Question

The measurement of assets and liabilities on the balance sheet was previously a secondary goal to income determination. As a result, various measurement techniques arose to disclose assets and liabilities. Required: Discuss the various measurement techniques used on the balance sheet to disclose assets and liabilities.

Answer 1

Various Measurement techniques used on the balance sheet to disclose assets and liabilities:-

S.no.	Asset	Measurement Basis
1	Cash	Current Value
2	Inventory	Current or past value
3	Accounts Receivable	Expected Future Value
4	Property Plant & Equipments	Past value adjusted for depreciation
5	Investment	Fair Value, amortised cost or the result of applying the equity method
6	Marketable securities	Fair Value or amortised cost
7.	Long-term financial liabilities	amortised cost

When looking at the differences, investors need to be aware that using the balance sheet to evaluate the company’s financial status should be looked at individually as each asset is completely different. The way information is presented for the expected future benefits to be consequent from holding these assets would be more beneficial to the users need

1.Cash

These include demand deposits with banks and highly liquid investments with original maturities of less than or equal to three months. Measuring cash and cash equivalents at amortized cost or fair value is not likely to produce materially different amounts.

2.Inventory

These are physical products which a company intends to sell to its customers, either in the form of finished goods or as inputs into a manufacturing process i.e. raw materials and work-in-process. Under IFRS, inventories are measured at the lower of cost and net realizable value, while under US GAAP, they are measured at the lower of cost or market value. Cost includes all associated costs of purchase, costs of conversion, and all other costs that are incurred in bringing the inventories to their present location and condition. Net realizable value (NRV) refers to the estimated selling price less the estimated costs of completion and costs necessary to make the sale. Market value is the current replacement cost, which cannot exceed the NRV and cannot be lower than the NRV less a normal profit margin. If the NRV or market value of inventory falls below its carrying amount, the company must write down the value of the inventory and reflect the loss in value in the profit and loss statement.

3.Account Receivable

These refer to amounts that are owed to an entity by its customers for products and services that have already been delivered. They are usually reported at net realizable value, which is an approximation of fair value that is based on estimates of collectability. An allowance for doubtful accounts is made to reflect an entity’s estimate of amounts that will ultimately be uncollectible. Additions to this allowance in a particular period are reflected as bad debt expenses; the balance of the allowance for doubtful accounts reduces the gross receivables amount to a net amount which is an estimate of fair value.

4.PPE

These are tangible assets, including land, buildings, and machinery, that are used in an entity’s operations and expected to provide economic benefits over more than one financial year. Under IFRS, PPE may be reported using either the cost model or the revaluation model. Under US GAAP, however, only the cost model may be used.

• When the cost model is used, PPE is carried at amortized cost, i.e., its historical cost less accumulated depreciation or depletion, and less impairment losses.
• When the revaluation model is used, the reported and carrying value of PPE is the fair value at the date of revaluation less any subsequent accumulated depreciation.

5.Investments

This is property used solely to earn rental income, capital appreciation or both. Under IFRS, investment property may be reported using either the cost model or the fair value model.

• Similar to the case with PPE, when the cost model is used, investment property is carried at amortized cost i.e. its historical cost less accumulated depreciation and less any impairment losses.
• When the fair value model is used, investment property is reported at its fair value. Gains or losses arising from a change in the fair value of investment property are recognized on the income statement in the period in which it arises.

6.Marketable securities

These include investments in debt or equity securities that are traded in a public market, and whose value can be determined from prices that are obtained in a public market. Further details on these financial assets tend to be provided in notes to the financial statements.

7.Long-term financial liabilities

• : These include loans and notes or bonds payable, and are usually reported at amortized cost on the balance sheet. Upon maturity, the bond’s amortized cost or carrying amount will be equal to its face value.

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