Virgin Media provides services of digital cable, internet, telephone and mobile to residents in the United Kingdom. The statistics show that Virgin Media is the largest service provider in the UK. Studying the financial statements of the company, it has been noticed that the company owns property and equipment, goodwill and intangible assets which are subject to amortization. These are the most important fixed assets owned by the company. Other than these, the company holds current assets which include cash and cash equivalent, trade receivables, prepaid expenses and derivative instruments. The total assets show an increase in 2013 as compared to the previous year.
- Property and equipment.
The property and equipment include support buildings and land, customer premises equipment and distribution system. The value of net property and equipment has increased as compared to the previous year. All these assets have a life ranging between 3 to 40 years. Regular depreciation is provided on the assets. Property and equipment are long term assets which are regularly depreciated. The depreciation is calculated using the straight line method. In case of the customer premises equipment, the authorities may decide to remove the equipment if it is not used to a long period of time.
Virgin Media may face problems in measuring the fair value of assets. Property and equipment are long term assets and regularly depreciated. The useful life of assets may vary. IFRS 13 is used to measure the fair value of an asset which uses the three approaches named market approach, cost approach and income approach. The market approach is based on the cost of similar asset, cost approach is based on the value of replacement of the asset and income approach takes into consideration the future undiscounted cash flows. Depending on the assets or group of assets, the techniques should be applied. Some other possible issues faced by Virgin Media is the potential alternative use of the assets, the characteristics of which assets should be taken into account, for considering the market value of the assets, it could be difficult to determine which market to consider as worthwhile. Virgin Media may also find difficulty in considering the transaction costs of the assets.
The method adopted by IASB for measuring the fair value of fixed asset is not practical for a company like Virgin Media which does not trade its assets in the financial market. The assets are purchased for a long term and are eventually discarded once they produce less than normal returns. The equipment may be replaced with new ones. The disclosure requirements need the company to show its assets at a fair value measurement. The means to determine the fair value are also not suitable for the company because the market price or replacement value cannot determine the fair value of the fixed asset already in use. Adjustments for impairment need to be made. IASB has tried to provide various means of asset valuation along with three different methods to do the same, but it is not fruitful for companies which do not intend to trade in the financial market. Fair value of shares or securities can be determined on a regular basis because they are usually traded in the market. Virgin Media would by no means trade any long term asset in the market. According to the disclosure requirements, the fair value of assets as on the reporting date would be shown by the company. But equipment as well as property is not something the company would be willing to trade in the short as well as the long run. It can be concluded that the IASB method for valuation of fixed asset for reporting is not suitable for a company like Virgin Media who is not willing to trade in the market.
- Goodwill
Goodwill is an intangible and extremely important asset of the company. Virgin Media has acquired positive goodwill from its customers as well as the market. Goodwill is difficult to measure because of various different aspects which can affect the value of the company. Positive goodwill leads to an increase in the value of the company. Any negative goodwill harms the company in the long run as well as affects the way consumers think about the company. It is essential for the company to maintain a positive goodwill from the industry. Virgin Media valued its goodwill at $5794 in 2013 which has definitely increased from the value it carried in 2012.
The difficulty faced by Virgin Media in determining the value of goodwill is in the method of valuation to be chosen. There are various methods to value the goodwill of the company and Virgin Media may face difficulty in deciding on one method. Goodwill also consists of customer relationships maintained by the company. The customer relationships were recorded at their fair values. No depreciation or amortization of goodwill takes place, instead it is annually impaired. Impairment is also done when there are situations which show that the carrying amount of goodwill may not be recovered. The company compares the fair value of goodwill with the carrying value of goodwill. Any amount which lies above the carrying amount in comparison to the fair value is treated as impairment loss. Goodwill amounts to a significant part of a financial statement. The IFRS suggests that goodwill should be valued at cost or replacement amount. The impairment of assets should be considered annually. To determine the fair value of goodwill, the carrying amount of goodwill should be compared with the implied fair value. If the carrying amount exceed the fair value, a loss of impairment should be treated as an expense in the income statement. Impairments show a decline in the future profitability of the business, hence it is not seen positively by the company. The methods given for measuring goodwill are to be adopted by Virgin Media too. Virgin Media has to disclose the value of goodwill in the financial statements. No company would trade goodwill in the financial market hence the methods provided by IASB are appropriate and advisable to use.
Goodwill shows the future profitability of the company and it cannot be traded in the financial market, hence Virgin Media may face problems with the valuation or impairment of goodwill but it has to report the fair value of goodwill in the financial statements. The fair value approaches given by the Board should be followed by Virgin Media in the valuation of goodwill. Goodwill is also affected by various factors like industry movement and economic and fiscal policies. Virgin Media may find it difficult to determine the appropriate value of goodwill due to these factors, but an implied fair value and the carrying value calculation is extremely necessary. A lot can be learnt from the goodwill of a company. Negative goodwill shows a negativity towards the company and may also show reduced profit possibilities. Virgin Media is good on its goodwill and customer relations, its fair value is sufficient enough to show that the company has positive goodwill and the future of the company is bright. The company should follow IASB rules for determination of the fair value of goodwill and report it as per the disclosure requirements of the Board.
© Intangible Assets subject to amortization
The intangible assets other than goodwill are subject to amortization. There were no such intangible assets in 2012. It is essential to determine the carrying amounts of the intangible assets so as to know if there is any amount recoverable from the asset. Cash flow from the assets also helps determine the value of the asset. If the carrying amount of the asset is higher than the undiscounted cash flow which may be generated by such asset, then impairment adjustment may be required. The impairment required is measured by the amount exceeded by the carrying value of the asset in comparison to its fair value. Fair value can be measured by determining the estimated cash flow, or the study of the cost of a similar asset or determining the estimated cost to replace the asset with a new one. Virgin Media may face difficulty in determining the fair value of the asset because an expected cash flow does not provide an accurate measurement of the impairment of the asset. Similarly the cost of replacement of the asset could also be affected by the economic structure and market policies which may have not existed at the time of initial purchase of the asset. The cost of similar asset provides the market value of the asset or the group of assets. This may also have been adjusted according to the economic policies and financial market.
IFRS 5 provides the means to impairment of assets. It specifies that the assets should be classified into held for sale or for distribution to shareholders. The asset should be measured at the fair value. IFRS 5 requires disclosure of any impairment losses and reversals as well as any increase in the fair value of the respective assets. The assets which are specifically held for sale are to be separately shown. Virgin Media does not hold assets meant for sale and nor does it trade the assets in the financial market hence the requirement for such a disclosure need not be fulfilled. The fair value of the assets can be determined using the cost model which can be calculated on the basis of the useful life of the asset or by using the revaluation model which is determined using the market value of similar asset. The intangible assets should be tested for impairment considering issues like decrease in the market price of the asset, reduction in the use of the asset, other issues like change in business climate, economic market conditions could also lead to impairment of an asset. The amortization of the asset shows the future expectations of return from the asset. If no particular pattern can be determined, a straight line method is advisable.
Virgin Media could face trouble in determining the face value of the assets for their impairment, again the usage of the market value may not provide the correct value for its asset. Using the guidelines of IASB, this way of valuation is not practical because Virgin Media may never want to sell off or trade its intangibles. For Virgin Media, this method of determining the fair value of intangible assets is not suitable because the company does not trade the assets in the financial market.
Hence we can conclude that the methods of fair value measurement are not practical for a company like Virgin Media which does not trade its assets in the financial or money market. Majority of its assets are for a long term and put to use for the purpose of the company. They are not meant for sale or for trading. The fair value methods provided by IRFS are basically meant for assets which are traded in the market and are usually held for sale. The methods of fair value measurement may lead to complication and an additional burden of disclosure on the company. These methods are applicable for companies dealing in the financial market and who hold the assets for sale.
All companies are required to follow the statutory regulations set by the Board, the disclosures are also required to be made in an appropriate manner. But it may not be practical for companies who do not trade in the financial market to value their assets according to the fair value as specified by the IASB. Determination of fair value of an asset can be basically done by three methods which have been provided by the IASB, the most suitable method should be chosen for the respective assets. The company should aim to provide true and correct information about the assets and the value of its amortization expenses.
The methods do not take into consideration various issues like change in the industry or market economy. It also does not consider the effects of inflation or the change in value of currency. Hence replacement method may not determine the correct value of the asset. Virgin Media has been using the given methods to determine the fair value or its assets and to reflect the true picture in the financial statements.
Hence it may be impractical for Virgin Media to use the various methods to calculate the fair value of assets but because it is required by the Board, Virgin Media may have to follow suit.
References
Consolidated Financial Statements : Redefining Control. (2011, July). Retrieved from Pwc: http://www.pwc.com.au/industry/real-estate/assets/practical-guide-ifrs-consolidated-jul11.pdf
Emma Blomstervall, T. T. (2012). Implementation of IRFS 3 and Goodwill Accounting. Retrieved from Goteborgs Universitat: https://gupea.ub.gu.se/bitstream/2077/32568/1/gupea_2077_32568_1.pdf
Fair Value Measurement- unifying the concept of fair value. (2011, Oct). Retrieved from Pwc: http://www.pwchk.com/webmedia/doc/634625645360922184_ifrs_practical_guide_jan2012.pdf
Fair Value Measurement. (2012, Dec). Retrieved from IFRS: http://www.ifrs.org/Use-around-the-world/Education/FVM/Documents/EducationFairvaluemeasurement.pdf
Guidlines on amortization of intangible assets. (2010, July 28). Retrieved from Ready for IFRS: http://faainc.blogspot.in/2010/07/guidance-on-amortization-of-intangible.html
IFRS News. (2011, Oct). Retrieved from Grant Thornton: http://www.grantthornton.co.nz/Assets/documents/pubSeminars/GTI-IFRS-news-special-edition-Oct-2011.pdf
Intangible Assets. (2012). Retrieved from IFRS: http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-English.pdf
IFRS at a glance. (n.d.). Retrieved from BDO International: http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20at%20a%20Glance/Documents/IAS%2038.pdf
IFRS 13- Fair value measurement. (n.d.). Retrieved from Deloitte: http://www.iasplus.com/en/standards/ifrs/ifrs13
IFRS 13 Fair Value Measurement. (n.d.). Retrieved from BDO: http://www.bdointernational.com/Services/Audit/IFRS/Need%20to%20Know/Documents/Need%20to%20Know%20%20-%20IFRS%2013%20Fair%20Value%20Measurement%20%28print%29.pdf
IFRS 5- Non Current Assets Held for sale and Discontinued Operations. (n.d.). Retrieved from Deloitte: http://www.iasplus.com/en/standards/ifrs/ifrs5
Intangible Assets Accounting: Amortization. (n.d.). Retrieved from Accounting Tools: http://www.accountingtools.com/intangible-assets-accounting
Mateja Jerman, M. M. (2008, Dec). Accounting Treatment of Goodwill in IFRS and GAAP. Retrieved from Organizacija: http://organizacija.fov.uni-mb.si/index.php/organizacija/article/viewFile/262/524
