Hca To Cca
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Hca To Cca

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Historical cost accounting to current cost accounting

Historical cost accounting to current cost accounting

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  • 1. MOROCCO IIR: Telecoms Cost Accounting Karim NOUIGUA, Manager Cost Analyst, MEDITELECOM
  • 2. HCA VS CCA VALUATION METHODS CURRENT COST ACCOUNTING ADJUSTMENTS
  • 3. HCA To CCA CCA HCA Limits Advantages
  • 4. HCA To CCA Historic cost Accounting Current Cost Accounting • At price paid today At price paid at time of purchase • For most efficient technology available Valuation today: Modern Equivalent Assets (MEA) • complex formula (Ratio method) Depreciation • from accounting books or (Roll-forward method) • Gross Book Value GBV / financial lifetime • function of Gross Replacement Cost, cost economical lifetime and yearly price changes • Relatively simple • Supports economically efficient decisions • Easy to produce Strengths • Provides absolute price floors and ceilings • Transparent and reconcilable • Outputs sensitive to specific chosen • Embeds economically inefficient resource methodology allocation Weaknesses • Mis-states real profit • May give volatile movements in profit over time
  • 5. CCA: ALTERNATIVE VALUATION METHODOLOGIES
  • 6. CCA: ALTERNATIVE VALUATION METHODOLOGIES CCA Hardly significant and/or Practical impossible to Easier be identified estimation & verification Ideal CC = min[RC, max(NRV,EV)]
  • 7. HCA VS CCA VALUATION METHODS CURRENT COST ACCOUNTING ADJUSTMENTS
  • 8. VALUATION METHODS UNDER CCA
  • 9. Analytical method (Absolute valuation & Indexation) Asset valuation method Name Description Suggested scope of application Analytical method (Absolute Quantities valuated at current The basic method valuation) prices Analytical method (Indexation) Indexation of historic cost values For unmeasured quantities (e.g.intangible assets) and asset classes with consistent composition 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. 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 to occur again at the time when valuation is made.
  • 10. MEA - Modern Equivalent Asset Asset valuation method Name Description Suggested scope of application Modern Equivalent Assets Valuation of equivalent assets of when technology is no longer available due to (MEA) current technology technological obsolescence or is still available on the market, but is not representative of the most modern technology Preconditions: the asset under valuation is no longer available on the market; 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
  • 11. Historic costs equal to current costs Asset valuation method Name Description Suggested scope of application HCA = CCA Use of historic costs as current For recently acquired or short-lived assets or asset costs values limited in amount, provided that, in aggregate, materiality limits are not overcome. Recently acquired assets Short-lived assets Assets revaluated or devaluated in financial accounts Assets irrelevant to telecommunication activities: Assets with negligible unit and aggregate values.
  • 12. VALUATION METHODS UNDER CCA Indexation Historic cost Absolute valuation Practical Mix of all three Ideal
  • 13. Choice of method to evaluate current cost asset Is useful life of the YES « A » asset short or is its Historical cos economic value valuation negligible? NO Are assets using NO The asset value is the same technology as « A » asset determined through MEA still marketed? YES NO Indexation Is technology Analytical method obsolete? Current price YES Is the cost of the YES Indexation « A » asset using Analytical method obsolete technology ≤ the MEA cost Current price NO The asset value is valued through MEA
  • 14. Asset valuation example’s
  • 15. HCA VS CCA VALUATION METHODS CURRENT COST ACCOUNTING ADJUSTMENTS
  • 16. CURRENT COST ACCOUNTING ADJUSTMENTS Operating OPERATIONAL TERM Capital the company’s capacity to Financial produce goods and services FINANCIAL TERM Maintenance the value of shareholder's equity Capital Maintenance
  • 17. CURRENT COST ACCOUNTING ADJUSTMENTS • Value adjustment • Variation in the • P&L effect of higher depreciations to be of fixed assets to annual calculated on the the current depreciation rate difference of current cost identified value. between opening and closing value of previous financial years. Revaluation/de Additional Backlog -valuation of depreciation depreciation fixed assets • Differences between the operating costs of an used asset and MEA operating costs. Operating costs
  • 18. CHOICE OF DEPRECIATION METHOD There are two methods by which CCA depreciation may be calculated: Ratio method Roll-forward method FORMULA CCA depreciation = (GRC open + CCA depreciation = historic GRC close)/(GBV open + GBV close) depreciation x (GRC/GBV) x historic depreciation simple to implement, and more widely applicable, works effectively when the including where there are high levels of recent additions are levels of additions but more low, and volumes of the asset complicated to calculate. are stable.
  • 19. MEA Calculation Assuming no operating cost or economic life differences between the existing and MEA, in: net charge of 60,000 (being The reduction written-back the net fall in in the gross RC depreciation of the asset value of 90,000 30,000 as an impairment).
  • 20. 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) 600 Less Holding gain (1200 – 1000) 200 Current 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 4000 Adjustment needed to bring depreciation Charge to current cost accounting basis 3000 Current cost depreciation 7000
  • 21. 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 Depreciation Replacement Year Replacement Historical Supplementary Cumulative Required Backlog Cost Cost 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 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.
  • 22. Cost Adjustments (Example 2) 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 Depreciation Replacement Year Replacement Historical Supplementary Cumulative Required Backlog Cost Cost 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 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.