Question

What do we have in common or not?

1. Build an argument against requiring current market values on the balance sheet.

Utilizing the historical value on the balance sheet provides a look into the real transactional value of the asset. What the company paid is ultimately what the company paid – there is nothing left for interpretation. Utilizing the historical cost approach maintains consistency in the documentation of assets and liabilities. For example, in today’s COVID climate, a company could decide to report higher valuations of certain assets/liabilities to make their balance sheets look more appealing. Even if the exercise was done in all levels of honesty, the value of assets and liabilities can change daily – especially in a volatile economy, Giving businesses the autonomy to make valuation decisions could lead to a misrepresented balance sheet.

2. Build an argument against using historical cost.

Utilizing current market values can provide a more realistic view of the company’s overall worth. For example, if a company had purchased a building/property in 1970 for $100,000 that building/property would certainly be worth 5 -10 times more than that in 2020. In a situation where a company was trying to sell their business, understanding, and documenting, the current market value of an asset (like a building) would make for a more realistic balance sheet and the company’s overall worth.

3. Which of the two arguments do you find most convincing?

I feel that using historical cost method should still be used in order to properly document. I feel that footnotes in filing paperwork could easily outline the age and potential worth of an asset in question. I believe giving companies the option of noting what they “believe” is a value of an asset could cause them issues down the road on what they truly have as assets in the company.

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What do we have in common or not?

a. If assets will be recorded in the balance sheet at current market value it shall be subject to manipulation of accounts and financial statements . It is not possible in case of every assets to ascertain its current market value exactly in such case possibility of bias arises and it may results in distorted information. Thus chances of manipulation also arises.

b. Historical cost is price paid for asset, with time market cost may change but asset shall be recorded in financial statements at historical cost only. This will result in incomplete information because financial statements are showing historical cost which is not valid for current time.

c The most convincing argument is argument against requiring current market values on balance sheet(option a) because doing so will give rise to manipulation which shall effect users decisions. More over if assets are not shown at current market values which shall result in incomplete information this shortcoming can be eliminated by disclosing current market values in footnotes to financial statements.

Answer 1

Option . B

If entity record assets at historical costs, it will not reflect the current value of the company and the other effect is if we record asset at historical cost then the asset will be depreciated on that basis, one of the reasons of charging depreciation is to keep funds ready to purchase the asset at end of its useful life but funds will not be sufficient if we depreciate on historical basis due to inflation the price of asset may have increased then entity will require more funds to acquire such asset.

Also, revaluation is permitted by IAS 16, and the stand taken in the argument that showing current assets at their market value leads to manipulation is not tenable, because entity will not randomly measure the current value of asset it will follow specific procedure may be assets will be valued by internal experts or external experts (Registered Valuers). Yes, there may be bias of management exits but at the time audit their judgments are evaluated, so it is not possible to over manipulation of asset value. Even entity can give information regarding historical costs in notes to accounts.

If the market value is lower than carrying amount then entity has to charge impairment of asset and bring down the value of asset since the intention here is entity should not show the value of asset more than recoverable amount and it is given in IAS 36.

So, to reflect Correct value of entity , it is preferbale to show current market vakue of assets.

(Hope you will understand this, please give your valuable feedback)