Question

With reference to Barth (2014), discuss how the author assessed the extent to which unmodified historical cost, modified historical cost, and fair value measurement possess the qualitative characteristics specified in the IFRS Conceptual Framework.

Answer 1

The conceptual framework in IFRS states the qualitative characteristics of the financial statements to be useful which are as follows:

1. Fundamental : Fundamental qualitative characteristics are relevance and faithful representation.

2. Enhancing: Enhancing qualitative characteristics are comparability, completeness, verifiablity and understandability.

According to Barth(2014), Historical cost does not possess the qualitative characteristics of the IFRS conceptual framework as it does not facilitates comparability and relevance but yes it is sometimes relevant. The historical cost should be modified to use in financial statements, it should be indexed for Inflation.

Modified historical cost possess the qualitative characteristics of the IFRS.

It is understandable, complete, accurate, but not considered as faithful representation. This is widely used but both modified historical cost and unmodified historical cost lack meaning.

Whereas the Fair value presentation is more consistent with the new framework and hence it should be widely used. This paper concludes that assets and liabilities at large should be measured at fair value to provide the financial statements with the qualitative characteristics.