Theory and Current Issues of Accounting

Question: Discuss the valuation of assets through historic cost and fair market value and explains the merits and risks associated with triple bottom line reporting in the given case of KGC Ltd. Answer: Introduction This report discusses the valuation of assets through historic cost and fair market value and explains the merits and risks associated with triple bottom line reporting in the given case of KGC Ltd. It also highlights the importance of legitimacy and recommendations to restore the legitimacy and evaluates the ways to record the environmental costs. Historic Cost or Fair market Value The valuation of assets from historic cost and fair market value are the opposite of each other. Fair value measurement requires a full updating of all variables while historical cost needs only partial and less regular updating. Historical cost is based on the principle of the original price, which is also preferred under the Generally Accepted Accounting Principle (GAAP). In this, most assets are reported on the balance sheet at historical cost or the original purchase price of an asset that ensures high reliability in data recorded on the balance sheet. In addition, historical cost also allows the company to allege objectivity and ensure the stability of the costs (Damodaran, 2012).On the other hand, the fair value of the asset can be changed due to volatility in the cost of an asset resulting from changes in market prices. But, fair value cost considers the current market value that provides the most meaningful picture of the financial position. However, fair value may cause volatility in the income statement, but it shows actual reflection on economic conditions. In addition, this method provides better value than historic cost method because the use of historic cost generates outdated information that may lead to wrong decisions in the business. At the same time, historical cost provides no information about the current values of the assets of the business that may also create confusion for the management to make decisions (Baker and Filbeck, 2014).Similarly, at historical cost, there is no requirement to record the opportunity costs of the use of older assets. It is also not effective to report the loss of real value of an asset due to inflation or the gain of real value in asset during deflation. Contrary to this, fair value measurement is more effective than historical cost due to its relevancy fo r the decisions by the users of financial statements. For instance, the management of the company can communicate the private information on asset values. Fair value measurement can be preferred by the company due to its ability to improve comparability, timeliness, and transparency of accounting information. On the other hand, there is no consideration of price changes in historical cost measurement. It is evident that current market is dynamic and there are different external environmental factors including political relations, economic conditions, government rules and regulations that have a significant impact on prices by affecting production line. The use of historical cost measurement can cause a high risk for the firms due to the wrong basis of cost estimation. There, it does not provide the true and fair value of the financial state of the organization. At the same time, this measurement also provides unrealistic fixed asset values because it records fixed assets at the price at which they are acquired (Zakaria, et al, 2014). The changes in the market value of PPE are ignored that can affect the actual value of the fixed assets. In addition, it may also give the false idea about operating performance of the company because, in historical cost accounting, gain or loss on account of holding assets may be mixed up with operating gains or losses. True and Fair value of the PPE Fair value is the price at which the asset could be sold in an orderly transaction between market participants at a particular date. After recognizing an asset, the fair value of PPE can be measured at a revalued amount, which is fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses (Baker and Filbeck, 2014). Accumulated impairment loss= replacement value value in use = $20.5 billion AUD- $12 billion AUD = $8.5 billion AUD Fair value = fair value at the date of the revaluation subsequent accumulated depreciation and subsequent accumulated impairment losses =30 (30/17) 8.5 = 30- 1.765 -8.5 = $19.735 billion AUD. This calculated value presents fair and true value of PPE according to revaluation method. This value of asset is related to the current value of the asset. Merits and risks of Triple Bottom Line aspect to reporting approach If KGC Ltd includes triple bottom line aspect to its reporting approach that can have merits and risks for the business of the company. Triple bottom line presents the approach of the company in relation to the fulfillment of objectives related to people, profit, and planet fairly. KGC has been accused of its environmentally irresponsible practices due to the dumping of ore-waste into a river. At the same time, many environmental groups were opposing the company for its environmentally harming practices. However, the company claims that it provides jobs, cleans potable water and offers healthcare and education to local people. In addition, its operations compensate the harms of its mining and processing in the Star Mountain Range in PNG (Henriques and Richardson, 2013). The focus on the triple bottom line in reporting approach can be effective for the company to improve its image as environmentally responsible company in the region. Through this, it can inform the people in the regio n about its practices, which are based on benefits of society and environment protection. The consideration of triple bottom line in reporting can enable the company to communicate the stakeholders about its approach to managing economic, environmental and social dimensions of its operations. It may help the company to improve reputation and achieve brand benefits and secure social license to operate the business without any hurdle. It is because the company also provides jobs, healthcare facilities, and education that should also be considered while determining its responsibility towards society, environment and shareholders (Willard, 2012). But at the same time, it may be difficult for the company to fulfill all aspects in triple bottom line. It is because when the company will focus on the environment protection by remediating the sludge spill, it will have to pay clean-up costs and fines and offset the work elsewhere and compensate cash payments to victims of its business practices. In such situation, it may cause risk for the company to fulfill the objectives related to high profits for the stakeholders (Gross, 2015). It is because the investment in the fulfillment of social and environmental objectives, the company will have to spend a significant part of profits that may affect the interests of the shareholders. Disclosure triple bottom line in reporting can cause resentment among shareholders regarding high investments in social welfare and environmental protection activities (Savitz, 2012). At the same time, the inclusion of the triple bottom line in reporting approach can cause management conflict. It is because management aims to maximize the returns to shareholders, but the focus on environmental and societal interests may reduce the returns that cause conflicts between company and shareholders. Similarly, it may be difficult for the company to quantify the social and environmental aspects in reporting that may create complexity in communication regarding these activities to the society. Nature and Importance of Legitimacy It is crucial for each organization to focus not only on material resources and technical information but also on the organizations perceived legitimacy. The nature of legitimacy is based on acceptance of organizational activities at legal, sociological and cultural level. It is the generalized perception regarding the actions of the organization in the desired and appropriate way within a social system. Apart from this, organizational legitimacy shows a relationship between the organization and its environment. Stakeholders have legitimacy-determining power as it is necessary for the company to maintain a coalition of supportive stakeholders. Maintaining legitimacy in the eyes of the traditional land-owners, the government of PNG, and the people of Australia can be important for the company to run its business without any hurdles (Beetham and Lord, 2014). Through this, the company can get support from different stakeholders including landowners, government, and community in operatin g the business hassle-free. It provides societal acceptance of the company by handling the ability of the stakeholders to exercise power and authority. There is a great impact of stakeholders power and authority on the business activities as the focus on the societal acceptance can be effective for the company to develop a good relationship with the stakeholders and get support in terms of resource acquisition. It may avoid legal issues and possible lawsuits by maintaining legitimacy through compliance with the government rules and regulations. Organizational legitimacy may support the company to make an adjustment to the changing business environment (Zaremba, 2014). Stakeholders including traditional owners of the land, government and people of Australia will judge the company on the basis of its consistency with rules for appropriate structures or procedures. If the company maintains its legitimacy, then it would be able to be consistent with the needed procedures and structures. It may also ensure the flow of required resources from the environment to the company that may be helpful to operate gold and copper mine in the Star Mountain Range in Papua New Guinea (Destri, 2014). It is because the stakeholders are most likely to provide the resources to the companies that are appropriate in terms of legitimacy. Loss of Legitimacy and its Consequences The legitimacy of KGC is at risk due to the allegation on the company for not fulfilling its responsibility towards environment protection that may also harm the people of Australia. In the given case, the KGC Ltd. pays royalties to the traditional owners of the land and taxes to the PNG government. At the same time, it also contributes to the community development through social welfare activities including grade schools, hospitals, and health centers in the Star Mountain Range in PNG. It also operates water processing plant to protect the environment. Apart from this, this company is the major source of the employment in the region because if it shuts down its mining operations in the Star Mountain Range in PNG, the unemployment rate of 45% among the 32% involved in the labor market will rise to 95%. Besides of these benefits, it is also noted down that company is accused of running activities, which harm the environment at large extent (Zaremba, 2014). The company dumped 5 million liters of ore-waste sludge into a river from which people of local villages draw their drinking water, fish, hunt, harvest lotus root and irrigate their crops. At the same time, sludge flushed through to the ocean. It has raised the issue for the company because many environmental groups in Australia are against KGC due to its environmental irresponsibility. In addition, the company is not ready to properly respond the issue suggesting that the sludge would be diluted at sea and the people of the Range in PNG are dependent on the KGC's operations for their income, employment, potable water, healthcare, and education. If KGC losses legitimacy, then the company may suffer in terms of loss of business in the region due to loss of brand image and possible lawsuits. Loss of legitimacy may lead to the shutdown of the business or loss of support by the local partners and people in running the business. Due to this, the company may face problem-related to resource acquisition that may affect the continuity of mining operations (Destri, 2014). In addition, the company may face lawsuits by the environmental groups and local people that may cause pena lties and damages along with the loss of brand reputation and survival in the corporate world. It may lead to a big loss to the financial performance of the company in the market. Recommendations to Restore Legitimacy KGC Ltd. can restore its legitimacy by adopting good practices in its business operations that could be effective to develop a good reputation among different stakeholders. The legitimacy can be restored by conforming to existing social norms, changing social norms and identifying with social values (Patty and Penn, 2014). Confirmation of existing social norms and identification with social values can be possible through better communication. In such adverse situation, KGC can adopt better practices to dump the ore sludge away from river and ocean. Apart from this, advanced technologies can be used to remove the ore sludge from the water of the river and then take care of preventing the dumping of sludge in the river water in future. There is a need for the firms to consider the interests of people and planet along with profits to maintain sustainability and maintain legitimacy (Zaremba, 2014). Therefore, the company can also communicate its sustainability activities and efforts to p revent pollution and its contribution to increasing employment and conducting social welfare activities including education and healthcare in the region. Concerning, image restoration theory posits that the firm can restore its legitimacy and image by the use of symbols. The company can restore its legitimacy by using language to communicate a message including corrective action, compensation, displacement, minimization and apology to audiences. On the other hand, Goffmans (1959) theory of self-presentation posits that it is effective for the firms to adopt positive disclosure of environmental information on the website to manage impressions of stakeholders and restore legitimacy. Regarding this theory, KGC can also show positive disclosure of environmental performance in order to enhance the appearance of stakeholders and restore legitimacy (Destri, 2014). At the same time, it can also be beneficial for KGC to conduct audit program to determine the actual position of the company in maintaining legitimacy. Through this, the company can determine the contribution of its activities in increasing pollution before any disclosure and adopt better measures to avoid such issues. Ways to record the cost of the harm associated with the sludge spill KGC could record the cost of the harm associated with the sludge spill in GPFS in different ways including past environmental costs not related to ongoing operations, current pollution costs related to ongoing operations and future environmental costs related to ongoing operations. Past pollution not related to ongoing operations is related to the environmental cost to clean up pollution caused in an earlier time. For instance, the remediation costs related to superfund incur today, but due to pollution in past time. This cost is included in product costs that often affect the profitability of products (Emblemsvg and Bras, 2012). Many companies consider this way to record environmental cost appropriate due to its contribution to future benefits in terms of product development. But, some companies consider that this way of recording the environmental costs is not appropriate because it will show a profit even corporation shows a loss. Another way of recording environmental costs is cu rrent pollution associated with ongoing operations. In this method, current environmental costs should be recorded in current product costs. It considers that current operating costs are related to current production in product costs. However, it is difficult to separate or track the environmental costs as companies are unable to decide their product costs accurately. In this, cost reduction is difficult because the firm is not able to determine which products cause the environmental costs. Another method is future environmental costs associated with ongoing operations that are based on estimated costs incurred in the future from todays activities (Stice and Stice, 2013).This method is the most suitable in concern of KGC to record the costs of the harm associated with the sludge spill. It is because this method would be beneficial for the company to make managerial decisions to avoid these costs. It will ensure the company to reduce the environmental risks and liabilities of current operations. Conclusion From the above discussion, it can be concluded that it is crucial for the firms to use fair-market value rather than historic cost due to its appropriateness in providing fair information. At the same time, it is also essential for the firms to maintain their legitimacy to gain the support of the stakeholders and ensure the flow of resources. It is also summarized that environmental costs can be recorded with current and future perspectives. References Baker, H. 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