Professional Documents
Culture Documents
TOID 3059
Question to consider
Measurement models in accounting
How does inflation affect the value of monetary and non-monetary assets and
liabilities differently?
assist in the development of future accounting standards and in its review of existing
accounting standards
assist preparers in dealing with topics that have yet to form the subject of an accounting
standard
Benefits of an accounting
conceptual framework?
Forces accountants to think about what they are doing and why they do them
Accounting standards will be more consistent and logical as they are developed
from an orderly set of concepts
Hines (1989) suggests that CFs have been used as devices to help
ensure the ongoing existence of the accounting profession by
boosting their public standing
CFs provide social legitimacy to the accounting profession
Fundamental form of social power accrues to those who are able to
uphold objectivity. Legitimacy is achieved because accounts generated
around this proposition are perceived normal (as CF concerns objectivity)
Accrual
basis
Stewardship
Decision-usefulness
In the definition of a reporting entity IASB states accounting role in providing financial information useful to
existing and potential equity investors, lenders and other creditors to make decisions about:
1. providing resources to the entity (i.e., decision usefulness) and
2. in assessing whether management and the governing board of that entity have made efficient
and effective use of the resources provided (i.e., stewardship).
Fundamental qualitative
characteristics of GPFRs
Relevance
Faithful
Representation
Something is relevant if it
influences decisions on the
allocation of scarce
resources, i.e., if it is capable
of making a difference in a
decision
For information to be
relevant it should have:
predictive value, and
confirmatory value
To be a perfectly faithful
representation, a depiction
would have three
characteristics. It would be
complete, neutral and free
from error.
What is an asset?
An asset shall be
recognised when
it is probable that any
future economic
benefit associated with
the item will flow to or
from the entity, and
the item has a cost or
value that can be
measured with
reliability (IASB
Framework, para.83)
What is a liability?
A liability shall be
recognised when
it is probable that any
future economic
benefit associated with
the item will flow to or
from the entity, and
the item has a cost or
value that can be
measured with
reliability (IASB
Framework, para.83)
How we measure assets and liabilities has direct implication for income and expense
recognition, and therefore for profits.
Disadvantages
Flexibility as circumstances
of each company differ
No active market vs
active market
Market uncertainties /
low level of trading
resulting in volatile
prices vs stable market
Undermines
comparability
Additively problem (what
does total assets
represent?)
Room for managerial
opportunism to drive the
selection of
measurement basis
Fair
value
less
costs
to sell
Valuein-use
Histo
rical
cost
Net
reali
sabl
e
valu
e
Fair
value
Net
pres
ent
valu
e
Inflation accounting
in 2009 a person would starve
on with just a billion Zimbabwe
dollars
Zimbabwe recorded an estimated
inflation rate of
89,700,000,000,000,000,000,000%
(89.7 sextillion percent) in midNovember 2008
Concept
of
Income
Measureme
nt of assets
Income = Money Capital Y1 Money Capital Y0 (excludes contributions from and distributions to
owners)
historical cost accounts adjusted for changes in the purchasing power of the dollar (using a price
index)
Income = Inflation Adjusted Capital Y1 Inflation Adjusted Capital Y0
Relies on current values which could be based on replacement cost
Income = Operating Capacity Y1 Operating Capacity Y0
Unlike other approaches income is calculated when items are purchased rather than when sold
Income = (Adaptive capacityY1 Adaptive capacity Y0) capital maintenance adjustment
Capital maintenance adjustment reflects the effect of movement in the general price level on the
purchasing power of opening capital
Relies on current values which are based on exist prices (net selling prices)
Comparison of measurement
methods
Non-monetary assets
Continuously Contemporary
Accounting (CoCoA)
The higher the current market value of the entitys assets the
greater the ability of the entity to adapt to changing
circumstances
Profit directly relates to changes in the current net selling price of the
entitys assets (or adaptive capital, reflected by the total exit values of
assets)
Criticisms of CoCoA
Level 1
Level 2
Level 3
Mark-to-market
approach
Rely upon observable
market values (market
prices)
Mark-to-model
approach
Rely upon valuation
models. Require the
identification of both an
accepted valuation model,
and the inputs required
by the model to arrive at
a valuation
Markets for
financial assets
(such as shares,
bonds and
derivatives) are
increasing
The banks
ability to lend
increases and
more lending
results
Increases in the
reported net
assets and
capital and
reserves of the
bank
Reducing
demand for &
increasing
supply of
financial assets
The banks
ability to lend
decreases and
less lending
results also