hca to cca
DESCRIPTION
Historical cost accounting to current cost accountingTRANSCRIPT
MOROCCO
Karim NOUIGUA, Manager Cost Analyst, MEDITELECOMIIR: Telecoms Cost Accounting
HCA VS CCA
VALUATION METHODS
CURRENT COST ACCOUNTING ADJUSTMENTS
HCA To CCA
HCA LimitsCCA
Advantages
Historic cost Accounting
At price paid at time of purchase
Current Cost Accounting
• At price paid today
• For most efficient technology available today: Modern Equivalent Assets (MEA)
Valuation
HCA To CCA
• from accounting books
• Gross Book Value GBV / financial lifetime
• Relatively simple
• Easy to produce
• Transparent and reconcilable
• Embeds economically inefficient resource allocation
• Mis-states real profit
• complex formula (Ratio method)
or (Roll-forward method)
• function of Gross Replacement Cost, economical lifetime and yearly price changes
• Supports economically efficient decisions
• Provides absolute price floors and ceilings
• Outputs sensitive to specific chosen methodology
• May give volatile movements in profit over time
Depreciation Depreciation
cost
Strengths
Weaknesses
CCA: ALTERNATIVE VALUATION METHODOLOGIES
CCA: ALTERNATIVE VALUATION METHODOLOGIES
CCA
Practical
Easier
estimation &
verification
Hardly
significant
and/or
impossible to
be identified
Ideal
CC = min[RC, max(NRV,EV)]
HCA VS CCA
VALUATION METHODS
CURRENT COST ACCOUNTING ADJUSTMENTS
VALUATION METHODS UNDER CCA
Analytical method (Absolute valuation & Indexation)
Advantages :
� the valuation at current cost assets whose quantities are not easily determined (grouping them in homogenous classes);
� the maintenance of a suitable correlation between current and historic values.
Name Description Suggested scope of application
Analytical method (Absolute
valuation)
Quantities valuated at current
prices
The basic method
Analytical method (Indexation) Indexation of historic cost values For unmeasured quantities (e.g.intangible assets) and
asset classes with consistent composition
Asset valuation method
� the maintenance of a suitable correlation between current and historic values.
Conditions:
� technology related to the assets types under valuation has not changed significantly in time;
� by using external and/or internal sources (i.e. statistics available at purchasing department), a reliable and significant index can be defined measuring variation of specific prices;
� historic asset cost to which index has been applied was not “influenced” by specific circumstances, which are not expected tooccur again at the time when valuation is made.
MEA - Modern Equivalent Asset
Preconditions:
� the asset under valuation is no longer available on the market;
Name Description Suggested scope of application
Modern Equivalent Assets
(MEA)
Valuation of equivalent assets of
current technology
when technology is no longer available due to
technological obsolescence or is still available on the
market, but is not representative of the most modern
technology
Asset valuation method
� the asset under valuation is still available on the market, but emerging technology, considered as “modern equivalent technology”, is available at lower costs than costs of technology to be replaced;
� new technology is available on a reference market for a business.
Adjustments under MEA method:
� Purchase cost adjustment� Operating costs adjustment
Historic costs equal to current costs
Name Description Suggested scope of application
HCA = CCA Use of historic costs as current
costs
For recently acquired or short-lived assets or asset
values limited in amount, provided that, in aggregate,
materiality limits are not overcome.
Asset valuation method
� Recently acquired assets� Short-lived assets � Short-lived assets � Assets revaluated or devaluated in financial accounts� Assets irrelevant to telecommunication activities:� Assets with negligible unit and aggregate values.
VALUATION METHODS UNDER CCA
Absolute valuation
Historic cost
Indexation
Ideal
Practical
Mix of all three
Choice of method to evaluate current cost asset
Is useful life of the
« A » asset short or is its
economic value
negligible?
Are
assets using
the same technology as
« A » asset
still marketed?
Historical cos
valuation
The asset value is
determined through MEA
NO
NO
YES
YES
Is
technology
obsolete?
Is the cost of the
« A » asset using
obsolete technology ≤
the MEA cost
The asset value is valued
through MEA
Analytical method
Current price
Indexation
Analytical method
Current price
Indexation
NO
YES
YES
NO
YES
Asset valuation example’s
HCA VS CCA
VALUATION METHODS
CURRENT COST ACCOUNTING ADJUSTMENTS
CURRENT COST ACCOUNTING ADJUSTMENTS
OPERATIONAL TERM
the company’s capacity to produce goods and services FINANCIAL TERM
OperatingCapital Financialproduce goods and services FINANCIAL TERM
the value of shareholder's equity
CapitalMaintenance
FinancialCapital
Maintenance
CURRENT COST ACCOUNTING ADJUSTMENTS
• Value adjustment of fixed assets to the current identified value.
Revaluation/de-valuation of fixed assets
• Variation in the annual depreciation rate
Additional depreciation
•P&L effect of higher depreciations to be calculated on the difference of current cost between opening and closing value of previous financial years.
Backlog depreciation
• Differences between the operating costs of an used asset and MEA operating costs.
Operating costs
CHOICE OF DEPRECIATION METHOD
There are two methods by which CCA depreciation may be calculated:
Ratio method
CCA depreciation = historic
depreciation x (GRC/GBV)
Roll-forward method
CCA depreciation = (GRC open +
GRC close)/(GBV open + GBV close)
x historic depreciation
FO
RM
ULA
simple to implement, and
works effectively when the
levels of recent additions are
low, and volumes of the asset
are stable.
more widely applicable,
including where there are high
levels of additions but more
complicated to calculate.
FO
RM
ULA
MEA Calculation
Assuming no operating cost or economic life differences between the existing and MEA, in:
The reduction in the gross RC
of 90,000
written-back depreciation of
30,000
net charge of 60,000 (being the net fall in
the asset value as an
impairment).
CURRENT COST ACCOUNTING ADJUSTMENTS
A company purchased an asset for 1 000 in January 2007. It holds it for a year and sells it for 1 600 when the replacement cost for the asset was 1 200. Historically, a profit of 600 has been made. This profit can be analyzed as follows:
Profit for 2007 €Historical cost profit (1600 – 1000) 600Less Holding gain (1200 – 1000) 200Less Holding gain (1200 – 1000) 200Current cost profit (or operating gain) 400
if the historical cost depreciation is 4,000 and the current cost depreciation is 7,000, the adjustment should be 3000 as follows:
Depreciation based on historical cost 4000Adjustment needed to bring depreciationCharge to current cost accounting basis 3000Current cost depreciation 7000
Cost Adjustments (Example 1)
Example 1 An asset in Bought at 10 000 €
The expected life is 4 Years
Linear depreciation
Replacement cost decreases 10% per year
YearReplacement
Cost
Depreciation
Replacement
Cost
Historical Supplementary Cumulative Required Backlog
0 10 000,00
1 9 000,00 2 250,00 2 500,00 250,00 - 2 250,00 2 250,00 -
2 8 100,00 2 025,00 2 500,00 475,00 - 4 275,00 4 050,00 225,00 -
3 7 290,00 1 822,50 2 500,00 677,50 - 5 872,50 5 467,50 405,00 -
4 6 561,00 1 640,25 2 500,00 859,75 - 7 107,75 6 561,00 546,75 -
7 737,75 10 000,00 2 262,25 - 1 176,75 - 7 737,75 10 000,00 2 262,25 - 1 176,75 -
Derivation/explanation:- current cost is the gross replacement cost of the asset,- current cost depreciation is derived as the gross replacement cost divided by the asset life,- historical cost depreciation is the original acquisition cost divided by the asset life,- supplementary depreciation is the additional depreciation charged as a result of revaluing the asset,- cumulative depreciation is the sum of cumulative Historic cost depreciation at the end of the previous period, supplementary depreciation for the previous period and current cost depreciation for the current period. -'required` is the difference between the gross and net replacement cost of the asset, and- backlog depreciation is the difference between required depreciation and cumulative depreciation.
Example 2 An asset in Bought at 10 000 €
The expected life is 4 Years
Linear depreciation
Replacement cost is rising by 5% per year
YearReplacement
Cost
Depreciation
Replacement
Cost
Historical Supplementary Cumulative Required Backlog
0 10 000,00
1 10 500,00 2 625,00 2 500,00 125,00 2 625,00 2 625,00 -
2 11 025,00 2 756,25 2 500,00 256,25 5 381,25 5 512,50 131,25
3 11 576,25 2 894,06 2 500,00 394,06 8 406,56 8 682,19 275,63
4 12 155,06 3 038,77 2 500,00 538,77 11 720,95 12 155,06 434,11
Cost Adjustments (Example 2)
4 12 155,06 3 038,77 2 500,00 538,77 11 720,95 12 155,06 434,11
11 314,08 10 000,00 1 314,08 840,98
Derivation/explanation:- current cost is the gross replacement cost of the asset,- current cost depreciation is derived as the gross replacement cost divided by the asset life,- historical cost depreciation is the original acquisition cost divided by the asset life,- supplementary depreciation is the additional depreciation charged as a result of revaluing the asset,- cumulative depreciation is the sum of cumulative Historic cost depreciation at the end of the previous period, supplementary depreciation for the previous period and current cost depreciation for the current period. -'required` is the difference between the gross and net replacement cost of the asset, and- backlog depreciation is the difference between required depreciation and cumulative depreciation.