Question

A tutorial question and its suggested solution was:

Q. What is the primary measure used for asset valuation on the statement of financial position? What is the source of this measure and justification for its use?

            Solution: The primary measure used for asset valuation is historical cost. This is one of the fundamental accounting concepts being based on such values being fair, verifiable, conservative and representative of the asset at the purchase date.

Required:

Name an alternative to historic cost for measuring asset values and explain why the alternative method would be used.

Answer 1

An alternative is “fair value” method.

The current market value is fair value. Non-current assets like, machinery, building, and plants could be recorded as fair values in the books of accounts. In the process of doing so the carrying value of an asset (original cost minus depreciation) should be compared with the fair value of that asset – in order to establish such fair value, an adjustment should be made for the difference with the carrying value, known as impairment loss.

This method would be used because of the following reasons:

No.1) this value is more “fair” than the historic method, since the current market indicates the current price only but not the historic price.

No.2) this value is more “verifiable” compared to the historic method. Although this is not the original cost but this could be authentically verified as the market reflects the current price.

No.3) this is conservative too, since it considers impairment loss but not gain.

No.4) there is faithful representation, because fair value indicates more current situation than the historic method, means the data from history.