CHALLENGES FOR STANDARD SETTERS

Potential measurement bases:

modified pas amount

current entry

pas entry or exit price

exit or equilibrium price

value in use or future entry or exit price

the conceptual framework project suggest that the standard setters are open to considering a range of measurement models

IFRS has introduced fair value measurement for derrivatives at each balance date and some other financial assets and liabilities (IAS 39)

The requirement to measure share-based payment to employees at fair value (IFRS 2)

Fair values are used to measure assets on initial recognition

IAS 17 leases

IAS 39 financial Instrument: recognition and measurement

ex: in IAS 16 Property,plant and Equipment

IAS 41 Agriculture

subsequent measurement at fair value is more rare

it is mandatory for some financial assets under IAS 39 for derivatives, held for trading financial assets and liabilities and those classified as fair value throughprofit or loss

LO4

ISSUES FOR AUDITORS

standard setters have provided guidance about how to measure fair value. they include:

income approach: conversation of future amount (such as cash flows or earnings)to a single discounted present amount

cost approach: the amount that currently would be required to replace its service capacity (current replacement cost)

the market approach: use of observable prices and information from actual transaction for identical, similar or comparable assets or liabilities

Auditing fair value creates difficulties for auditors

because the requires the application of valuation models, and frequently, the use of valuation experts

the fair value for assets has been identified by the chief executive officer of the global auditing firm

To develop an effective audit approach

auditors need to understand the client firm's processes and relevant control for determining fair values

and make judgement on whether the client firm's measurement methods and assumptions are appropriate and likely to provide a reasonable basis for the fir value measurement

Auditors need to appreciate management's potential biases and likely errors in applying valuation models

if managers have incentives to overstate assets

then auditors need to be aware of the critical components of valuation models that would make this easier for managers to achieve

LO 5