Week 2 Flashcards
Historical Cost
Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using information derived, at least in part, from the price of the transaction or other event that gave rise to them.
Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a liability becoming onerous.
Historical Cost measures based on the price of the transaction or other event that gave rise to them. Examples could include PPE, inventory etc.
Current Value
Current value is the measurement of assets and liabilities using information that is updated to relfect current conditions at measurement date.
Reflects changes since the previous measurement date, in estimates of cash flows and other factors reflected in those current values.
CV provide more relevant and useful information than historic cost - more useful for decision making by the users of the FS ie museums.
There are 3 current value measurement bases:
accounting measurement is problematic
- Different measurement rules vary depending on the type of element being measured.
- Different types or classes of the same element can be measured in different ways.
- Cost based vs value-based measurement
- Initial recognition or subsequent too initial recognition
- Market-value measurement objectives or entity-specific measurement objectives
- Need different measurement as all have different useful life’s.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Eg. shares on NZX, valuation on land and buildings.
Three valuation Techniques
- Market Approach
- Cost Approach
- Income Approach
Three levels of the fair value hierarchy that are used to categorise the inputs to the valuation techniques used to measure fair value under NZ IFRS 13.
- Level 1 inputs
- Level 2 inputs
- level 3 inputs
Value in use/fulfilment value
reflects entity specific current expectations about the timing and uncertainty of future cash flows.
Examples could include provision for LSL, value in use of PPE etc.
Current cost
The current amount that would be paid to buy an equivalent asset or take on an equivalent liability.
Examples could include replacement cost for state highway network, collections in a museum etc.
Describe the theory Current Cost Accounting
Provides a calculation of income that, after adjusting for changing prices, can be withdrawn from the entity and still leave the physical capital (operating capacity) of the entity intact
Exit Price
The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants
A real estate company might use exit price to value a commercial property it owns. The exit price would be the amount the company could sell the property for in the current market. This valuation would consider factors such as market trends, location, and the condition of the property.
Market Approach
Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
This technique relies on observable market data to estimate fair value
Cost approach
The amount that would be required currently to replace the service capacity of an asset (current replacement cost)
Income approach
Current market expectations of future amounts.
Eg. Present value techniques
fair value based on the present value of future cash flows that the asset is expected to generate. This technique considers the asset’s potential income and discount rates to calculate its value.
Valuing a state highway: Waka Kotahi’s annual report
Cost approach:
**Market Data: **There may be limited market transactions or comparable sales for state highways, making the Market Approach less practical.
Income Generation: State highways are primarily public assets and may not directly generate income in the way a commercial property might, making the Income Approach less suitable.
**Replacement Cost: **The Cost Approach provides a practical means of valuing infrastructure by estimating the current cost to replace the highway, adjusted for depreciation.
This method is useful for public assets where market transactions are rare and direct income generation is not a primary consideration.
Waka Kotahi:Cost Approach to value state highways.
This approach aligns with the nature of their assets, which are public infrastructure with significant replacement costs. The cost approach allows Waka Kotahi to reflect the expense involved in constructing or maintaining the highway, providing a practical valuation method for assets where market transactions and direct income streams are not relevant.
Level 1
Quotes prices (unadjusted) in active markets for identical assets that the entity can access at the measurement date.
- Quotes prices for shares listed on the NZX
- Commodities such as gold and crude oil
- similar pieces of art from the same artist should at auction e.g. Sotheby’s.
