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THE CONCEPTUAL FRAMEWORK PART 3: MEASUREMENT AND RECOGNITION :star: -…
THE CONCEPTUAL FRAMEWORK
PART 3: MEASUREMENT AND RECOGNITION :star:
Adopted by entities in preparing their financial statements in historical cost. Usually combined with other measurement bases.
Three main income and capital measurement systems
Current cost accounting
Exit price accounting
Providing useful information
Relevant and reliable information
Additivity - Results in meaningful financial statements
Adaptive decision making
Reality real world reference
Objectivity
Allocation free
A measure of risk
Historic cost accounting
Choice of measurement base will depend on
Cost, or
The fair value of whatever is given in exchange for the asset plus any cost incidental to the acquisition.
Value
Refers to preference people have for some items over others because of perceived benefits to themselves. It relates to the consumer’s willingness to give up something to obtain it.
Valuation Principles Under CCA
Non-monetary items
Monetary items and loan capital
Non-monetary assets bought and sold on the same market
Concept of Capital Maintenance
Financial capital maintenance
Physical capital maintenance
Objective of Current Cost Accounting
Based on current buying price of assets
CCA values asset at current market buying price and profit is determined using matching expense
Manager wants to know hoe assets should held, form of assets and how assets be financed
Previous and actual data need to ; to consider as useful information need to adjust future decision
Price movement in a given period
are important to management
Criticisms of EPA
Profit concept
Value in use versus Value in exchange
Additivity
Criticisms of CCA
A fixed asset's value lies in its service potential, not in its market value.
Current cost accounting anticipates profit which never be realised
Current cost is subjective in determining the amount of increase in cost.
If the firm intends to use an asset instead of selling it, changes in its market price are irrelevant
If the firm intends to use an asset instead of selling it, changes in its market price are irrelevant
Current cost accounting has been rejected as it violates the traditional realization principle
Holding Gain / Loss
Gains are recorded only when assets are disposed off unless disposed and purchase in the same period
Comparing efficient firm may be misled
Mixing holding and operating gains confuses the evaluation of management decisions and hinders the allocation of resources in the economy
Historical Cost Accounting (HCA)
Assumption
Flow of cost
Stewardship
Reasons of dominance
Useful
Understandable
Verifiable
Objective
Relevant in making economic decisions
Insufficient evidence to justify rejection of HCA
Criticisms
Basis of Historical Cost
Matching
Information for Decision Making
Notion of Investor Needs
Objectivity of Accounting is Too Narrow
Nature of CCA
Replacement cost model.
firm is a going concern and is continuously replacing its assets. Assumed that cost of consuming the assets in the profit generation process is equivalent to the cost of their replacement.
In the absence of market price, CCA can be estimated by appraisal or specific index adjustment