Accounting theory & Accountability essay on stock exchange
Sharonhy
Powerpointslides-Measurement-FairValue11.pptx1
Accounting Theory and Accountability (Godfrey Chapter 6)
Measurement – Fair Value
Part 1
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The 5 key Learning Objectives in this lecture about alternative measurements to HC
Role of Fair Value in accounting
Evaluate the traditional definitions of fair value
Key Aspects of the new definition of fair value
The nature of current cost accounting and exit price accounting
Criticisms of current cost and exit price accounting
Why these alternate models have not replaced historical cost
Changing responses to measurement issues in accounting standards
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THE TRADITIONAL DEFINITION
The amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arms-length transaction.
IFRS 3/AASB 13
Shortcomings of the Traditional Definition
Does not specify if the entity is buying or selling
What does “settling” a liability mean?
Does not refer to a ‘creditor’
At what stage of the hypothetical transaction is fair value measured
What does willing mean?
Could one party be desperate?
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Current Cost Accounting uses buying prices to measure
Based on current market buying prices.
Non – monetary items valued at current cost.
Profit is determined by allocation (matching) based on current costs.
Holding decisions – Do we hold an asset or liability or dispose of them through sale of asset or repayment of debt.
holding gains/losses
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IFRS 13/AASB 13 FAIR VALUE MEASUREMENT
Objectives
(a) to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application;
(b) to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly; and
(c) to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values.
Fair Value Defined
Fair value is
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
(IFRS 13/AASB 13, Para. 9)
Objective of current cost accounting
CCA values assets at their current market buying price and profit is determined using matching expense allocations based on the current cost to buy
Profit is more precisely defined as the change in capital over the accounting period
Managers are better able to evaluate their past decisions and better use the firm’s resources to maximise future profits
Shareholders, investors and others are able to make better allocations of their resources
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Objective of current cost accounting
Managers will examine
the current operating profit
the excess of the current value of the output sold over the current cost of the related inputs
realisable cost savings
increases in the current cost of assets held
holding gains/losses
realised/unrealised
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Financial capital versus physical capital
Profit is the change in capital
Holding gains are included in profit under financial capital
Holding gains are excluded from profit under physical capital
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Arguments for and against current cost
Recognition principle
violates the conservatism principle - but actual phenomena
are holding gains profits or revaluation adjustments?
Objectivity of current cost
lacks objectivity
Technological change
appears to ignore technological advances
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More specific criticisms
Advocates of historic cost accounting
violates the realisation principle; subjectivity of increase
Comparisons of the results with historic cost
industry variations
Advocates of exit price
the logical expression of opportunity cost is the current selling price
the arbitrary allocation of expenses is still a problem issue
additivity problem exists
number of reasons for an asset having value to a business
irrelevant to most business decisions
physical capital concept fraught with weaknesses
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The End
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