Qns: One of the problems in accounting standard setting is that there are many competing accounting systems, all

with strengths and weaknesses, eg. Historical cost, replacement cost, fair value, economic value etc. Standard Setters therefore have no alternative but to mix and match these measurement systems within and across accounting standards Briefly discuss this statement and explain any preferences you have between the different measurement systems given your view of the purpose of financial reports. Indicate whether these make you favour a mix and match solution. According to the IASB, measurement is the process of determining the monetary amounts at which the elements of a financial statement are recognised and carried in the balance sheet and income statement. According to Lennard, one main reason why there are different accounting and measurement systems is because the value of an asset differs for different entities depending on the entities own economic constraints and opportunities. Some entities may profitably hold an asset in their business which makes the measurement system of exit pricing irrelevant. Exit pricing however may be relevant with the same asset is held by a bank for only the purpose of realization. Therefore, different accounting systems have their own strengths and weaknesses that are dependant on the entity, situation as well as the measured element. There are three commonly used measurement systems, namely Replacement cost, Net Realisable Value and Present value, each with their own strengths and weaknesses. Replacement cost refers to the amount that an entity has to pay to replace an asset at current time, according to its current worth. A major strength of Replacement costing is that by valuing assets at their prices on an input market, financial reporting provides information on how well the entity is performing by comparing its costs with the value of what it receives in return. Additionally, it is argued that replacement costing enables financial statement users to better assess the companys operating performance because it separates profits into operating and holding gains. However, it is criticized that replacement costing is not objective because not all assets can be replaced due to reasons such as obsolescence. Determining the replacement costs where a second hand market does not exist is up to the managers subjective discretion. Net Realisable value is the amount at which an asset can be sold less selling costs. The advantages with this approach is that it shows the amount of cash resources which the entity can command. It is also relevant to managerials decision making since selling prices determines whether it will be more worthwhile to hold the asset or sell it. However, it is criticized that if assets are not intended to be sold, at least in the short run, then such a valuation method is not relevant. Moreover, according to Baxter, NRV may distort values because if a company buys a highly useful but specific machine, it may incur a loss, but if the company buys a not very useful but high resale value machine, it may record a profit. Present value method, also known as Value in use is the value of the expected returns of the assets, reduced to present value using a discount based on the level of risk. This is consistent with the Hicksian measure of income, which more adequately captures the assets contribution to the firm. However, it is criticized that such an approach is highly subjective because future expected returns are based on managements estimated forecasts. Many assets also do not produce cash flows alone and only work together in a

cash generating unit. Hence, it is not possible to measure these individual assets using value in use method. In my view, consistent with Whittington is that financial statements should provide information as input to users own decision models rather than providing a decisive valuation. In essence, the financial statements should not be concerned with valuing a business but instead, provide information that will help users to perform their own valuations. An informational approach consistent with the mix and match measurement system is preferable to a single measurement system because it satisfies the objective that the type of measurement system chosen should be one that provides information that is most relevant to assessing the current economic and financial performance of the entity. Therefore, I would prefer the Deprival value because it is closest to achieving this objective by attempting to measure the economic opportunities facing the entity. Deprival value reflects the loss to the entity if it is hypothetically deprived of that asset and it is calculated as the lower of replacement cost or recoverable amount. According to Macve, a major advantage Deprival Value has in this regard is that rather than being a Measurement Per Se, it is a rule that identifies which is the most appropriate measure for a firm to use in a particular economic circumstance. This essentially requires the consideration of the various measurement bases to determine which is the relevant outcome in each situation, so that the best decision can be made. Given that it is superior for internal use by managers, it can be contended that it is more likely to be reliable information when reported externally. Deprival value however is not without problems. It has difficult aggregation problems and that it requires three different measures which includes the highly subjective value in use.

Qns: Measurement methods should be selected with the market context in mind. Having a single pre-selected measurement method may not best reflect market

conditions or meet users needs. Accounting provides information as input to users own decision models, rather than providing a decisive valuation Discuss the above quotation with reference to your answer in part (a). According to the IASB, measurement is the process of determining the monetary amounts at which the elements of a financial statement are recognised and carried in the balance sheet and income statement. According to Lennard, one main reason why there are different accounting and measurement systems is because the value of an asset differs for different entities depending on the entities own economic constraints and opportunities. For instance, some entities may profitably hold an asset in their business which makes the measurement system of exit pricing irrelevant. Exit pricing however may be relevant with the same asset is held by a bank for only the purpose of realization. Therefore, as different accounting systems have their own strengths and weaknesses that are dependant on the entity, situation as well as the measured element, it is important to consider whether or not a single pre selected measurement method can best reflect market conditions or meet users needs. It is argued that a single measurement basis can best do the above, for instance Fair value. Fair values are submitted to be a superior ideal single measurement in an ideal complete and perfect market equilibrium where market prices are readily observable for all assets and liabilities and that and reflects the expected cash flows to a fully informed investor. Given that the law of one price, the values of assets and liabilities under FV therefore supports consistency and comparability. However in reality, markets are not perfect and complete such that information regarding the assets and liabilities are not always available to derive an ideal unique market price. The very existence of accounting means that markets are not perfect because if they are, that means everybody would be fully informed that calls no need for accountability. As such, single measurement based system like FV does not work very well under such circumstances. Moreover, it is important that the measurement best represents the economic properties of the particular item. Single measurement basis cannot realistically hope to achieve this as the market context of the item may differ. In the absence of a market, fair value accounting leads to subjective estimates of the value of an asset that may not be reliable. Proponents to the single measurement system also suggested Replacement costs and NRV as ideal pure measurement systems. However, it is criticized that replacement costing is not objective because not all assets can be replaced due to reasons such as obsolescence. Determining the replacement costs where a second hand market does not exist is also up to the managers subjective discretion. NRV has also been criticized on grounds that if assets are not intended to be sold, at least in the short run, then such a valuation method is not relevant. In my view, consistent with Whittington is that financial statements should provide information as input to users own decision models rather than providing a decisive valuation. In essence, the financial statements should not be concerned with valuing a business but instead, provide information that will help users to perform their own valuations.

An informational approach is preferable to a single measurement system because it satisfies the objective that the type of measurement system chosen should be one that provides information that is most relevant to assessing the current economic and financial performance of the entity. Therefore, I would prefer the Deprival value because it is closest to achieving this objective by attempting to measure the economic opportunities facing the entity. Deprival value reflects the loss to the entity if it is hypothetically deprived of that asset and it is calculated as the lower of replacement cost or recoverable amount. According to Macve, a major advantage Deprival Value has in this regard is that rather than being a Measurement Per Se, it is a rule that identifies which is the most appropriate measure for a firm to use in a particular economic circumstance. This essentially requires the consideration of the various measurement bases to determine which is the relevant outcome in each situation, so that the best decision can be made. Given that it is superior for internal use by managers, it can be contended that it is more likely to be reliable information when reported externally. Deprival value however is not without problems. It has difficult aggregation problems and that it requires three different measures which includes the highly subjective value in use.