Question

The IASB conceptual framework (2014) does not provide any detailed prescriptions on the issue of measurement. In recent years however, accounting standards have shifted away from the use of historical costs in favor of fair values. Why do you think this shift has been happening? Why do you think that conceptual frameworks are yet to clearly stipulate an alternative to historical costs, such as fair values? (750 words)

Answer 1

"The IASB conceptual framework (2014) does not provide any detailed prescriptions on the issue of measurement. In recent years however, accounting standards have shifted away from the use of historical costs in favor of fair values."

it can be very well seen and practically experienced, specially in Stock Market Investments or Investments made in Property or any other assets whose value are derived from value and conditions prevailing in the market. Suppose a building acquired in 2010 for $100,000 (where there were cash crunches in the market as a result of the global cries of 2008), the value at which the asset would be appearing in the balance sheet post considering Depreciation at 5% is $55000 (Useful life is 20 years).

But the market conditions have changed now as compared to 2010. the Market Value of the same building today is $160,000.

This Directly reflects that the building is not appearing in the balance sheet at its Fair Value or is reflecting the true position of Assets and Liabilities of the Company. In order to overcome such obstacles and misleading presentation, Accounting Standards have introduced the concept of Fair Value Accounting. the purpose is to reflect the true position of the companies assets and its profitability.

Conceptual Frameworks are yet to clearly stipulate an alternative to historical costs, such as fair values because determination of Fair value is not easy and it can be even be used to further manipulate the books of Accounts. There exists possibilities that there are number of buyers for the same building offering different rates according to their valuations or the company can create fictitious buyers to inflate its books of Accounts. So the Conceptual Framework are working on a strong model for better determination of Fair value of Assets or liabilities appearing in the balance sheet.