Question

The board of directors of the great wisdom company want to know the impact of measuring the items of the financial statement using current (replacement) cost rather than historical costs. Two sets of financial statement based on different measurement bases for the most recent financial year were drafted and presented to the board of directors by accountant. During the corona virus period ,the reported profit under replacement cost were materially lower than those reported under historical costs. The board of directors were equally divided in to two. They are: 1) Those who thought the draft financial statement showed ‘true and fair view of financial position and financial performance under historical cost. 2) Those who thought the information reflects true and fair view under replacement costs. There are four measurement bases that can be used to measure assets .They are historical cost, current(replacement)cost, realizable (settlement) value and present value.

Required: i)Explain the meaning of ‘true and fair view’ of a company ‘s financial position and financial performance

. ii)Explain why two measurement bases gave different financial information.

iii)Explain which of two sets of financial statements provide the true and fair view of financial position and financial performance of great wisdom company.

Answer 1

1. Company's financial statements are considered to be reflecting true and fair view if the financial information and amounts reported are not material misstated from the financial information and amounts that are required to be reported if financial statements are complied with its applicable financial reporting framework (FRF).  Thus in simple terms if Difference between Financial statements (Not complied FRF) and Financial statements (FRF complied) is IMMATERIAL then Financial statements are reflecting true and fair view.

2. Historical Cost measurement method is based on Past/Historical costs which have already incurred.

Replacement Cost measurement method is based on current costs which are required to replace the same asset with similar functionalities.

Since both methods are based on different time frames of cost, thus they gave different financial information.

3. During the corona virus period ,the reported profit under replacement cost were materially lower than those reported under historical costs

Financial statements here would be reflecting true and fair view if the company follows replacement cost method which reflects more of the true position of the company during the corona virus pandemic.