Question

In: Accounting

The process of determining the monetary amount at which the elements of the financial statements are...

  1. The process of determining the monetary amount at which the elements of the financial statements are to be included in the balance sheet and income statement is called measurement. The IASB Framework includes the four bases of measurement. Explain these four bases of measurement with example. Identify that which measurement bases is used by PHILIPS in preparing their financial statements?

Annual Accounts of PHILIPS: https://www.results.Philips.com/publications/ar19

Solutions

Expert Solution

There are four bases of measurements:

Historical cost: Historical cost is a concept in which assets are usually recorded at historic cost, for example, when a company records some asset (goodwill) it usually records at its historic cost.

Fair value/realizable value: Realizable value means the value at which assets can be sold at the current time; for instance, when the company purchases some stocks for trading, then it records it as fair value or realizable value according to stock prices and mark to market accounting. In most cases when inventory is purchase it is also recorded at fair value.

Present value: Present value is a concept that says that assets can be recorded at the present value of their benefits. Sometimes, revenues present value can also be recorded in case of revenues, but it is not used widely.

Current cost: Current cost is also called book value, for example, you have issued a bond and you will record the bond value per year by amortizing their cost, or for instance, you purchase a building, then you will depreciate it each year to record its current cost.

.

PHILIPS annual report is suggesting that the company recorded it goodwill at historic cost, it recorded its current assets as fair value, and it recorded its fixed assets at current cost.

So, the company recorded its different items of financial statement on different bases as most companies do.


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