5 Flashcards
Why is measurement important and what is it
Process of quantifying in monetary terms information about an entities assets, liabilities, equity, income and expenses
What is a measurement basis
An identified feature of an item being measured
What is included in a financial statement
Assets, liabilities and equity, income and expenses. Items will be included only if we can measure them at monetary amount
What is the problem with traditional and historical cost (money measurement unit)
Items bought several years ago appear cheap to use so profit looks high. Adding up measurements of items bought at different times may not be meaningful so historical cost doesn’t represent current value of a companies asset
Is historical cost a neutral system
No because gains are recognised only when realised but losses are provided for when expected. Companies can manipulate timing of profits by advancing or deferring sale of assets that have risen in value. If you want bigger profit sell older asset
What is purchasing power measurement unit
Adjust all measurements for changes in price levels by using a unit representing purchasing power at reporting date
What requires use of purchasing power unit
IAS 29 for accounting in hyperinflationary economies
Are purchasing power numbers real
No. Instead standard setters now use fair value when a current value is considered necessary instead of historical costs
What is fair value
Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. Fair value is a current market based exit price without deduction of costs to sell
What are examples of dimensions of measurement
Past prices, current prices, future prices. Entry value, exit value 
What are entry values for assets
Based on cost to company of buying an item at historical cost or current replacement cost
What is historical cost
What did item cost when it was acquired. This is traditional basis for accounting, and objective measure based on an actual transaction
What is current replacement cost
What item would cost to buy at reporting date. This is an estimate and possibly not relevant if company would not replace item
What is entry values and depreciation
For assets that are expected to be used over several periods, cost is charged as an expense systematically over assets useful economic life and using depreciation or amortisation so balance sheet value falls. I measure that the tax depreciation and/or impairment Is cost based, as amount shown in accounts will be based on historical cost or current replacement cost. If a building is revalued upwards to current replacement cost, subsequent depreciation expenses increase
What are two exit values for assets
Fair value = current market price
Net realisable value deducts cost of making item available for sale, and selling costs
Why do companies typically hold most assets for use in business rather than with aim of selling them
Because they expect future economic benefits from using the assets
What does value in use measure
Future economic benefits. It calculates discounted net present value of future expected net cash inflows (GCF). This is a sort of exit value.
What is deprival value 
Amount business would lose if asset can no longer be used
What are types of use of fair value in IFRS
Initial measurements, particularly as a way of estimating cost.
Subsequent measurement –a continuing measurement basis for assets or liabilities.
What are some assumptions of fair value measurement
Sale in principle market assumed
Transport costs deducted but not transaction costs
Sale of assets in highest and best use assumed – this must reflect perspective of market participants in general rather than any specific user
What are the problems with fair value measurement
Level three measurements are highly subjective
Difficult for many assets to avoid entity specific measurements
Use of valuation models and assumptions may be difficult to justify
Is an exit price relevant for assets that business does not intend to sell
Both cost and revaluation models are allowed by IAS 16 and IAS 40 so what factors influence the choice
Relevance to users, verifiability
Costs associated with the valuations
Impact on debt/equity ratio
Effect on income
No tax effect 
What is the link between fair value and economic crisis
Fair value measurement makes financial markets more volatile
