Question

1. The ‘Conceptual Framework for Financial Reporting’ permits four alternative measurement bases to be used in the valuation of assets and liabilities. These are:

•             Historical cost

•             Current cost

•          Realisable (settlement) value

•             Present value

Required:

Explain these four measurement bases and give an example of each being used in international financial reporting standards.

Answer 1

Historical Cost - This principle states that the assets and liabilities are recorded in the books at the fair value on the date at which they were acquired or they occur. Assets are recorded at the cost that was spent to purchases the asset. For example - If Land was purchased for $50000 3 years ago and its current value today is $200000, Asset will be recorded at $50000 and not current value

Current Cost - This principle states that the assets and liabilities are recorded in the books at the current cost rather than fair value on the date at which they were acquired or they occur. Assets are recorded at the current cost i.e. their current value. For example - If Land was purchased for $50000 3 years ago and its current value thast must be paid for purchasing the same asset is $200000, Asset will be recorded at $200000 and not the value at which it was purchased.

Realisable (settlement) value - This principle states that the assets and liabilities are recorded in the books at the value that could be realised when it is sold or transferred. Assets are recorded at the current sales price i.e. their current value. For example - If Land was purchased for $50000 3 years ago and its current value thast must be received after selling the same asset is $180000, Asset will be recorded at $180000 and not the value at which it was purchased.

Present Value - It is recording if the Assets or liabilities at the present value of the future cash flows. The cash flows are discounted at the interest rates and present value of asset is calculated. For Example - An asset purchased for $50000 will generate $60000 in year 1 and has 10% interest rate. Present value will be 60000/1+i = $54545