in the activities of the organization lead to an increase in the amount of taxes that it receives from the organization. This becomes a regular source of income for the organization as its existence assures that tax arm of the government that they will remit their returns.

There are many ways through which KGC LTD could record the cost of the harm associated with the sludge spill in its GPFS. It may opt to start with the treatment of the water to reduce the impact of the spill on the sea and the effect it has on the people around as well as the quality of life affected therein (Widmer et al, 2005 p436). On the other hand, it has to record the cost of the hard on their expenses side as they look for options that will rectify the mistake they have already done on the environment. They may also choose to record such costs as part of the responsibility they have towards the community terming it as donations. Such will reflect on the financial statements as donations as it has to record each movement of their money.

An advantage of recording the cost of the harm as an expense will reflect in their accounts and during the auditors reports; they can trace back the amount of money spent in the costs through the receipts. Such will also serve as an incentive through which the management can explain on how they used such a large amount of the shareholders and stakeholders’ money on an activity through the whole community including the interest parties may have such information already. The disadvantage of such a choice is that the owners of the investment may feel cheated s they may rate this expense as a waste of resources since the organization had the choice of disposing their waste in the right way. The advantages and disadvantages of recording the cost as a donation is that it may affect the financial statements through such a large amount of money as it would have no tangible evidence on using the resources. 

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