10-03-2009, 04:27 AM
Star
I appreciate your approach for discussing the pros and cons. I also liked the way you replied a question on Finance Lease at some other thread.
However, some of the things are quite surprising for me. For example your remarks that where does law say that certificate provides absolute assurance. What is this I mean? Can you tell me where does law say that audit provides moderate assurance?
Here the difference is between "true and fair" and "true and correct". The certificate states "This is to certify that.........". Or "we certify that.......". This certifies a thing in absolute terms and takes the responsibility of "true and correct". This difference is also understandable if one knows the ISAs.
I hope you must have read and be knowing ISAs. So it should be understandable for you.
Your comments about why to charge depreciation on "assets revalued" on consistent basis also depicts that you did not so far have experienced it. I ask you to study IAS 16 to know how assets are revalued. I guarantee you the procedure mentioned in IAS 16 is in fact followed by valuers.
They value assets either on the basis of market based fair values (like Land or investment property) or on the basis or replacement value (like buildings, plant, machinery and vehicles etc). Replacement values are always available for newly constructed or acquired items and have to be depreciated on consistent basis to reduce the "replacement values" to "depreciated replacement values". This is done to match the valuation with current deteriorated condition of the asset.
I wish you to know that normally with the exception of land (valued at market values) all other assets are valued at "DEPRECIATED REPLACEMENT VALUES". All depreciation charged in accounts, however treated, has no bearing or relationship with the depreciation discussed in RULE 8. Rule 8 specifies it as a procedure that how gross valuation will be reduced by the valuer. This depreciation is to be adjusted by valuer in his report to reduce his valuation on consistent basis.
This logically cannot be a depreciation which you understand since the revaluation for issuance of shares has to be made very nearer to the date of issue and such gap of time cannot be so huge which give rise to a need to charge depreciation. If this happens a new valuation will be required.
Further, it is also mentionable that the purpose of such valuation is to assess that the shares are not being issued more than the value of assets. Its purpose is not to state the assets under revaluation model in financial statement at all. Doing so is the choice of accounting method.
In case the value of assets (as per valuation) is lesser than the book values, impairment charge has to be recognised and shares will be issued against reduced net worth. This is as per prudence concept and has to be followed since the business is being transferred.
However, if the valuation of assets is greater than the book values, it is not compulsory to enhance the net worth by increasing the value of assets and issue shares more than the net worth based on book values. It is also not necessary to incorporate such valuation in books of account.
Let me again explain that purpose of Rule 8 is only to check that shares are not being issued on more than the actual underlying value of assets (less liabilities, if any). There is no other condition except to have a validly conducted valuation and a certification that it has been done. These both are interconnected and inter related at least for this very purpose of Rule 8.
I also mention that for stating assets under revaluation model in financial statements (which is entirely another thing and has no linkage with valuation required under rule 8) no rule or law or standard requires specific certification by a practicing CA or auditor. Why? Because such valuations are eventually judged by auditors under a specific ISA during audit. If auditor feels there is some issue, he can modify his report on such valuations as well.
Likewise if a practicing CA feels issues with a valuation done under rule 8 or it is incorrect or misleading in his view, he can either withhold his report and resign from the assignment or can qualify his certification, as may be deemed fit.
Issuance of a wrong certification, believing and knowing it to be wrong, (ie knowing that the valuation is incorrect) will be a professional misconduct.
I again invested this time because I felt you have some issues in its understanding. If the permanent difference still exists, I withdraw from posting further on this thread unless some logical question is asked.
Regards,
Kamran.
I appreciate your approach for discussing the pros and cons. I also liked the way you replied a question on Finance Lease at some other thread.
However, some of the things are quite surprising for me. For example your remarks that where does law say that certificate provides absolute assurance. What is this I mean? Can you tell me where does law say that audit provides moderate assurance?
Here the difference is between "true and fair" and "true and correct". The certificate states "This is to certify that.........". Or "we certify that.......". This certifies a thing in absolute terms and takes the responsibility of "true and correct". This difference is also understandable if one knows the ISAs.
I hope you must have read and be knowing ISAs. So it should be understandable for you.
Your comments about why to charge depreciation on "assets revalued" on consistent basis also depicts that you did not so far have experienced it. I ask you to study IAS 16 to know how assets are revalued. I guarantee you the procedure mentioned in IAS 16 is in fact followed by valuers.
They value assets either on the basis of market based fair values (like Land or investment property) or on the basis or replacement value (like buildings, plant, machinery and vehicles etc). Replacement values are always available for newly constructed or acquired items and have to be depreciated on consistent basis to reduce the "replacement values" to "depreciated replacement values". This is done to match the valuation with current deteriorated condition of the asset.
I wish you to know that normally with the exception of land (valued at market values) all other assets are valued at "DEPRECIATED REPLACEMENT VALUES". All depreciation charged in accounts, however treated, has no bearing or relationship with the depreciation discussed in RULE 8. Rule 8 specifies it as a procedure that how gross valuation will be reduced by the valuer. This depreciation is to be adjusted by valuer in his report to reduce his valuation on consistent basis.
This logically cannot be a depreciation which you understand since the revaluation for issuance of shares has to be made very nearer to the date of issue and such gap of time cannot be so huge which give rise to a need to charge depreciation. If this happens a new valuation will be required.
Further, it is also mentionable that the purpose of such valuation is to assess that the shares are not being issued more than the value of assets. Its purpose is not to state the assets under revaluation model in financial statement at all. Doing so is the choice of accounting method.
In case the value of assets (as per valuation) is lesser than the book values, impairment charge has to be recognised and shares will be issued against reduced net worth. This is as per prudence concept and has to be followed since the business is being transferred.
However, if the valuation of assets is greater than the book values, it is not compulsory to enhance the net worth by increasing the value of assets and issue shares more than the net worth based on book values. It is also not necessary to incorporate such valuation in books of account.
Let me again explain that purpose of Rule 8 is only to check that shares are not being issued on more than the actual underlying value of assets (less liabilities, if any). There is no other condition except to have a validly conducted valuation and a certification that it has been done. These both are interconnected and inter related at least for this very purpose of Rule 8.
I also mention that for stating assets under revaluation model in financial statements (which is entirely another thing and has no linkage with valuation required under rule 8) no rule or law or standard requires specific certification by a practicing CA or auditor. Why? Because such valuations are eventually judged by auditors under a specific ISA during audit. If auditor feels there is some issue, he can modify his report on such valuations as well.
Likewise if a practicing CA feels issues with a valuation done under rule 8 or it is incorrect or misleading in his view, he can either withhold his report and resign from the assignment or can qualify his certification, as may be deemed fit.
Issuance of a wrong certification, believing and knowing it to be wrong, (ie knowing that the valuation is incorrect) will be a professional misconduct.
I again invested this time because I felt you have some issues in its understanding. If the permanent difference still exists, I withdraw from posting further on this thread unless some logical question is asked.
Regards,
Kamran.
