The Measurement issues in financial reporting Essay

As a cardinal facet of fiscal coverage, we can state that measurings of concern fiscal place and, besides, measurings of concern public presentation have a certain temperament towards most of us, on one manner or another.

How the capital is allocated within single concerns and companies?

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Is concern regarded as a success or non?

What dividends investors receive?

Whether employees will gain a fillip, or can they maintain their occupations?

How much revenue enhancement does the concern wage?

All these inquiries should be answered through the fiscal study.

Large corporations frequently adopt assorted plus rating attacks. These include traditionally used historical cost, and among others, amortized historical cost, just value, and besides, value in usage. Non-current assets are frequently acquired in different fiscal old ages. Their value will be merely added to give a entire value in dollars even though the costs or ratings of these buttockss will supply limited contemplation of their current value. In conformity with AASB 116 “ Property, Plant and Equipment ” it is acceptable for some categories of belongings, workss and equipment to be measured at cost, less a proviso for depreciation while another category of belongings, workss and equipment can be measured at just value. Then, values of otherwise measured belongings, workss and equipment are merely added together with the entire presenting neither cost nor just value.

With clip passing by, standard-setters have favoured different measuring bases. From the get downing they favour the historical cost base to mensurate a house ‘s assets and liabilities, so in the sixtiess and 1970s, they started to favor the current cost base because of the high rising prices rates at that clip, accounting criterions required signifiers of current cost accounting were introduced in the US and UK in 1979 and 1980 severally ( Malcolm & A ; Janice 2000, p. 4 ) . But this experimentation on accounting measuring failed and in 1985 the UK standard-setters withdrew this criterion. Now the standard-setters seem to favor a assorted measuring bases to mensurate the value of plus and liability and the other accounting elements such as net income. Harmonizing to AASB criterion, a house ‘s fiscal studies should supply utile information for external users to do determinations. Under this way, in our research we try to happen out which measurement base is more likely to be used to mensurate a house ‘s assets, liabilities and equity etc.

Key Aims

Every clip we talk about the cardinal facets of fiscal coverage, we will stop up with measuring. Because there are different accounting theories which use different measuring bases, if there is non some general measuring criterions, those fiscal studies will be nonmeaningful and wo n’t supply relevant & A ; dependable information to users. For illustration, we use historical cost footing to acquire the value of an plus, issue monetary value for the other assets and prevent value for the liabilities, so we add up the figures into the balance sheet, this balance sheet is irrelevant, undependable and misled ; it can non carry through the determination usefulness aims of fiscal studies. In this paper we will seek to give some accounts on how standard compositors approach measuring, what are normally considered measuring bases, and how our research can lend in attempts to decide issues related to measuring.

Theoretical Positions

For accounting intents, when we use the word “ measuring ” , it means we want to mensurate the value of each plus, liability etc such as historical cost. For many old ages, comptrollers have argued about which value is most enlightening for fiscal study users. Some claim that we need to determine the house ‘s aims and from this infer the sort of pecuniary value that will outdo inform users about the house while others propose that measuring should reflect the hazard borne by investors and loaners to the entity ( Godfrey et al. 2006 ) . In this paper, we will explicate three sorts of measuring bases that are used today, which are historical cost, cyberspace realisable value and just value.

Internet realisable value method uses exit monetary value to mensurate the value of plus, it subtract the cost of sale from expected merchandising monetary value to acquire the sum. Because of the failings of historical cost method, some comptrollers suggest that we should utilize issue monetary value to replace historical cost, they believe this method can supply better information for determination devising to the users. This method refers to the sum of hard currency or hard currency equivalent that would be obtained if the plus is sold presently. It reports all operating net incomes and keeping additions and losingss in the period which they occur and excludes the operating net incomes and keeping additions and losingss in the old period so that it can extinguish the timing mistake. It besides provides the relevant information of the current value and portrays the house ‘s adaptability. By utilizing the issue monetary value base, the rating of all elements in the balance sheet and income statement are at their money equivalents, hence, they can be added up and the balance sheet can supply comparative dependable information. However, like historical cost method, this method besides has failings which make it non peculiarly utile for determination devising. It does non peculiarly concern the operation of the house but alternatively concerns monetary value alteration of assets and liabilities ; therefore it is difficult to measure the house ‘s public presentation and efficiency because it concentrates on the fiscal liquidness and short-run determination devising. Besides this, the fiscal place might hold to be no value if the plus can non be sold individually. Furthermore, if an plus is retained alternatively of merchandising, its value in usage is more likely greater than the current issue monetary value. Finally, some intangible assets such as good will would be assessed as no value because they do n’t hold net merchandising monetary value. All of the above failings can dramatically diminish the dependability of the fiscal information.

The term ‘fair value ‘ is defined in Australian Guidance which can be found in Accounting Handbook ( but is non portion of AASB 116 ) states “ it is the most advantageous monetary value moderately gettable by the marketer and the most advantageous monetary value sensible obtained by the purchaser ” ( Accounting Handbook, 2006, p.482 ) . In finding the just value of an plus, the plus has to be traded in equal period of selling to get its most advantageous monetary value ( Accounting Handbook, 2006 ) . “ The just value of an plus is determined by mention to its highest and best usage, that is, the usage of the plus that is psychically possible, lawfully allowable, financially executable, and which consequences in the highest value. ” ( Accounting Handbook, 2006, p. 482 ) . An entity cheques at each coverage day of the month if there is any screenings that revalued plus ‘s transporting sum may significantly differ from that which would be determined if the plus were revalued at the coverage day of the month ( Accounting Handbook, 2006 ) . If any such indicant exists, than the entity would find plus ‘s just value and make the reappraisal of an plus to that sum ( Accounting Handbook, 2006 ) .

As there were much unfavorable judgment of historical cost accounting during the period of the 1970s and 1980s, besides there were many protagonists of historical cost accounting ( Deegan, 2009 ) . The method of accounting used today is still based on historical cost accounting, nevertheless some recent accounting criterions have introduced component of current value or just value measurings ( Deegan, 2009 ) . IAS 16/ AASB 116 allows describing entity to take between the “ cost theoretical account ” ( mensurating belongings, works and equipment at historical cost ) and the “ just value theoretical account ” for mensurating categories of belongings, works and equipment ( Deegan, 2009 ) . Fair value theoretical account refers to the reappraisal of the plus to its just value ( which means that revised signifier of historical cost accounting may be used ) which is one manner to take history of altering values ( Deegan, 2009 ) . In relation to the intervention of altering monetary values, Deegan considered IAS 41 ( AASB 141 within Australia ) ( 2009 ) . IAS 41 refers to the measurings regulations for biological assets ( for illustration, pipelines or cowss ) ( Deegan, 2009 ) . Changes in the just value of biological assets from period to period should be treated as portion of the period ‘s net income or loss as required from the accounting criterion ( Deegan, 2009 ) . Sing the development of the accounting criterions some research workers were reasoning that the addition in just value related to altering monetary values should be distinguished from alterations in just value as a effect of physical alterations ( Deegan, 2009 ) . The chief issue they were reasoning was that merely the physical alterations should be treated as portion of net income or loss ( Deegan, 2009 ) . In malice of the fact that IAS 41 treats the entire alteration in just value as portion of income, it is besides of import to observe that IAS 41 supports revelations that distinguish among alterations in the just values of the biological assets are based upon monetary value alterations and those based on physical alterations ( Deegan, 2009 ) .

On the authorization of paragraphs 5.1.6 to 5.1.10 of AASB 1041 the just value can be in general specified 1 ) by mention to minutess for the same assets, 2 ) by mention to minutess for similar assets, or 3 ) by computation of the present value of the net hard currency influxs expected ( Godfrey, Hodgson & A ; Holmes, 2006 ) . The cardinal rule stated in the criterion is to find a suited just value and the standard provides important discretion, even with respect to the frequence of reappraisal ( Godfrey et al. , 2006 ) . The value should be reassessed in the accounting period in which the alteration take topographic point if there are major alterations in just value ( Godfrey et al. , 2006 ) . If there is no important alteration, so no accommodation is needed, or the values can be indexed, but the standard requires that an official alteration will take topographic point every three old ages ( Godfrey et al. , 2006 ) . The criterion besides O.K. that one time the just value method is selected, an entity may alter back to be footing, or merely halt to reevaluate the just value of assets ( Godfrey et al. , 2006 ) . In malice of that, the chief issue is that the cost footing is the foundation for the acceptance of and support for the historical cost method by the Australian accounting attack and the standard scene organic structure ( Godfrey et al. , 2006 ) . Where just values refer to some groups of assets and non to others, AASB authorises entities to hold a assorted attack ( Godfrey et al. , 2006 ) . On top of that, the specification of just value is comparatively loosely determined and licenses for assorted methods of rating, both between categories of plus and over clip ( Godfrey et al. , 2006 ) . AASB presents the pick of current value accounting although the definition of an plus has been determined, which is in struggle with many other accounting criterions and the historical cost theoretical account with its cardinal standard of objectiveness ( Godfrey et al. , 2006 ) . It is clear that policy shapers are willing to switch to alternate measurings methods, irrespective of the failure to develop SAC 5 ‘Measurements of the Elementss of Fiscal Statements ” ( Godfrey et al. , 2006 ) .

Research method

We use the secondary informations which published in the web site, text edition and diary to execute our research.

Research findings

In our research we have found that much of the thought of standard-setters about measuring seems to be based on an idealised position of markets as complete and in absolutely competitory equilibrium. There is a alone market monetary value such as just value for every plus and liability, so this monetary value can be used as a individual measuring base. It explains why the standard-setters try to present individual measuring method because a individual method can supply consistence with histories and improves comparison across entity. But in world, markets are imperfect and uncomplete, So standard-setters use the same attack to measurement issues as they approach other standard-setting issues and inquiries. That is, they will try to use all the recommendations and methods contained in their conceptual model. In conformity with recent activities of the IASB and AASB it is clear that the usage of historical cost is likely to be lower, and usage of just value or a mixture of measuring methods is traveling to increase. When boards have debated different measuring bases, the decision was that just value in the best mode meets the conceptual model standards instead than other measuring bases that have been considered if individual method attack is used. However, alterations in accounting measuring to fair value are non applicable for all assets and liabilities. Some other measuring bases besides have features and will be considered to stay a portion of the criterions.

Restriction of the research/further research

Because we perform the research based on the secondary informations gathered in different resource, the degree and the exactitude of findings are limited. We besides have non used experimental method to look into the findings. Further research uses other method such as study is recommended to prove the findings.


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