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