Hca To Cca

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


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;


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


� 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


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.


� 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



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


• 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).


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.

Hca To Cca

Economy & Finance

Transcript of Hca To Cca