Question

Fair value measurement is relevant for inventory valuation but less so for property, plant, and equipment. Explain why you agree or disagree with this statement.

Answer 1

We agree to this statement. Fair value measurement is relevant for inventory valuation but less so for property, plant and equipment.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.in the market at the measurement date under current market conditions.

Inventory is part of current assets while property,plant and equipment are non current assets.Current assets are those assets which can be realised or converted into cash within one year or within the accounting/ operating cycle.

Being a current asset, inventory will be sold off regularly, in the current accounting period. So, to show the correct profit earned from the sale of inventory, we should value the inventory at lower of cost or fair value. All its gains/ losses will be realised in the current period itself.

Property,plant and equipment is a non current asset. It is not held for resale.It is held for being used in the business for more than 1 year. It is disposed off when it is fully depreciated or used up. So, to constantly value Property, plant and equipment at fair value, is not feasible because it will unnecessary create unrealised gains/ losses, as the gains / losses will only be realised after its sale takes place.