Question

Based upon a review of literature, compare and contrast the four major measurement bases other than the fair value accounting (FVA).

Answer 1

Contrast:

• As per the Historical Costs, value of items are measured at their costs actually paid at the date and time of acquisition of the asset. Hence it does not consider fall in value of the item over time into account.
• Current costs on the other hand, updates this historical costs periodically by charging an amount in form of depreciation, depletion, amoritzation to bring down the histroical cost to the value at which it is likely be sold in the market. It is also refered to as Book Value.
• Net realizable value is another base used to measure in accounting. The value of the item will be the rate at which it can be sold in an open market after deducting all necessary expenses likely to be incurred to make that item saleable in the open market. Hence having an open markets to compute the value effectively is necessary.
• Items are also valued at their Present Value (PV) whrein the future economic benefits in terms of money will be carefully compiled and discounted at an appropriate discount factor to arrive at the present value of future economic benefits.

Compare:

For computing current costs we need data pertaining to the historical costs and understand the period till when we can derive economic benefits out of it. This current cost is in line with or similiar to bringing down the asset to more or less its Net Realizable value. Current costs are reduced periodically to its scrap/residual value (or to Zero). By this it is implied no economic benefits will flow to business when the current cost become NIL or reaches the Residual Value.

In accounting we bring down the historical cost to its current cost by charging a portion of historical cost as expense. This current cost is then tested for impairment. The Present Value of future benefits will be compared with the net realisable value. The lesser will be then matched with the current value. In case the current value is higher than such value, we charge impairment losses to have no contrast among these accounting bases.