Week 9: Fair value Flashcards
What are the 4 measurement bases ?
1) Historical cost
2) Fair value
3) Value in use/ Fulfilment value
4) Current cost
What is historical cost?
Based on past information from the price of the transaction/ events that gave rise to it.
What is fair value?
Price that would be received to sell an asset, or paid to transfer a liability at measurement date. Reflects current market conditions.
E.g. if you buy a laptop for £1000, you sell it in a years time for £800 as it has reduced value.
What is value in use/ fulfilment value?
The present value of cash flows that an entity expects to derive from the use of an asset. e.g. what value is the laptop to you, you may use it for uni work so value it higher at £900.
What are the different valuation techniques of fair value?
- Market approach- Looks at the market and sets an appropriate price.
- Cost approach- How much it costs to replace it, may be the same as market.
- Income approach- Converts income stream into an indicator of market value.
Does IFRS 13 include transaction and transportation costs in the value?
Does include transportation
Does not include transaction.
What is the principle market?
The market with the one with the highest volume and activity for the product.
What are the reasons for using fair value?
- Reflect current economic conditions
- Reflects active management
- Reduces complexity of a mixed- measurement accounting model.
- Improves comparability by making similar items looks alike and dissimilar look different.
What are the reasons against fair value?
Misleading due to:
- Difficult to distinguish between actual transactions and hypothetical values.
- Gains are liable to be reported even though the business has deteriorated, gives an incorrect illusion of profit.
- There is an inbuilt bias towards short-termism.
what is current cost?
cost at measurement date, includes transaction costs
