Historical and Current Value Flashcards
What is historical cost?
Cost that was incurred when asset was acquired or created
Liability is value of consideration received when liability was incurred
Historical cost advantage?
Are objective
Are reliable
SFP and SCF are consistent with each other
Less possibiltiy for manipulation in asset valuation
Cost is readily understood
Limitations of historical cost?
Overstatement of profit
Out of date asset values
ROCE distorted
Ignores impact of inflation when measuring gain/loss on monetary items
Why does historical cost overstate profit?
Shows current revenue less out of date costs
More inflation = more overstatement
What does current value try to resolve?
Reflect conditions at the measurement date to remove problems with historic cost
Forms of current value?
Fair value
Value in use (assets)
Fulfilment value (liabilities)
Current costs
What is fair value?
Price which would be received to sell an asset, or paid to transfer liability
What is value in use?
Present value of cash flows that entity expects to derive from use of an asset
What is fulfilment value?
Present value of cash that an entity expects to be obliged to transfer
What is current cost of an asset?
Consideration paid at measurement date plus transaction costs
What is current cost of a liability?
Consideration received for an equivalent liability at measurement date minus transaction costs
Advantage of using current value?
Assets and liabilities are measured after management considered the expected benefits from future use or cash flows incurred in fulfilment
What is relevant to needs of information users?
Assess stabiltiy of business entity
Assess vulnerability of business
Judging future prospects
Limitation of using current value?
Problems of providing an estimate of current costs for non-current assets purchased new
